The excessive costs of excess inventory
Until recently, it has been difficult to quantify the severity of production-related waste
due to a lack of available data. In June 2021, an ITV report revealed that the online retail giant Amazon was every week destroying around 120,000 unsold items such as smartphones and other electronic devices in one of its fulfillment centers.
Using the findings from the ITV report, we used water consumption estimates needed for smartphone production to get a rough quantitative estimate of the environmental impact of production-side waste from Amazon and then scaled this to represent all online retailers. Although these values, for reference, are in terms of water consumption estimates, CO2 consumption is highly correlated to water consumption and comprises a good portion of total carbon emissions worldwide. This makes water consumption a good indicator to measure environmental costs.
This example illustrates that focusing circular economy efforts on the production-related dynamics would result in a higher payoff than focusing efforts on the consumption-side dynamics only. So, what steps can organizations and governments take to limit the waste from excess production?
1. Decrease lead times
Long production lead time due to offshore manufacturing is a major contributor to production-related waste since companies need to determine their sourcing quantities well in advance of the selling season. With ever-increasing product choices, decision-makers are faced with significant demand uncertainty. If actual demand turns out to be lower than the estimated amount, high amounts of excess unsold inventory are destroyed even before reaching consumers.
To alleviate this problem, companies should cut production lead times by sourcing from local manufacturers instead of offshore alternatives. With shorter lead times, decisions about order quantities can be made closer to the selling season, when demand signals are less uncertain. While local manufacturers may be more costly, the improved match between supply and demand resulting from having ordering decisions placed closer to the selling season results in higher profits. Consequently, the cost of disposing of excess inventory can be drastically decreased even if individual item costs might be somewhat increased due to local sourcing.
Hugo Boss is one example of a company shortening its supply chain. The German firm is increasing production in Europe and Turkey, which are closer to its market base, to rely less on production in Southeast Asia. Daniel Grieder, CEO of Hugo Boss, claims that having factories close to Europe has been a “massive competitive advantage” for the company. Reducing production lead time by utilizing local manufacturers would thus benefit firms both in profitability and environmental aspects.