Green Supply Chain

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“We are looking now at a future climate that’s beyond anything we’ve considered seriously in climate model simulations,” says Christopher Field, director of the Carnegie Institution’s Department of Global Ecology at Stanford University, in the same article¹. If the current financial crisis is serious, the future is horrendous.

The world’s best scientists have been warning — that climate change is happening faster and will bring bigger changes quicker than anticipated. Ironically, market and the nature hitting the wall at once, is a sign that we need to find better ways to be more sustainable².

Whether the drive is to comply with the government regulations or to meet the customers’ expectations companies are finding motivation to go green. Going green does not just impact company’s thinking and strategy but influences supply chain as well. Righteously, the focus is not just to attain cleaner water consumption and alternative energy sources for server farms, but to make supply chains more environmentally friendly³.

Yet, despite the potential for significant gains, most supply chain managers are still not focusing on environmental concerns. Typical to any supply chain are the following processes and functions, which support the complete cycle of material flows. Each of these functions has a profound impact on the environment.

Key components of Supply Chain
Purchasing and Inbound Logistics: The purchasing function involves the acquisition of materials from suppliers to meet the needs of producing the organizational product or service. The purchasing decisions like vendor selection, material selection, outsourcing, etc. can have a deep impact on the environment4. For example, purchasing recycled material from a distant location or selection of the material or vendor that uses toxic materials.

Other practices, such as the Just-In-Time technique (JIT), is used by a lot of companies to save money on storage, raises fuel consumption and traffic congestion. Carrier selection, a part of supplier selection, is an important in-bound logistics decision. Transportation is important to all industries. As an example, the Chemical Manufacturers Association (CMA) cited Roadway Express, a major carrier, as a responsive care partner in hauling chemicals⁴.

Production: Within this area come issues like designing the product, empowering employees, controlling the quality etc. Most often companies encounter questions like what happens to liability and corporate risk when sensitive and sometimes technically complex issues are part of the environmental decisions? Similar to quality control, which has evolved to include everyone in an organization, can environmental decisions be allowed to permeate? These questions are critical since employee involvement is a practice that companies’ believe are central to pollution control in the production function⁴. Issues like disassembly, remanufacturing, and material recovery principles also play a major role.

Distribution and Outbound logistics: Whereas, purchasing and in-bound logistics focuses on managing the vendor-organization relationships of the supply chain, the distribution and out-bound logistics function is meant to address the organization-customer relationship issues. Customers’ interest in environment friendly product plays a very important role in company going green. No matter what the incentive is, companies first look for economic impact and then at the environmental impact.

Reverse Logistics: Reverse logistics incorporates the return of materials, components and products back into the “forward logistics” chain. Reverse logistics operations include the following major steps: collection, separation, densification or disassembly, transitional processing, delivery and integration. The operational emphasis is dependent on the type of material or component that flows in the reverse logistics channel4. For example, disassembly will be required for copy machines, whereas plastic bottles would require densification. This is an area that makes tremendous impact on the environment. For instance, shifting to a supplier that uses plastic packaging will have a negative impact on the environment.

In one form or the other, every corporation as a whole has an impact on the environment; and this impact has a price that every corporation pays in the form of ‘environmental costs’. But the traditional structure of the cost accounting system does not count these costs.

Raw material and labor costs are directly allocated to the appropriate product or process, the other costs are accumulated into overhead accounts, which are allocated at a set proportion (e.g., based on the number of units manufactured) to all products, processes, or facilities but costs such as waste disposal, training expenses, environmental permitting fees, and other environmental costs-go unaccounted⁵.

For instance, if a new production process requires the use of hazardous materials, the expenses that a company might incur to clean up hazardous material spills would be classified as ‘contingent’ costs. However, any future spills might also trigger ‘image/relationship’ costs, such as concern among the company’s employees or neighbors, and ‘external’ costs, such as damage to a nearby aquatic ecosystem⁵.

