Evolution of Green Value Chains

Written by Nicholas Little, Director Railway Education, Center for Railway Research and Education, Michigan State University Eli Broad College of Business

Railways, passenger and freight, need to think and behave differently to survive and prosper. Headlines like this one from a McKinsey & Company January 2022 article by Jordan Bar Am, Nina Engels, Sebastian Gatzer, Jacqueline Lang and Frank Sänger of the company’s Consumer Packaged Goods Practice drive the point home: “How to prepare for a sustainable future along the value chain.”

Why? We see a lot about sustainability, so what’s different here?

First, the McKinsey article talks about the value chain, not the supply chain. Value chains, by definition, are a series of relationships that result in the outcome of consumer value. The value chain combines a series of intermediate value-adds, both outputs and outcomes. 

Supply chains are much more about combining several discrete outputs, many of which contribute to overall value. Regular readers of my writings may recognize this difference, but let’s briefly recap. Only one person puts real money into either a value chain or a supply chain. Modern consumers seek to spend their money on brands that they perceive to have close alignment to their personal values.

Is this all marketing mumbo-jumbo? Apparently not, according to modern marketing thinking. Professor Ayalla Ruvio (presenting to the Michigan State University Center for Railway Research and Education Railway Management Certificate Program in 2021) gave several examples of products and services that have strong brand loyalty because of what they stand for, rather than what they are; what they represent emotionally as well as what they accomplish.

One of the key areas this is taking place is around “sustainability.” This has to be one of the most used and abused words these days in business and society. What does it really mean? McKinsey’s article says it covers environmental, social and governance areas (i.e., ESG – organizations adopted responsibilities for sustainable development in these three areas).

Many years ago, I represented the U.K. Post Office in meetings of The Prince of Wales’ Trust for the Environment, presided over by Prince Charles himself. Some 25 major U.K. companies from the private and public sectors were represented. Listening to the combined brainpower indicated three major categories for impact: environment, economic and ethics. You could equate these to ESG’s scope today. However, one very important aspect is missing.

When I came to MSU (in 1995, originally for a year on loan), I very quickly identified the missing link. It’s another “e” word—education. It’s not about the doing—that’s training. It’s about learning and understanding. It’s about knowledge and sharing that knowledge. Sharing it along the supply and value chains.

Such sharing is one of the factors that I believe differentiates the two types of chains. Both are relationships. Supply chain relationships are based on data and facts and are event-driven, measurable and revolve around operational output and capabilities. A major current area of focus is on visibility. I could argue that is not true visibility.

In contrast, value chains are driven by achievement. Providing the final consumer with things they value, even those attributes that are hard to define and incredibly hard to evaluate or measure.

Successful value chains share much more than data. Successful value chains share and amplify consumer expectations and experiences. Successful value chains are made up of companies that identify with each other’s strategic imperatives. 

One of my mentors in the 1970s to 1990s was Anita Roddick. Dame Anita Lucia Roddick DBE founded The Body Shop stores in the U.K. and took the chain international. Its cosmetics and beauty products were natural. Their suppliers had to support the brand’s image to develop “ethical consumerism.” This was a fundamental, underlying and enforced strategy.

Now think about today’s and tomorrow’s consumers from the four generations who travel and buy products that are transported between supply chain stages and to the point of purchase/consumption. Baby Boomers are no longer the prime target audience for consumer goods companies. Generations X, Y (Millennials) and Z have the most purchasing power. The latter two appear to account for most discretionary expenditure, a growing market segment. 

What does this mean for rail? Let’s look at passenger traffic first. I was recently asked how Amtrak’s carbon (emissions) footprint compared with air and road for specific journeys. Detailed numbers are hard to find, let alone determine a tipping point where one mode is always more beneficial in terms of carbon impact (and that’s not the only metric that should be explored). You need to look at the end-to-end journey and calculate for each mode used to come up with any answer that approaches a scientific result. You also need to look at other emissions and on a “well-to-wheel” basis.

All transport modes are currently seeking to reduce emissions, including carbon and specific pollutants. Passenger journeys often start from home and involve walking, riding a bike, driving/using a car, bus, plane or train. There are apps available now that can calculate your carbon footprint using different modes for the individual sectors in a given journey so individuals can offset variables such a journey time against global impact against cost.

What about freight? Trucking and some railroads have adopted SmartWay (the Federal EPA’s transport-related emissions calculator), yet it is still not easy to calculate the E2E sustainability impact of just carbon emissions all the way back through a value chain. In fact, experts project that by 2050, global freight emissions will surpass those from passenger vehicles. This, of course, assumes a constant rate of (slow?) adoption of EV technology for freight transportation.

I suggest that passenger vehicles (cars, buses and trains—particularly where electrified) and developed-world heavy trucks will accelerate the rate of adoption of low- and zero-emission power technologies. Rail faces a danger. Rail locomotives have much longer life-expectancy and hence require more capital asset replacement spend to try and level the competitive playing field. Yes, rebuilding locos to battery or hydrogen fuel-cell/battery hybrids may be an answer, but as BNSF’s mixed-consist freight locomotive trial demonstrated, diesel fuel has a major energy density benefit over other options that may not be easily addressed.

Once electricity is generated from renewable sources and hydrogen can be produced at scale and on-site by electrolysis from 100% renewably sourced electricity, or we find an economic way for long-distance electrification of relatively uncongested transcon routes, we face a prospect of being left behind in the dust of other modes more readily able to convert, adapt and change to low- or zero-emissions power.

That will mean that the thoughtful end consumer will need to be informed, accurately and in full, of the positive contributions rail can make to the product or service they buy. We should start with going well beyond current proposed systems, many of which serve only to provide specific output metrics. We must seek to provide true visibility that meets customers’ strategic goals. We need to show the benefits from the rail network for the whole journey, not just a segment on a Class I intermodal train.

Nick Little

The time to start doing this is now. We have the base data to make calculations, and our industry should think about producing an app that allows prospective shippers to see comparative emissions data for different traffic types over a route including interchanges. Think of something like Google Maps on steroids!

Finally, from MSU … GO GREEN!

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