DHL Express Asia Pacific: Going Green

08/2012-5874 This case was written by Anne Yang, Research Associate, under the supervision of Francis de Véricourt, Associate Professor of Technology and Operations Management at INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2012 INSEAD TO ORDER COPIES OF INSEAD CASES, SEE DETAILS ON THE BACK COVER. COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATION MAY BE COPIED, STORED, TRANSMITTED, REPRODUCED OR DISTRIBUTED IN ANY FORM OR MEDIUM WHATSOEVER WITHOUT THE PERMISSION OF THE COPYRIGHT OWNER.

“Most experts believe that climate change is the greatest danger facing mankind and will thus trigger a green revolution with regard to products and services. Global warming will force governments to rethink their environmental policies. The very ubiquity of this threat will also change the consciousness of every individual, significantly influencing their future behaviour... They will consciously select environmentally friendly products – right across the board.”1 Frank Appel, CEO, Deutsche Post DHL “I just happen to believe that the earth's temperature has been moving up and down for millenniums now, and there are enough scientists that happen to be skeptical about the reasons for it and I happen to be one of those that are skeptical. For us to spend billions of dollars on a theory that is not proven and that you have skeptical science against that is not in America's best interest.” Rick Perry, Republican Presidential hopeful 2012, Governor of Texas2 By 2006, global warming – the continuing rise in the average temperature of the Earth’s atmosphere and oceans – had become a politically charged issue. Massive amounts of power and money were tied up in industries that emitted CO2, but while many considered it to be one of the most pressing challenges, others questioned whether it was even real. There were also arguments that the economic damage caused by cutting greenhouse gas emissions could be more damaging to humans than the effects of global warming. For example, some estimates showed that reducing US carbon dioxide emissions by 7% below 1990s levels by year 2012 (a target set by the Kyoto Protocol)3 would require higher energy taxes and regulations, causing the loss of 2.4 million jobs and $300 billion in annual economic output.4 Deutsche Post DHL (DP DHL) was the world’s leading mail and logistics services group, with 470,000 employees in more than 220 countries and territories. In 2006, as part of DHL’s comprehensive strategic review, it was the first global logistics provider to commit to a 30% improvement in its CO2 efficiency by 2020. The ambitious goal meant having to implement measures in every division of DHL, including fleet optimization for both aircraft and ground vehicles, and expanding the range of carbon-neutral, climate-friendly products and services. In 2008, DHL Express Asia Pacific (DHL Express AP) started to assess its carbon footprint from energy consumption in real estate and ground transport in order to measure and improve carbon efficiency through carbon abatement programmes. By 2010, its GoGreen initiatives covered over 2,000 sites in more than 70 markets worldwide, and it had made significant 1

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DP DHL (2009, April 6) DP DHL Education and environmental protection – what companies can do. Retrieved December 17, 2011, from http://www.dp-dhl.com/en/media_relations/speeches_and_interviews/interview_appel_future_study _delivering_tomorrow.html MSNBC (2011, August 20) First Read – Perry sticks to his guns on controversial comments. Retrieved December 05, 2011, from http://firstread.msnbc.msn.com/_news/2011/08/20/7426856-perry-sticks-to-hisguns-on-controversial-comments The Kyoto Protocol was a protocol to the United Nations Framework Convention on Climate Change (UNFCCC or FCCC), aimed at fighting global warming. American Policy Roundtable (2011 December) The Great Global Warm Up. Retrieved December 02, 2011, from http://www.aproundtable.org/tps30info/globalwarmup.html>

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progress towards achieving its 2020 goals through a range of initiatives targeted at reducing its carbon footprint. It was also the first global company to join the United Nations Environment Programme’s (UNEP) Climate Neutral Network.5

