The Incorporation of Environmental Aspects into the Supply Chain

Term Paper, 2002

23 Pages

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Table of Contents

1. Introduction

2. Environmental Issues Affecting Businesses

3. Conflict between Environmental Obje ctives and Business?

4. Porter's View of Pollution as Inefficiency

5. Supply Chain Aspects
5.1. Supplier Selection and Evaluation
5.1.1. Case Study: Directive on Waste Electric and Electronic Equipment
5.1.2. Case Study: Office Furniture Industry
5.2. Surplus and Scrap Disposition
5.2.1. Case Study: Furniture Maker Herman Miller
5.2.2. Case Study: Dow Chemicals
5.3. Carrier Selection and Transportation of Hazardous Materials
5.3.1. Case Study: Dow Chemical
5.4. Process Design, Product Design, and Packaging
5.4.1. Case Study: Mobile Phone Manufacturer
5.4.2. Case Study: AT&T
5.4.3. Case Study: Dutch Flower Industry

6. Environmental Standard ISO

7. Conclusion

8. Bibliography

Executive Summary

Environmental aspects are becoming more important to business operations all across the world. Most of the necessary changes have to be made because of government regulations or in order to avoid a loss of reputation. Numerous managers still perceive these regulations to be a "conspiracy" against business and fear a decrease in their competitiveness. This paper first introduces some of the most important environmental issues that affect companies in the U.S. and Europe. Then, an alternative perspective toward this topic is described, based on Michael Porter's idea that firms should not regard environmental tasks as a matter of pollution control, but instead as resource inefficiency. The key message of this point of view is the thesis that by improving environmental performance, it is also possible to simultaneously improve operational efficiency. To do this, it is necessary to implement environmental aspects into the entire process, and not just at the end of it. Strong parallels to the quality revolution of the 1980s can be seen. At first, managers were also convinced that an improved quality would only lead to cost increases, but not to efficiency gains. However, when quality was incorporated into the whole supply chain, both aspects improved. Finally, four aspects of supply chain management are being analyzed with regard to their environmental improvement potential. Also, for each of these four areas, case studies are introduced, which support Porter's hypothesis.

1. Introduction

Particularly in European countries, probably no other societal trend has been as strong during the last two decades as the environmental movement. This movement has manifested itself in the fact that "green" parties are now part of some of the European governments and that in basically all countries of the Western hemisphere, environmental aspects play an important role in the party platform of each big political party. Furthermore, this trend has brought about significant changes in the way people live and thus in the way they make their purchasing decisions for or against certain products. As environmental concerns have influence on all levels of the society, they also have a large impact on business. Not surprisingly, managers have very different attitudes toward this issue. While some of them are active environmentalists themselves, others regard it even as a conspiracy to big business and nothing but a threat to their competitiveness.1 However, even those managers cannot deny the increasing impact that this topic has on their jobs for several reasons.

One of these aspects is reputation. Since the people, i.e. the companies' customers, have become increasingly aware of the need to protect the environment, they use their power to recklessly punish corporations that do not live up to their expectations. Examples for this phenomenon are a large paper company that lost five percent of its sales after an article was published about its deficient reforestation and waste reduction efforts or a cotton producer that lost a multimilliondollar contract because of inadequate agricultural practices. An international airline was even punished for "noise pollution" with the loss of a major corporate account because its loud jets distracted workers in a closeby office park.2 However, with regard to the customer relationships, firms' environmental activities are not only driven by fear, but also by the hope for admiration and a reputation boost. HewlettPackard for example has incorporated environmental aspects into its toplevel corporate mission.3 UPS claims to be especially proud to belong to Fortune magazine's most admired companies in the transportation industry because of their special attention to environmental responsibility, which the company claims to have resulted in a significant positive effect on corporate reputation.4

While reputation is oftentimes not measurable, financial performance is. And especially in the light of the aforementioned perception of environmental regulations as a "conspiracy", this is probably the most important question that managers are concerned with. As for the capital markets' point of view, a recent study has shown quite surprising results regarding this issue. Companies that took significant steps to respond to environmental challenges in fact experienced an improvement in their financial condition in terms of their stock price. The most likely explanation for this phenomenon is the fact that investors perceived these companies to be less vulnerable to environmental lawsuits. Also, their risk to cause an environmental accident that they have to pay for later is lower. Given the traditional textbook concept of stock valuation, this lower risk is reflected in a lower risk premium and thus in a lower cost of capital, which results in a higher stock price.5

But not only regarding this external perception of companies, also for the relationship between environmentally friendly procedures and internal efficiency, there is a lot of evidence that economic and environmental goals are compatible6 and that the environment is in fact not a threat to companies, but a market opportunity.7

However, even in spite of these hypotheses, which should encourage the voluntary implementation of environmentally friendly practices into the supply chain, the main drivers for companies to do so are compulsory measures like for example harsher government regulations or a decreasing number of available landfills due to increasing resistance among the population ("not in my backyard" attitude).

