The EU Green Deal and operations: advancing from digital operations transformation to physical value chain reengineering

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• Legal

Zeroing in on Scope 3…

It’s a shift for which many companies are currently woefully underprepared. In PwC’s recent EU Green Deal Survey – conducted among 296 senior decision-makers across Europe – less than half of the respondents were familiar with the Green Deal, and only 21% very familiar. It’s a knowledge gap that’s evident in companies’ current approach to operations transformation. And it’s one they must close as a matter of urgency.

Why does the EU Green Deal change things so radically? Because it looks beyond companies’ Scope 1 and Scope 2 impacts – which include direct emissions from their own operations, and indirect ones from things like purchased energy – and zeroes in on Scope 3: emissions all the way up and down the value chain, from raw materials and suppliers to shipping to use of its products by customers.

…will reshape global supply chains

Under the Green Deal, a focus on measuring and managing Scope 3 must be embedded into companies’ operating models and will directly impact their profits and losses. The effect is revolutionary. To see why, take a typical global supply chain that’s been digitally optimised. The company has used digitalisation to quickly connect changes in market demand all the way back to its suppliers. The problem, however, is that the supply chain is still global, probably with sourcing in Asia and elsewhere, potentially creating major sustainability impacts.

What’s more, as well as bringing profound implications for sustainability, global supply chains also create a combination of low resilience and high supply chain risk. That’s why sustainability – coupled with new customer expectations and the need for supply chain resilience – is accelerating the move towards the restructuring and re-engineering of value chains.

The Green Deal reinforces the needs for change. By requiring companies to think holistically about their emissions footprint across the whole value chain, it expands the focus away from the digitalisation of the legacy supply chain structure, relationships and locations. And it demands a fundamental rethink of how the value chain is set up – including what materials are used and how they’re sourced; which suppliers process them, and in what way; where those suppliers are located geographically; how the products are designed and made; and how they’re distributed to end-customers.

Regionalisation and collaboration

The effect is that companies stop focusing just on connecting data flows, and start seeking out ways to reshape and reengineer their value chains to minimise environmental impacts. As companies do this, and begin actively owning and managing their Scope 3 impacts, we’re seeing three key trends emerge:

• Regionalisation, involving the reconfiguration of global supply chains into regional supply chains – a change that requires a new manufacturing and distribution footprint, and consequently a different flow of goods.
• The development of new suppliers and supply lines, shifting to regional supply with enhanced sustainability.
• Improved product design and use of materials (including re-use) to ensure that the future product portfolio is reusable and will provide better support for the progression to Net Zero. Hence a key trigger for future value chain redesign is now linked to changes in product design in combination with the supply chain.

Many of the companies taking these steps are also looking to move beyond traditional customer/supplier interactions and relationships, and build collaborative alliances and partnerships with tier two and tier three suppliers. The most forward-thinking companies will use this closer integration not only to achieve environmental goals, but also to drive optimisation from a servicing and cost perspective.

Bringing tax and operations together…

So the Green Deal creates major opportunities. But to maximise them, companies also need to do something more: integrate and align their tax and operations agendas more closely. Already, many companies are investing in getting their supply chains ready for Net Zero. But not all of them realise that with changing patterns of supply chain, the tax footprint also changes, heavily impacting project decision-making and budgeting. In addition, organisations that are tuned in can leverage incentives made available by governments to help them speed the transition to Net Zero.

Integrating tax is key to reaping the full benefits of the Green Deal. All tax planning should be updated with the Green Deal’s implications for operations – and all operations decisions taken with the tax perspective in mind. This means bringing together expertise in operations, supply chain, tax, reporting, government incentives, and sustainability goals and management. PwC’s comprehensive range of closely-integrated capabilities across all these areas makes us well qualified to help.

…to reap major benefits

What’s the prize on offer for companies that get all this right? They’ll clearly help to save the planet. But the benefits will go much further. They’ll also benefit from lower costs and higher competitiveness, including in areas like tax and CapEx. This competitiveness also extends into the workforce, where sustainability goes a long way in attracting talent. And in many industries, they’ll find their customers are increasingly eager to buy products that have the Green Deal embedded in them. So there’ll be positive impacts on top-line sales as well as bottom-line costs, with companies that have adapted well to the Green Deal winning market share.

In conclusion, to set up sustainable operations aligned to the Green Deal, companies need to rethink everything from their product designs to how they operate, and from their choice of suppliers to their delivery of products to the market. Instead of focusing narrowly on operational transformation, enhancing operations today comes with a need to focus on the social impact on each location – and on how the organisation wants to deliver positively.

As a result, it’s no longer about value chain optimisation, but value chain reengineering. That’s the big opportunity that the EU Green Deal is opening up. And organisations that seize this opportunity – by rethinking their value chain, and designing sustainability and resilience into their future set-up – will be able to outperform the market both on the top and bottom line. That’s the prize on offer.