I. Deutsche Post DHL’s (DP DHL) Corporate Green Vision The UN Framework Convention on Climate Change estimated that more than 20% of global emissions of greenhouse gases were produced by the transport of goods and people. Countries that had ratified the Kyoto Protocol were starting to change their environmental policies in terms of greenhouse gases and establishing industry goals and regulations. As the public became more aware of environmental issues and global warming, consumers started asking more questions about the products and services they were using. Companies were expected to answer questions about how green their manufacturing processes and supply chain were, their carbon footprints, and whether they recycled. DP DHL felt a pressing need for action. It estimated that the company contributed 28.4 million tons of CO2 emissions6 annually. Although it represented less than 0.1% of global emissions per annum,7 it equated to a fully loaded aircraft making a round-trip from France to New York 54,000 times. CEO Frank Appel felt it was important for the company to improve its carbon efficiency as part of being a good corporate citizen. Thus, DHL made a commitment to environmental and social issues and dedicated resources to programmes in the areas of climate protection, disaster relief and education to live up to its motto ‘Living Responsibility.’ It saw the challenge of climate change as an opportunity to position itself as the leading logistics provider in ‘green’ transportation through its comprehensive GoGreen strategy (See Exhibit 1). From the business point of view, in a harsh regulatory scenario its costs could potentially increase significantly (due to regulatory compliance) compared to the business-as-usual (BAU) scenario. Appel enthused: “I see global warming not only as a threat but as a business challenge. We can turn it around to a business advantage – let’s make green products, reduce our footprint and become more competitive – and an even more attractive investment.” DP DHL announced that it planned to improve the carbon efficiency of its internal operations by 10% by 2012. More ambitiously, it would boost the carbon efficiency of all its operations (including third-party contractors) by 30% by 2020. With its target set, DP DHL embarked on implementing a carbon accounting process to measure and report carbon emissions. In 2010, DP DHL achieved 12% carbon efficiency for its own carbon emissions, surpassing its 2012 target of 10% carbon efficiency improvement two years ahead of schedule.

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The Climate Neutral Network was established to assist those interested in achieving significant reductions in greenhouse gas emissions to reach their goals, by making public the inspiring plans and strategies that pioneering partners have drawn up in order to achieve climate neutrality and encouraging them to publicize their achievements-and challenges-via regular up-dates of the web pages. To ensure transparency and credibility, DP DHL engaged independent external auditor PricewaterhouseCoopers to verify and certify its calculations. Proceedings of the National Academy of Sciences of the USA 2007, based on emissions from burning fossil fuels.

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II. DHL Express Asia Pacific Takes the Lead "To measure is to know. If you cannot measure it, you cannot improve it." Baron William Thomson Kelvin, British physicist, mathematician and engineer DHL Express Asia Pacific (DHL Express AP) was one of DP DHL’s fastest growing regions (See Exhibit 2). With overall Asia Pacific international market volume estimated at €5.54 billion, DHL Express was the clear market leader amongst the integrated logistics companies (See Exhibit 3). It employed close to 20,000 employees and shipped more than 38 million shipments annually through its three hubs in Asia.8 The company was also ahead of its peers in terms of overall customer satisfaction and bagged numerous awards in the Asia Pacific region, including the 2010 ‘Asia Pacific Green Logistics Service Provider of the Year’ distinction. With DP DHL’s global strategy set and communicated throughout the organization, Christopher Ong, DHL Express AP Vice President of Business Development, First Choice and GoGreen, decided to take a proactive approach towards reaching the region’s CO2 targets. Ong quickly recruited Romeo Gabato, a bright and enthusiastic senior analyst in his department to be the regional lead in DHL Express AP’s GoGreen project. However, neither Ong nor Gabato had any experience in carbon reduction strategies. As DHL Express AP was the first division within DP DHL (and indeed, the industry) to commence measuring and improving its carbon emissions, they realized that they needed the help of experts. Starting from scratch, DHL Express AP had to craft all-new guidelines and procedures for the entire carbon reduction process. Fortunately, Ong and Gabato were able to leverage DHL Neutral Services, a special consulting entity within DP DHL with experience in carbon reduction strategies. Its Managing Director, Asia Pacific (and INSEAD alum), Kevin Bennett, welcomed the opportunity to join DHL Express AP in its GoGreen endeavour, and they quickly formed a regional project team based out of Singapore. They established a virtual organizational network of country and site GoGreen representatives to drive the necessary changes at the country and site levels. The regional project team was also supported by a DHL Neutral Services Team based in the UK.