Government regulations are generally based on the economic theory that environmental pollution represents external costs of manufacturing that are not accounted for in a company's own accounting system. Without government intervention, these costs have to be paid by the society. Therefore, regulations are established in order to internalize these costs, i.e. hold the polluters accountable for their actions. In reality, the positive effects of these measures do often not only relate to the macroeconomic level, but they can also lead to an increase in efficiency of the firm's own supply chain and therefore its entire operations. In these cases, the prejudice of the contradictoriness of economic efficiency and environmental protection does apparently not hold true.

In the further course of this paper, some of the environmental aspects that are significantly affecting business' operations will be described. Furthermore, an alternative interpretation of the relationship between economic and environmental issues will be introduced. Then, four specific areas regarding the supply chain will be addressed that have been identified as particularly relevant for environment programs. This analysis will be accompanied by specific examples. A particular focus is given to the alleged threat to competitiveness and cost efficiency, and these case studies will demonstrate that in fact it is possible to increase efficiency of the supply chain as well as competitiveness and profitability of the company while simultaneously improving environmental quality.

2. Environmental Issues Affecting Businesses

While in Europe, recycling appears to be the biggest issue in terms of environmental activity, in the U.S. it is probably the cleanup of contaminated land. 8 Due to the aforementioned increased awareness of the population, people do not want to live next to landfills anymore, thus the intended opening of a new waste dump immediately becomes a political problem. Oftentimes, environmental activists succeed with the result that it is becoming more difficult for companies to find spots where they can get rid of their waste, so that in the long run, it appears to be recommendable to consider different ways of handling this problem.

As for existing regulations, the U.S. government established already in 1976 the Resource and Conservation Recovery Act (RCRA). This act holds companies responsible for any kind of hazardous waste they produce and establishes strict, technologybased standards on landfills that handle those wastes. This regulation was extended by the Hazardous and Solid Wastes Amendments in 1984, which required the respective companies to have a waste minimization program in place that reduces and in the long run eliminates this waste.9

Regarding the various recycling regulations in Europe, Germany has been one of the pioneers in this area. One example is the Packaging Ordinance10 from 1991, which imposes the legal duty on companies to take back used packaging of their products. Furthermore, firms must then take care of the recycling or reuse of this packaging.11 One of the most current issues in Germany is a legislation that obliges car manufacturers to take back their cars at the end of their lives and recycle them. German car makers have consequently started to design new automobiles with as much recyclable components as possible.12 P81_10309

Due to the increasing degree of integration among European countries, these various laws are also spreading into E.U. legislation. One example is the panEuropean responsibility for producers to take back their electronic waste, which makes the respective producers just like German car manufacturers accountable for the recovery of electronic goods at the end of their lives. Moreover, the Producer Responsibility Obligations Regulation from 1996 required all member countries to ensure that by 2001, 60% of all packaging waste were being recovered. In order to materialize this requirement, the single governments then passed this obligation on to the companies and not to the customers.

These examples reflect very clearly how particularly legislative issues appear to be increasingly supply chain focused. In order to meet all the various requirements, it is mainly the responsibility of the supply chain managers to establish or change structures, procedures, or processes, which are then able to properly respond to the various regulations.13

3. Conflict between Environmental Objectives and Business?

The history of recycling dates back to WWII, when severe material shortages forced people to reuse and recycle what they had.14 Back then, these activities were not only necessary, but also economically reasonable. The question must be raised why this is not necessarily the case anymore, i.e. what the arguments for the alleged conflict between environmental objectives and business objectives are today.

One of the reasons is the fact that over time, labor has become more expensive relative to the price of raw material. Examples would be disposable bedding in the hospitals of some countries, which is cheaper than washing the sheets. Another example is the phenomenon that it is more expensive to use new softdrink bottles each time than returning them through supermarkets and refilling them. Also, in some cases the actual processes appear to be the problem. Dow Chemical calculated that recycling plastic takes more energy than it saves, which seems to be another strong argument against the presence of an economic rationale in environmental activities or regulations.15

Even when talking about avoiding as opposed to recycling waste, there is not always necessarily a congruence of goals. At first sight, it seems obvious that particularly packaging causes a lot of paper, plastic, and cardboard waste, which does not have a specific purpose. However, this material can also serve to avoid other kinds of waste like e.g. food that would go bad or products that would otherwise break. Other examples are packaged peas or tinned grapefruits, which are said to produce less waste at home than an unpackaged product, while furthermore companies can deal easier with the waste, which remains at the factory, because it is unmixed.16

As can be seen, there are apparently in fact some strong arguments that support the "conspiracy" thesis. However, in many cases the root cause for these arguments is simply that a system is not prepared to take on conditions that have changed rather rapidly. Coming back to the recycling issue, there is oftentimes just not enough technology available to handle the amount of returned material like e.g. new paper mills that would have to be built in order to take all the old paper instead of processing new pulp. While customers especially in Europe willingly sort their waste and return it to the system, this waste often cannot be absorbed by the market. As for every excess supply, prices fall, and in some cases these prices might even become negative. This means that governments e.g. have to pay companies to accept waste plastic for recycling.17

Systems are adaptable, thus it can be expected that in the long run, these systems will be prepared to handle the new requirements and challenges. This means that most of the aforementioned aspects, which appear to reflect the contradictoriness of environmental and efficiency goals, will only hold true for a certain amount of time. Without doubt, very fundamental changes will be necessary in the companies' operations, but there is probably a high chance that one day, for example recycling plastic will be much less energyintensive, or enough new paper mills will exist, which make recycling profitable and the entire paper industry more efficient.

