Measuring and managing total impact: Strengthening business decisions for business leaders - Food & beverage scenario

Start adding items to your reading lists:
or
Save this item to:
This item has been saved to your reading list.

Should barley be imported or should an alternative, locally grown crop be grown for the brewery?

Procurement decisions are based on capital and revenue expenditure (including overheads) as well as potential risks such as regulatory change. Often they do not take account of wider impacts (e.g. environmental or social) or the more intangible implications for business (e.g. reputation or changes in consumer attitudes).

In this case, the brewer wants a balanced, holistic analysis to support its decision. An approach that compares the total long-term impact of using barley with that of a locally grown alternative will provide the basis for transparent decision making on sourcing. This new total impact perspective could also help address, for example, security of supply and foreign exchange exposures. In addition, it would allow the brewer to develop a clearer long-term strategy for the business and help engage with stakeholders on the basis of a more credible analysis of the impacts of business decisions.

Overview of the options

Option 1: Import barley

Upside:

  • Less consumption of water, which is a scarce resource of the local community

Downside:

  • Higher GHG emissions
  • Lower investment in new infrastructure

Option 2: Grow and source locally

Upside:

  • Communities benefit more (jobs, health etc)
  • Investment in new infrastructure
  • Lower GHG emissions

Downside:

  • Higher consumption of scarce water resource and associated health impacts

Summary outputs of the TIMM analysis

The brewer has two options: it can import barley from Country A (Option 1) or it can grow an alternative crop locally in Country B (Option 2). Each option has different social, tax, economic and environmental implications as well as, of course, financial ones. TIMM can be used to measure and value not only the business financial performance, but also the societal costs and benefits of each option on both a global and a national basis. A simplified analysis of the pros and cons of each strategy are set out.

The TIMM wheel summarises the results of the TIMM analysis for the two options. Each bar represents a positive (green) or negative (red) impact. The inner circle represents the expected return to shareholders. The different impacts can be compared and aggregated.

Business financial performance:

  • Local sourcing in Option 2 reduces the brewer’s costs and risks due to lower distribution costs and reduced foreign exchange exposure.
  • Local sourcing in Option 2 enhances the brewer’s reputation with local consumers which is reflected in stronger demand and customer loyalty; in Option 1, the brewer’s reputation in barley-growing countries is weakened, but only marginally.
  • However, Option 2 has higher set up and running costs, including supply chain development, community investment and increased local staff and offices.

Trade-off: Will reduced operating costs of Option 1 outweigh the benefits and set-up costs of Option 2?

 

Environment:

  • Option 2 generates lower greenhouse gas emissions as transport demands are lower and creates less water pollution because more traditional growing techniques are utilised which use natural fertilisers.
  • On the other hand, Option 2 has some higher environmental costs due to less advanced waste management and the loss of valuable ecosystems which may have been cleared for agricultural purposes.
  • Even though the alternative crop chosen requires less water than barley, Country B has greater water scarcity which means consuming water leads to less available clean water for local communities.

Trade off: Which is better... reduced global greenhouse gas emissions or better water availability in Country B?

 

Economic:

  • More mechanised barley production in Country A means that more physical capital is employed in Option 1.
  • Local procurement under Option 2 has more widespread economic impacts along the brewer’s supply chain. Although, given the higher value added activities across the supply chain for Option 1 (i.e. higher use of technology), this generates overall higher profits.
  • Additional investment is needed under Option 2 to establish the infrastructure required for local production which will have a positive economic impact.
  • At a global level, there is no net effect on exports so the impact in both options is zero.
  • Even though Option 2 will require more local employees, these generate lower value added per employee so the overall impacts for the two options are similar.

Trade-off: It can be seen the impact on the economies of the two countries is very different under the two scenarios.

 

Social:

  • Under Option 2, local farmers benefit from access to a (more) secure market and the support of the brewer in developing business infrastructure such as co-operatives, training and health services. This is reflected in more secure livelihoods, greater self-confidence and enhanced cohesion of the agricultural communities.
  • Under Option 1, barley is bought on the international market with no established direct supply chain relationship. This means the brewer’s influence is weaker on the social outcomes in exporting communities.
  • Volumes of beer consumption are largely unaffected by the choice of option.

Trade-off: There would appear to be a clear social impact benefit of Option 2.

 

Tax:

  • Under Option 2 the brewer is expected to be more profitable in the long term and, hence, liable to greater profits tax. However, in the short term, the costs of establishing the local supply chain will reduce profits tax.
  • Under Option 1, duty would be payable on imports of barley; this would not be offset by the taxes payable by local farmers.

Trade-off: In reality, tax considerations would be considerably more complex.

 

Summary

In this hypothetical example, in the absence of total impact thinking, the decision would have been made largely using financial analysis with some qualitative overlays.

TIMM brings a new perspective. Using TIMM and putting a value on the qualitative overlays, the total impact of each decision is clear and the many trade-offs between Options 1 and 2 are easy to identify. It is immediately obvious that there are two key trade-offs that need to be considered:

  • reduced greenhouse gas emissions vs increased water usage in a gas emissions more water scarce location
  • improved societal outcomes vs an increased use of an already scarce water resource in those same communities

TIMM may not be able to provide the empirical answer, but it gives management significantly more information with which to make a more informed decision, and communicate the rationale for that decision with their multiple stakeholders.

Contact us

Tom Beagent

Director, Impact Strategy and Analytics

Tel: +44 7973 565380

Will Evison

Director

Tel: +44 (0)7718 864854

Follow us