III. Measuring Carbon Footprint DHL Express AP followed the lead of its headquarters which had chosen to use the Greenhouse Gas Protocol (GHG Protocol) to measure and track its carbon footprint. The GHG Protocol was the most widely-used international accounting tool for businesses to understand, quantify and manage greenhouse gas emissions. Its guidelines showed how companies could set targets to measure environmental performances and outlined three potential ‘scopes’ to distinguish sources of greenhouse gas emissions. Scope 1 encompassed a company's direct GHG emissions. Scope 2 accounted for energy that was purchased from offsite (e.g., electricity). Scope 3 consisted of other indirect CO2 emissions from business partners (e.g., CO2 from transportation services of subcontractors and business partners like sub-contracted pick-up and delivery, purchased slots from airlines etc. (Refer to Exhibit 4).

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Located in Hong Kong, Bangkok, Singapore

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However, accounting for Scope 3 emissions could lead to double counting, hence reporting of Scope 3 was considered optional under the GHG Protocol. DP DHL decided to include Scope 3 in its target to provide corporate stewardship in reducing emissions in its whole supply chain. Its Scope 3 emissions – mostly from subcontracted transportation – formed approximately 80% of its carbon footprint. To track its carbon reduction progress, the company instituted a CO2 Index based on divisional operational measures. They include benchmarks such as CO2 emitted per letter for mail or CO2 per m² for real estate. The increase in overall efficiency meant that DHL Express AP had to reduce its relative carbon footprint with regards to its business with every letter mailed, every ton transported, and every square metre of warehouse or office space used. Carbon Collection Methodology, Assessment Tool and Carbon Accounting A critical task for the DHL Express AP GoGreen team was to calculate the company’s 2008 baseline carbon emissions. The team invested considerable time and resources to collect and track its carbon emissions data to create a ‘balance sheet’. Recording and tracking accurate carbon emissions was a tedious and time-consuming process. The relevant information was dispersed across different documents, but primarily found in company invoices. As a company which took great pride in keeping accurate data, the company was not afraid to dig deep into their documents to trace the exact data sources to ensure accountability. In order to centrally track its carbon emissions reduction efforts across its sites, DHL Express AP, together with DHL Neutral Services designed and developed the Carbon Footprint Assessment (CFA) tool. The GoGreen team prepared comprehensive instructions on how to obtain the relevant carbon data as well as instructions on how to proceed if information was missing (See Exhibit 5). It also took great pains to design a user-friendly CFA interface to minimize the time needed for data input and collection; each facility was required to fill in an online questionnaire which took less than ten minutes to complete on a monthly basis. GoGreen Data Collection and DHL Express Staff Involvement With the GoGreen instructions and tools in place, the team was ready to roll out the GoGreen programme across its Asia Pacific sites. The timing of the launch amidst the global financial crisis of 2008 could not have been worse. With uncertainty over DHL Express’ core business, staff grumbled that they were either swamped with reducing operational costs or cultivating new business and did not have time to rummage through old invoices for carbon-related data to input into the CFA tool. Furthermore, it was already Q3 2008, which meant they had to dig through three quarters of invoices and other documentations from the start of 2008 to collect the baseline data for the year. Despite earlier preparations by the core AP GoGreen team, additional exceptions to the CFA tool as well as Carbon Accounting Guidelines surfaced; paperwork and system changes required to achieve the requirements were substantial. It was an uphill task to motivate the DHL Express AP staff to allocate any part of their time at work to the GoGreen initiative. Serendipitously, the project team was able to take advantage of the financial crisis and the general focus on efficiency in favour of the GoGreen programme. They discovered that by explaining to the DHL Express AP staff that by optimizing the company’s supply chain both

