New Metrics

Vertical or Horizontal? Measuring Sustainability & Supply Chain Implications

I’ve been thinking about different approaches to measuring sustainability for some time now (for the purpose of this discussion, I’m concerned mostly with quantifying carbon emissions, though the discussion can be generalized beyond this). I’ve begun to categorize the measurement approaches I see into one of two categories: horizontal vs. vertical.The horizontal approach is organization-centric. It measures total impact across an organization. The vertical approach is product-centric. It looks all the way up and down a product’s supply chain and measures the total impact of the product through its life cycle.

By Yoram Bernet | Published 10 years ago | About a 5 minute read

The horizontal approach is *organization-*centric. It measures total impact across an organization. The vertical approach is *product-*centric. It looks all the way up and down a product’s supply chain and measures the total impact of the product through its life cycle.

Both of these are valuable — the horizontal approach enables us to make statements like, “Acme generated 30,000 tonnes of CO2e this month.” We can go further and look, for example, at emissions per square foot of facility area. That might help us identify outliers and discover opportunities for increased efficiency. This approach also provides just the kind of data that Acme might report to the CDP.

But the horizontal approach does not tell us the impact of a particular product.

For example, what if I wanted to know the carbon cost of a specific widget that Acme produced? The horizontal approach does not immediately tell me the carbon cost that Acme incurred in producing this product, let alone the life cycle cost of producing this product.

But this is exactly what consumers want to know. And — it’s what product manufacturers want to be able to show their customers. Wouldn’t it be nice if they could slap a sticker on their product, rating it with a number so that end customers could do comparison shopping at the retail store, comparing the carbon emissions associated with Acme’s lederhosen to those associated with Schwartz Brothers' lederhosen?

This calls for the vertical approach.

The vertical approach is difficult. There are many sophisticated life cycle analysis tools and plenty of consultants happy to spend years conducting LCA studies. But these are mostly theoretical or non-empirical. The Higg Index (from the Sustainable Apparel Coalition) is a promising and novel example of the vertical approach, but (as of v1.0) it does not actually measure emissions so much as rank products using a unitless index.

I think that there’s a lot to be gained by combining the horizontal approach and the vertical approach. Consider the following hybrid approach:

Each participant in a product’s supply chain conducts the kind of horizontal GHG inventory that we described earlier.
Each participant in the supply chain works out how to allocate their overall emissions among the different widgets that they produce. This is tough — while it may not be possible to do this perfectly, it’s probably possible to get pretty close.
Finally — each participant in the supply chain provides an emissions per widget number to the next link down the chain. As this number moves down the chain, it represents cumulative emissions for the product.

See Figure 1 for an illustration of how this works.

Vertical

Figure 1 shows a few links in an imaginary supply chain for an imaginary product. Acme is represented by the circle at link N in the chain. Acme builds lederhosen out of three different widgets that Acme buys from various vendors that are, by definition, at link N-1 in the supply chain (and are represented by separate circles). Each of the vendors in link N-1 have built their widgets from widgets supplied in turn by their vendors (at link N-2) and so forth.

Each of the three vendors at link N-1 have conducted their own GHG inventory for their operations and have worked out how to allocate the appropriate portion of their emissions to each of the widgets that they produce. They also work out how to include emissions from prior links in the supply chain (we’ll see how this part works in just a minute when we look at Acme).

Now, when each of the vendors at level N-1 reports to Acme, they include a kind of emissions accounting trail for the emissions associated with the specific widget that they are providing Acme, itemizing the associated emissions from each level for this specific widget.

OK, now it’s Acme’s turn to do the right thing. Acme supplies a certain widget (call it widget D) to a downstream customer at link N+1. Acme builds this widget using parts of the widgets (A, B and C) that it received from various vendors at link N-1. When Acme reports to its downstream customer, it supplies an accounting trail for each widget that it sells the customer. This accounting trail includes:

(N-3widget A + N-2widget A + N-1widget A) * Rwidget A +
(N-3widget B + N-2widget B + N-1widget B) * Rwidget B +
(N-3widget C + N-2widget C + N-1widget C) * Rwidget C +
Nops * Rops D

where:

N-nwidget X represents the emissions quantity passed to Acme for widget X from link n
Rwidget X represents the proportion of widget X used to make widget D
Nops represents the total operational emissions of Acme
Rops represents the proportion of Acme’s total operational emissions allocated to widget D

In this manner, the last link in the supply chain effectively provides the retailer with the accumulated emissions for the widget.

I’d love to see step 2 developed further. Do you represent a company that does GHG inventories today? How would you allocate your company-wide operational emissions to the various widgets that you send down your supply chain? Tell us in the comments section below.