Environmental Costs

• Conventional costs - Material, labor, other expenses, and revenues that are commonly allocated to a product or process
• Potentially Hidden - Expenses incurred by and benefits to the firm that are not typically traced to the responsible products or processes, e.g., supervisor salaries and safety training courses
• Contingent - Potential liability or benefit that depends on the occurrence of a future event, e.g. potential occupational health and clean-up costs related to a spill of a hazardous substance
• Image/Relationship - Costs/benefits related to the subjective perceptions of a firm’s stakeholders, e.g., a community group’s resistance to a plant expansion or an insurer’s concern about the lack of a formal environmental management system
• External - Costs/benefits of a company’s impacts upon the environment and society that do not directly accrue to the business, e.g., the benefits of reduced traffic congestion from a company’s telecommuting program

By taking into account the above costs, a company can not only save potentially hidden expenses but also save the image of their product. For instance:

• Purchasing and Inbound: GM reduced its disposal costs by $12 million by establishing a reusable container program with its suppliers.
• Production: Commonwealth Edison, a major electric utility company, realized $25 million in financial benefits through more effective resource utilization.
• Outbound and Distribution: Andersen Corporation implemented several programs that reduced waste at its source and had internal rates of return (IRR) exceeding 50%.
• Reverse Logistics: Public Service Electric and Gas Company saved more than $2 million in 1997 by streamlining its inventory process to avoid product obsolescence and disposal

Decision-Making Framework⁵
While the potential benefits are significant, relatively few companies are pursuing the opportunity to improve their financial and environmental performance by explicitly addressing environmental costs. A clear, simple framework can help companies adopt Green Supply Management System.

By following the four-step framework companies can pinpoint and understand the costs and environmental impacts that result from materials management decisions.

• Identify Costs: A systematic review of the facility or process is conducted to determine if and where significant environmental costs occur.
• Determine Opportunities: The identified functional areas and processes are evaluated to determine which changes will likely yield significant cost savings and reduce environmental impacts. Potential changes are evaluated with criteria that can include the magnitude of potential cost improvement, the types of environmental burdens, and the barriers to change. This step yields a possible set of alternatives with significant potential for improving costs savings and reducing environmental impacts.
• Calculate Benefits: Quantitative and qualitative analyses of the costs and benefits of a selected group of projects are conducted. Some of the analytical tools and methods used during this step are activity-based costing approaches, net present value (NPV) calculations and risk evaluations. The result is a summary of the merits of the current process and any proposed alternatives.
• Decide, Implement and Monitor: First, a decision is made to continue with the status quo or to pursue a new approach. Financial benefits and/or environmental improvements then occur as changes are put into action. The new practices are institutionalized as information collection processes are integrated into the company’s materials resource planning (MRP II), enterprise resource planning (ERP) systems and other information systems. After implementation, a periodic review and continuous improvement effort allows decision makers to evaluate their progress and pursue additional opportunities.

Environment Management System:
After adopting the Green Supply Chain Management (GCSM), next in line are EMSs or Environment Management Systems. Although the role coincides with the GCSM, EMSs are strategic management approaches that define how an organization will address its impact on the natural environment. More than 88,800 facilities worldwide had certified their environmental management systems (EMS) to ISO 14001, the global EMS standard, and thousands more had adopted uncertified EMSs⁶.

An EMS consists of a collection of internal policies, assessments, plans and implementation actions affecting the entire organization and its relationships with the natural environment. Although the specific institutional features of EMSs vary across organizations, all EMSs involve establishing an environmental policy or plan; undergoing internal assessments of the organization’s environmental impacts (including quantification of those impacts and how they have changed over time); creating quantifiable goals to reduce environmental impacts, providing resources and training workers; checking implementation progress through systematic auditing to ensure that goals are being reached; correcting deviations from goal attainment; and undergoing management review⁷.

