Assessing the environmental cost of supply chains

Using nearshoring is always better for the environment than using expedited shipping to make the supply chain faster, Swinney said. However, faster supply chains of any type—including nearshoring—can be better—or worse—for the environment than slow, offshore supply chains.

“For example, you might think that using air shipping is always worse for the environment than shipping via sea,” Swinney said, “but that’s not necessarily true.”

Swinney said firms relying on slow supply chains that produce offshore and ship by sea have to make production decisions well in advance of knowing market demand.

“They have to guess what demand is going to be and often they will guess wrong,” he said, “so they will sometimes make too much, and that excess will be disposed of at a significant environmental cost.”

The environmental benefit of reducing such excess production potentially offsets the environmental cost of using airplanes to transport products, Swinney explained.

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“A more responsive supply chain can reduce overproduction, let the firm make better inventory decisions, and reduce waste,” he said.

But more responsive supply chains can also be worse for the environment than slow, offshore supply--even in the case of nearshoring, the type of responsiveness considered most eco-friendly, Swinney said.

“If you increase supply chain speed, and demand turns out to be really high, the firm has more ability to meet that demand by increasing production,” Swinney said. “And this could be bad for the environment.”

Whether reducing inventory hurts the environment depends on what alternative the consumer has, Swinney added.  

“Say I sell electric vehicles. If I'm out of stock, and the customer substitutes with a new gas car or keeps using their old gas car, then the outside option is environmentally worse,” he said.

Swinney said after COVID, companies are under pressure to build faster, more responsive supply chains. But fast supply chains are more expensive, the researchers say, while slow ones are often more cost-efficient.

The researchers examined when faster supply chains are both good for firm profits and for the environment. They found that a responsive supply chain is most likely to be “win-win” if demand for the product is highly variable and the alternative product in the market is environmentally worse, Swinney said.

With highly variable demand, a firm with a responsive supply chain can capture sudden spikes in demand that would otherwise go somewhere else, Swinney said. If alternative products are environmentally worse, capturing those demand spikes is good for the environment.

Swinney said amid the recent push to diversify production and build resilient supply chains, speeding up supply chains—especially by reshoring production—has been getting a lot of attention.

Swinney hopes both policymakers and companies can use his research to re-evaluate their supply chain strategies by factoring in the environmental cost related to their unique circumstances.

“Governments, in particular, need to be selective about which products they are going to provide incentives to re-shore production,” Swinney said. “Our work shows you need to look at this on a case by case basis.”