The big picture
- Because efforts to decrease CO2 emissions have fallen short of current net-zero targets, leading companies are committing to rapid change and ambitious new goals for emissions reduction.
- Every industrial machine comprises countless essential components; producing these components generates carbon emissions throughout the machines’ lifecycle.
- Manufacturing, transport, and construction are the most emission-heavy sectors in the world when Scope 3 emissions from their supply chains are accounted for.
The challenge at hand
Danfoss is among the organizations working to resolve this challenge. As one of the largest producers of component parts for heating and cooling, drives, and power solutions, the Nordic company’s net-zero transformation is helping manufacturers around the world to make their supply chains green.
In the summer of 2021, Kim Fausing, CEO, and Jürgen Fischer, president of Danfoss Climate Solutions, began high-level discussions with McKinsey about how to engage customers—who use Danfoss’s component parts to produce equipment across emission-heavy sectors—as preferred partners in decarbonization. In these conversations, Danfoss sought to determine its optimal decarbonization target and to develop a realistic plan to meet it.
“Everything Danfoss does is focused on increasing machine productivity, reducing emissions, lowering energy consumption, and enabling electrification.” Kim noted. “We want to be the best-in-class preferred partner for customers seeking to decarbonize, and we are taking our own medicine by continuously making the way we run our business more energy-efficient.”
Teaming up with McKinsey sustainability experts, Danfoss looked for ways to decarbonize various aspects of its Climate Solutions business. The company learned that, while most carbon emissions come from using products throughout their entire lifecycle, the second-largest source of emissions lies in the materials and construction processes. Product redesign and an alternative supply chain offered two possible ways forward.
Results achieved
To help accomplish these objectives, Danfoss, with McKinsey’s help, developed a digital platform called Zero Carbon Product that assesses carbon emissions along each product’s entire supply chain. Developed from McKinsey’s Catalyst Zero solution, Zero Carbon Product has mapped Danfoss’s bill of materials for each product against a library of around 600 decarbonization levers spanning 100 material categories. The result was a cost-optimized decarbonization roadmap showing, for example, alternative suppliers for certain materials like iron, steel, and aluminum. Danfoss can use this roadmap to create low-carbon versions of existing products at low cost.
Danfoss next decided to:
- Test the roadmap’s likelihood of success. Pilot journeys were created for five products from Danfoss’s Climate Solutions portfolio. For a minimal cost increase, emissions from materials purchased can be reduced by as much as 95 percent—showing a clear path to eliminating most emissions at low cost.
- Consider scale. Danfoss’s portfolio comprises hundreds of product lines, each with anywhere from tens to hundreds of product variances. While Danfoss has around 5,000 suppliers, McKinsey’s analysis found that around half of total embodied emissions came from just 50 of those suppliers—resulting in a shortlist of suppliers to focus on for maximum impact.
This effort has helped Danfoss to achieve its goal of assessing its entire Climate Solutions product portfolio by the end of 2022, with the aim of creating a clear product engineering roadmap. Moreover, the insights gained have been incorporated into a broader set of science-based targets: by 2030, Danfoss plans to reduce all direct and indirect emissions from purchased energy by 46.2 percent, to decrease emissions across the value chain by 15 percent, and to become carbon-neutral throughout its operations.
From the end of 2021 into early 2022, training Danfoss personnel to move this decarbonization process forward became a priority. By employing a “train-the-trainer” model, McKinsey has since equipped around 20 key Danfoss employees with the skills and tools needed to train employees across the organization to carry out this decarbonization mission.