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overall costs and carbon emissions would be lowered, they were more receptive to GoGreen initiatives. It was shown as another way to cut costs in their operations. Ong explained that “If you are carbon efficient, it means that you are energy efficient, which means you’re lowering the cost of operating our business. Once the Country, Finance and Operations Managers were able to make the connection that by making a difference to climate change, they were also helping their bottom-line, the momentum of the GoGreen initiatives picked up.” DHL Express Asia Pacific GoGreen Initiatives The project team had anticipated from the programme’s inception that the success of its GoGreen initiatives was highly dependent on their colleagues on the ground. Success stories started to trickle in and the DHL Express AP staff received immediate (and positive) feedback via the CFA tool. To generate and sustain the initiatives, GoGreen messages were incorporated into DHL’s morning briefings. Minor behavioural changes such as adjusting air conditioning to optimal settings were repeatedly encouraged. GoGreen boards were installed in all DHL Express’ AP facilities to enable staff to track developments in the programme and the monthly energy consumption of their facilities. Graphs and reports from the CFA system were printed out at each facility and placed on prominently located noticeboards for DHL Express staff to monitor their GoGreen progress. Benchmarks with other facilities fostered friendly competition. Being able to compare and see how each change, no matter how minor, contributed to reducing energy consumption, spurred further GoGreen efforts. The GoGreen team emphasized ideas that centred on two main sources of its carbon emissions – electricity and fuel consumption. Energy reduction initiatives reaped immediate benefits, including replacing regular light bulbs with energy-efficient lighting and optimizing the use of natural daylight through skylights. All employees were empowered to take actions to reduce their own energy usage –a DHL Express Singapore staff suggestion of ‘lights off at lunchtime’ became the norm in its facilities. In another example, conveyor belts at DHL Express’ warehouse facilities used to run even when there were no packages being sorted as the previous focus had been on ‘operational efficiency’ – minimal time wastage for the conveyor belt to shut down and start up again in order to be able to sort parcels and packages as quickly as possible. The team experimented and found ways to automatically shut down the conveyor belt when there were no parcels and packages being sorted. With this change, they succeeded in cutting electricity costs and carbon emissions with minimal disruption to operations. Fuel management also proved to be one of the most effective short-term improvement tools for DHL Express AP’s GoGreen programme; for every litre of fuel saved, 2.6kgs less carbon were emitted. The team conducted fuel management training for all DHL Express couriers in better use of braking, gears, cruise control, momentum, acceleration and correct tyre pressure, and provided each driver with their weekly fuel-efficiency report. The couriers enjoyed competing to see who had been the most efficient on their routes. Over a nine-week period, a pilot trial saw a 12% improvement in fuel efficiency, a 5% reduction in idling time, and a 45% reduction in speeding events. As the months progressed, DHL Express AP employees gained deeper insights into ways to improve their carbon efficiency and were able to coordinate bigger GoGreen initiatives

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spanning functions and even countries. For example, DHL Express India made a massive 29% improvement in its CO2 efficiency in 2009 due to the GoGreen carbon abatement measures put in place. DHL Express India9 worked on substituting air routes with inter-city road haul to reduce its carbon emissions. It implemented pick-up and delivery optimization measures to further enhance the company’s operational efficiency and service levels for customers. Through optimizing courier route runs and replacing vehicles with motorbikes, it also improved its overall fuel efficiency. In addition to network optimization efforts, new technology such as the Blue Dart Smart Truck10 (See Exhibit 6) was piloted. The Smart Truck came with the latest technological innovations in the industry – an optimized route planner that used real-time GPS systems and local traffic data to calculate an ideal sequence of deliveries, and flexibility to allow for last-minute pickups was pilot tested. Despite rising shipment volumes, DHL Express AP increased the utilization of its facility assets and consolidated several warehouse/distribution facilities in India and Pakistan DHL Express Investment Process Earlier analysis had shown that capital investments in road transport, ocean, rail and buildings and facilities could make a significant carbon emissions difference to its 2009 carbon footprint. More importantly, new investments in property, plant and equipment could impact the company’s environmental performance for the next 50 years. Previously, DHL Express AP staff had followed a process based on NPV and IRR analyses prior to getting approval for new investments. The team revamped the process to incorporate ‘GoGreen’ criteria into all procurement decisions, ranging from its recycled paper policy to long-term large capital investments in buildings (See Exhibit 7). Romeo elaborated on the new process: “This is not a trade-off but rather an independently-assessed criteria, which is subsequently integrated into all DHL Express AP’s business decisions. At the staff level, they are trained to complete a simple cost-benefit calculation to determine the impact on CO2 savings for each project whether its replacement or investment on additional assets,11 and depending on the investment amount, sign-offs by various management levels of the GoGreen team need to be secured.”

