Climate change: BMW’s supply chain strategy to reduce CO2 emissions
The article explores how BMW, the most sustainable automotive company based on the Down Jones sustainability index of 2016, is able to use its supply chain as a lever to reduce CO2 emissions.
Automotive manufactures need to reduce CO2 emissions to remain competitive in the current business environment. On one hand, strict regulation is forcing automotive companies to rethink their manufacturing processes to comply with the new rules. On the other hand, a growing penetration of electric vehicles with a more environmentally conscious supply chain, puts additional pressure on the conventional car industry. Therefore, a key management concern is how to reduce CO2 emissions and become more sustainable across all of the company’s processes. Supply chain processes are key in this strategy since traditional supply chain emissions can be greater than those from direct operations.
BMW is the example of a company that is redefining its business model in reaction to the effects of climate change. In 2016, BMW was named the world’s most sustainable automotive company by the Dow Jones Sustainability Index[1]. The company aims to reduce at least 50% of its CO2 emissions by 2020[2]. In order to do so, BMW is focusing on four key areas of its business supply chain.
Development of a sustainable strategy and organization in supply chain
BMW’s 2020 vision includes sustainability as a key area of development. The BMW Group is the most successful and sustainable premium provider of individual mobility[3]. To achieve its vision, the company has created a Sustainability Board that is in charge of executing the sustainability strategy and cascading it to the rest of the organization. Specifically, in supply chain, the company has set its 2020 goal to Develop a sustainable resource efficient supply chain[4]. To execute its goal the company has established a decentralized sustainability team in the supply chain area with key short term and medium-term goals.
Increased supply chain transparency
By 2020 The BMW Group plans to increase supply chain transparency through the Supplier Sustainability Standards, which establishes the minimum requirements a supplier needs to meet to work with BMW. In order to ensure compliance, the company has created an industry wide sustainability questionnaire in which it analyzes the supplier overall commitment with sustainability. The questionnaire is a key resource for decision making in the tendering process.
In addition, BMW encourages its suppliers to report their CO2 emission targets. In 2016, 69% of BMW’s suppliers publicly reported their emissions[5]. With these metrics, BMW can benchmark and push suppliers to achieve specific sustainability goals. BMW’s plan for 2020 is the requirement that all suppliers report their sustainability metrics. By doing this the company is indirectly generating competition among suppliers to become more sustainable.
Training suppliers
In order to help suppliers achieve sustainability standards, BMW has created a training program for suppliers. During 2016, more than 150 purchasers[6] participated in BMW’s trainings. Moreover, BMW identified key suppliers with high CO2 emissions and designed specific trainings for those suppliers. In addition to these training programs, BMW started a sustainability awareness program in which they participate in industry wide events with key talks on sustainability. By 2020, the company expects to increase the number of supplier trainings and expand its awareness programs to Latin America and USA.
Reduction in the consumption of key supply chain resources
In order to excel in its production processes, BMW has set a goal for the supply chain to: reduce its resource consumption (energy, water, waste, solvents) per vehicle produced by 45% by 2020[7]. The role of the supply chain team to achieve this objective is to find more efficient sources of energy and to identify opportunities of vertical integration to reduce energy consumption. For instance, 63% of the company energy purchases in 2016 came from sustainable energy sources that at the same time are low CO2 emissions.
Post 2020 goals
Post 2020 the company has different specific areas of action to become more sustainable: Become a leader in the electric car market, implement vertical integration of suppliers to reduce CO2 emissions and monitor supplier sustainability metrics through digital platforms.[8
Additional suggested actions
I would recommend that BMW act across two dimensions to in response to climate change and the increased pressure on its supply chain. First, BMW should try to develop pilots for purchasing non-conventional materials for car manufacturing. For instance, develop prototypes to replace aluminum and cobalt (which are high emission sourcing processes), by more green products e.g. recycled products. As a second area of action, I believe BMW should take a more drastic approach towards suppliers that don’t comply with sustainability metrics. Specifically stop sourcing from those providers or define penalties in long term contracts if the sustainability goals are not achieved.
Additional important questions:
1-What additional incentives should governments implement to shift car manufacturers’ current business models towards sustainability?
2-If the electric car is not the most cost-effective solution for car manufacturers to address climate change, what other disruptive technologies are worth exploring?
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[1] BMW press release (Munich 8 September 2016): BMW Group once again sector leader in the Dow Jones Sustainability Index. World’s most sustainable automotive company in 2016
[2] BMW Sustainable value report 2016
[3] BMW vision, BMW Annual Report 2016
[4] BMW Sustainable value report 2016
[5] CO2 emissions reported in CDP Supply Chain Report, BMW Sustainable value report 2016
[6] BMW Sustainable value report 2016
[7] BMW Sustainable value report 2016
[8] BMW Sustainable value report 2016, BMW Annual Report 2016, company strategy presentations 2016
Thank you, Juan! I found your essay very interesting, and it reminded me our IKEA case regarding the balance between growth and sustainability. It seems that BMW, being a leader in the auto industry, has a much stronger “pull” to ensure all the tier-1 and tier-2 suppliers to follow its lead in reducing CO2 emission. I’m wondering, as you mentioned in this essay, if the electric vehicle is ultimately the best solution to reduce CO2 emission as much as possible? In addition, what is the sales/growth target of BMW while it’s targeting to reduce at least 50% of its CO2 emission by 2020? Similar to our discussions in the IKEA case, how will BMW achieve both its growth target and CO2 emission reduction target, especially given the more and more fierce competition in the automotive industry?
Great article! I think BMW is approaching this in the right way, pushing on transparency in its supply chain to generate competition among suppliers, and providing training programs. In my view, this is the most effective way to drive change and spur more innovative and sustainable operations in the automotive supply chain. However, I agree with you that BMW could be tougher towards suppliers who do not comply with sustainability metrics. As long as suppliers can ‘get away’ with not meeting metrics, they will be less incentivized to develop more sustainable operations. In fact, since conventional automotive manufacturers all share the objective of reducing CO2 emissions in their supply chains, I believe there is merit in them together establishing industry standards for acceptable CO2 levels among suppliers – and sticking by this when making sourcing decisions. This would create significant pressure on suppliers to develop more sustainable operations.
Great read on how climate change is pressuring the automotive industry. I think BMW definitely needs to be proactive in addressing this issue, particularly given the recent scandals and the growing desire from customers for high sustainability standards. In thinking about the supply chain, I wonder whether there are other areas where BMW can improve in becoming more environmentally-friendly. If they were to become more vertically integrated, for example, could they have more control on some of the practices and processes implemented across the chain? To your point on electric vehicles, if that is not a sustainable solution for the industry, what role does technology play in combating climate change? I imagine there are ways to reduce emissions via more technological solutions, potentially even disrupting the way cars are produced. Will be interesting to follow this trend in the next few years.