EMSs are intended to help organizations embed environmental practices deep within their operational frameworks so that protecting the natural environment becomes an integral element of their overall business strategy. EMSs implementation requires companies to get ISO 14001 certified. ISO 14001 adoption requires certification by an independent third party auditor who helps to ensure that the EMS conforms to the ISO 14001 standard. Once certified, the ISO 14001 label indicates that the organization has implemented a management system that documents the organization’s pollution aspects and impacts, and identifies a pollution prevention process that is continually improved over time7. For example, Federal Foam Technologies, Inc., a Minnesota-based company, adopted an EMS and certified it to ISO 14001. By relying on its EMS structure, the firm reduced its annual landfill use by 40 percent, and decreased its associated disposal costs and liability risks⁷.

Although organizations have been using EMSs to be more environmentally sustainable, issue is that EMSs do not require organizations to improve their environmental performance, instead focus on creating and documenting environmental policies and procedures. EMSs therefore may represent only symbolic efforts to improve an organization’s image.

The relationship between EMSs and GSCM practices has potentially complementary and significant implications for an organization’s environmental sustainability because together they offer a more comprehensive means of defining and establishing sustainability among networks of business organizations7. However, when EMSs are adopted in the absence of GSCM, environmental benefits are likely to diminish. This is because the organization’s supply chain network does not share its environmental goals and environmental sustainability of any organization is impossible without incorporating GSCM practices.

Case Study 1⁸:
A large Chicago-based electric utility company, with annual revenues of approximately $7 billion, demonstrated that electric utilities and other companies can successfully and substantially reduce their costs and environmental burdens with innovative accounting practices.

Analyses of the total cost of managing materials and equipment revealed that the costs related to environmental management were often overlooked. In the first phase of life cycle management activities, company minimized the chemical inventories at generating stations. After realizing its successes, company launched a formal Life Cycle Management (LCM) initiative. Since then a small, dedicated LCM staff has formed effective partnerships with the operating divisions to systematically assess life cycle costs and benefits. This initiative has not only reduced waste volume but also provided over $50 million in financial benefits. These gains include improvements in supply chain management, facility management, and other business processes, accruing to the supply chain activities.

Case Study 2⁸:
As the largest manufacturer of wood windows and patio doors in North America, the company achieved substantial financial and environmental benefits when it began incorporating environmental considerations into its purchasing, materials handling, inventory and disposition decisions.

Started as a directive to the staff to reduce emission levels of toxic chemicals; soon became a Corporate Pollution Prevention Team whose mission was to eliminate the use, release and transfer of hazardous chemicals.

The team conducted a waste accounting project, developed waste reduction goals, and justified waste reduction projects by developing several business cases that quantified environmental and other cost savings. For example, the team justified the purchase of an improved system for mixing paints at point-of-use based on the savings from improved material usage rates and reduced waste. Based on their initial success, company managers recognized that a more systematic implementation of environmental accounting techniques would improve their ability to make strong business cases for a wide range of projects. Accordingly, they developed procedures for environmental cost assessments for a number of supply chain management activities. The process leads to more comprehensive and lucid business cases, including detailed Internal Rate of Return (IRR) schedules that incorporate savings from increased material efficiency and reduced waste streams.

Conclusion
With companies waking up to an environmentally aware world, whether it’s about the competitive advantage or for regulatory reasons, greening the supply chain has become a necessity. Greening the supply chain is not a onetime exercise, nor can it be done overnight. It’s a journey that not only requires the four major functions - purchasing and in-bound logistics, production, distribution and out-bound logistics, and reverses logistics- to be the drivers, but also requires organizations to adopt an EMS system.

EMS and GSCM adoption may not just provide a vehicle for organizations to “signal” to market participants that their environmental strategies adhere to or exceed generally accepted environmental standards but also lead to greater acceptance of the organization’s strategic approach and insulate organizations from competitors’ criticisms⁷.