IV. Continuing the GoGreen Journey DHL Express AP leadership also saw the GoGreen initiatives as an opportunity to further differentiate itself from its competition. Leveraging the CFA tool and internal system, it could generate accurate reports of customer carbon footprints based on actual operational data, which was a first for the express delivery logistics industry. By packaging the GoGreen service as a way for its customers to engage in corporate social responsibility (CSR) and

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Blue Dart - India’s premier courier and integrated express package distribution company in which DHL Express (Singapore) Pte. Ltd had acquired a 81.03% stake in 2005. Developed by DP DHL’s logistics technology unit, DHL Solutions & Innovations in DP DHL CO2 savings are only calculated for replacement assets (assets which replace other assets) which either use energy or generate CO2 emissions

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contribute to reducing global CO2 emissions, DHL Express AP could attract new accounts and increase customer loyalty. For a small surcharge, DHL Express AP customers could ‘offset’ their shipment’s carbon emissions by reinvesting in certified carbon management programmes12 (See Exhibit 8). DHL Express AP succeeded in securing contracts with several major clients. While the premium charged by DHL Express often did not cover the cost of implementing and running the DHL GoGreen service, the service enhanced DHL’s brand awareness and image, particularly for its environmental and GoGreen efforts. Gabato elaborated: “Many companies are now more aware of environmental issues and would like their suppliers to be as green as possible. DHL Express is giving our customers the opportunity to play their part in reducing CO2 emissions.” DHL Express AP’s GoGreen initiatives resulted in an impressive drop of 19 million kg in its CO2 footprint and reduced its overall energy costs by €10.1 million in 2009 (compared with 2008) despite higher power rates and the opening of numerous new sites across Asia Pacific. It also succeeded in improving its carbon footprint with CO2 abatement initiatives and improving its overall CO2 efficiency by 19% in 2009 and 14% in 2010. For its efforts, DHL Express was recognized for its industry-leading excellence in Asia Pacific with five wins at the 2009 Frost & Sullivan Asia Pacific Transportation & Logistics Awards. The project team was proud of DHL Express AP’s achievements over the past two years and DHL Express AP’s GoGreen efforts impressed many in the industry. However, there were growing signs of consumer apathy towards environmental issues (including global warming) as well as the suspicion that environmental claims were simply marketing ploys, and that the term ‘green’ had been used so often it had lost all meaning.13

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Programmes included a biomass and a hydro power plant in India and a wind farm in China, as well as internal DHL projects such as alternative fleet technology (e.g., electro-hybrid vehicles and fuel cells) and non-fossil fuels (e.g., biogas, hydrogen, and vegetable oil). To ensure accountability and transparency, DHL Express AP arranged for the programme to be annually verified by an independent certifying body – the Swiss-based Société Générale de Surveillance and their customers received certification from DHL stating the total amount of CO2 offset on their behalf during the year. Bloom, Michael, Thomson, Michelle, “Turning Green Into Gold: Green Marketing for Profit” The Conference Board of Canada, October 2009.

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Exhibit 1 DHL Express –GoGreen Strategy



Source: DP DHL Internal document

Exhibit 2 DHL Express Asia Pacific Key Figures 2009  Revenue 

€m  10,312 

of which Europe 

€m 

5,603 

  

Americas 

€m 

1,473 

  

Asia Pacific 

€m 

2,580 

  

EEMEA (Eastern Europe, the Middle East and Africa) 

€m 

1,054 

  

Consolidation/other 

€m 

‐398 

EBIT before non‐recurring items 

€m 

238 

EBIT     

€m 

‐807 

Return on sales  

% 

‐7.8 

Operating cash flow 

€m 

‐459 

Number of employees2) 

     

1)

1) EBIT/revenue. 

99,494    

2) Average FTE as at 31 December 2009. 

Source: DP DHL Website

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Exhibit 3 Asia Pacific International Express Market (2008)1: Top 4 Market volume: €5,542 million

7% TNT 11% UPS

23% FedEx

36% DHL

1) Country base: AU, CN, HK, ID, IN, JP, KR, NZ, MY, PH, SG, TH, TW, VN. Source: MRSC study from 2007, annual reports, press releases, company websites, estimates and analyst reports. Asia Pacific international express market

Source: DP DHL Website

Exhibit 4 DP DHL – GHG Scope The  GHG  Protocol  defines  the  approach  to  accounting  and  reporting  of  greenhouse  gas  emissions along three scopes: 

Scope 1: 

Direct CO2 emissions from purchased fossil fuels such as petrol, gasoline or kerosene  used in vehicles, trucks, cars, aircraft and boats which we directly own, rent, lease or  charter,  and  direct  CO2  emissions  from  fossil  fuels  used  to  heat,  cool  or  provide  power in buildings which we own, rent or lease. 

Scope 2: 

Indirect  CO2  emissions  from  purchased  electricity  and  from  purchased  district  heating or cooling. 

Scope 3: 

Indirect  CO2  emissions  from  subcontracted  transport  (e.g.,  subcontracted  pick‐up  and  delivery,  purchased  air  freight,  purchased  space  on  container  ships,  trains,  trucks, etc.). 

Furthermore,  the  GHG  Protocol  defines  core  issues  such  as  relevance,  completeness,  consistency, transparency and accuracy of carbon data.  Source: DP DHL Internal documents

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Exhibit 5 DHL Express – CFA Tool

The energy consumption data has to be collected from external invoices or similar documents (fuel reports, etc.) from gas stations, power supply companies Source: DP DHL Internal Website

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Exhibit 6 DHL Express – Smart Truck DHL India was the first to deploy Smart Truck technology outside Germany in August 2010. The technology is designed to provide solutions to urban logistic challenges such as traffic restrictions, density and clogging, while ensuring environmental protection and fulfilling the customer need for ontime delivery, said the company. Created by DHL Solutions and Innovations (DSI) in Germany, Smart Truck was a pick-up and delivery vehicle that combined numerous innovative technologies including a route planner. DHL Smart Truck reduced number of miles travelled by 15 percent and length of average route by 8 percent during its pilot stage which reduced both fuel consumption and CO2 emissions.

Smart Truck increases efficiency in both pick-up and delivery

The intelligent route planning system is based on satellite-supported geo and telematic data.

The system literally gives the green light if everything is on board. Source: DP DHL Website and Press Release

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Exhibit 7 DHL Express Asia Instructions on Calculating CO2 savings A simple calculation is needed to determine the CO 2 savings from replacement assets1

A Amount of fuel/energy used by original asset (in liters of fuel, kilowatt hours of electricity etc.)

‐

B

=

Amount of energy used by replacement asset (in liters of fuel, kilowatt hours of electricity etc.)

C Savings from replacement asset (in liters of fuel, kilowatt hours of electricity etc.)

The amount of fuel or energy used by the original and the replacement asset could be included in the BCA documentation. If it's not included, or for more complex investments, you should ask the BCA owner or the relevant department (e.g. Operations, Real Estate or Procurement) for support.

>

CO2 Savings from replacement asset in kilos or tonnes

Convert fuel or energy savings to CO 2 savings using the CO2 converter using the standard DPDHL standard emission factors.

Source: DHL Express GoGreen 1) CO2 savings are only calculated for replacement assets (assets which replace other assets) which either use energy or which generate CO2 emissions

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Exhibit 8 DHL Express – The GoGreen Shipment

Annually a certificate is issued by DHL and verified by SGS*. The certificate states total amount of offset CO2 per customer. * SGS, formerly Société Générale de Surveillance, based in Geneva, Switzerland, is the world‘s leading inspection, verification, testing and certification company.

Source: DHL Express GoGreen internal documents

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