4. Porter's View of Pollution as Inefficiency

The most famous counterargument against the described criticism is probably the idea that economics and ecology have in fact a common ground, which is resource reduction.

Consequently, there is a lot of empirical evidence that environmental programs are in fact able to improve corporate efficiency.18 On a more general level, Michael Porter analyzed this issue and provided an interesting interpretation of environmental activities from the viewpoint of business, which will be described in the following.19

Porter's key idea is that each environmental element in a company's operations should not be seen as pollution control, i.e. the minimization of waste at the end of a certain process. Instead, it must be see as a measure to improve resource productivity, and it is this perception that should govern managers' decisionmaking. This idea entails a totalsystem approach of thinking and a different understanding of what a product's "total costs" and "value" means. This way of thinking materializes already today for businesses in some countries that must carry all costs i.e. also the costs to society associated with their products. At first sight, resource inefficiencies are caused by incomplete material utilization or poor process controls, resulting in defects and unnecessary waste.

However, looking at a product's entire life cycle, there are many more aspects to consider. Examples are excessive packaging or usable materials that are discarded, which constitutes the socalled "hidden costs" that customers have to pay for, thereby decreasing the products' value to them. While in the past, the focus has been on the disposal of discharges, the better objective would be to prevent pollution before it occurs, i.e. environmental standards must be built into processes and into the entire supply chain in order to lower the total cost or increase the value of a product.

Porter shows a very interesting analogy to the emergence of quality philosophies during the 1980s. In the past, managers had thought that improving quality meant a lot of inspections and reworking defects. They perceived these defects to be inevitable and therefore, a quality improvement as very expensive, without the potential to add value. This was based on the idea that product and process design were fixed. Eventually, a new mindset unfolded, which regarded defects as a sign of inefficiency instead of an inevitable byproduct. Once that quality was built into the entire process and supply chain instead of an addon at the end of the process, it became visible that it was possible to improve quality while simultaneously lowering total costs. This new mindset made innovations possible that proved the alleged contradictoriness of high quality and low cost not to be true.

As for environmental aspects, pollution is a result of deficiencies in a product's design, the underlying production process, or the supply chain. Therefore, Porter suggests that environmental efforts should follow the same or very similar principles that are used in quality programs:

- Use inputs more efficiently
- Eliminate the need for hazardous, hardtohandle materials
- Eliminate unneeded activities

Porter attributes the widespread resistance among managers to take on these challenges to socalled "static thinking", which prevents these managers from recognizing how environmental standards can actually improve their competitiveness.

One example are distillers of coal tar. When a new legislation was passed that required reductions in benzene emissions, they complained that the only solution to achieve these reductions was to cover tar storage tanks with expensive gas blankets. Aristech Chemical Corp. chose a different approach. They developed a way to remove benzene from tar already in the first processing step, which made the gas blankets obsolete and saved the company $3.3 million.

Another example for this static thinking is the ignorance of learning effects. Companies from the pulpandpaper industry originally estimated the cost of conformance to a certain regulation to be $16.40 per ton of paper. In fact, the actual cost today turned out to amount to only $4 to $5.50 per ton. The same phenomenon can be observed in the chemical industry. In 1990, the cost for controlling sulfur dioxide emissions was estimated by analysts to be twice as high as it actually was in 1995, with a clearly visible trend toward a further decrease in costs.

One reason for this static thinking is certainly also a lacking knowledge about current research and case studies in this field. Porter quotes several studies that provide strong evidence for his hypothesis:

- For a sample of manufacturers of printed circuit boards, the effects of 13 major operational changes with regard to environmental aspects were analyzed. 12 of these changes resulted in cost reduction, 8 of them caused an improvement in quality, and 5 of them an extension of production capabilities
- In the chemical sector, only one of 181 waste prevention activities resulted in a net cost increase. 70 of these activities affected product yield, with 68 of them causing an average 7% in product yield. Two thirds of the analyzed activities had payback periods of six months or less. Other studies also appear to confirm this observation: for a company sample of 75 large firms, a survey found that the average payback for investment in waste reduction was only one and a half years, accompanied by an annual ROI of 63%.20
- Pressurized by a new legislation in 1987, Dow Chemicals redesigned a production process at its California facility. While it cost $250,000 to implement this new process, it saves the company $2.4 million annually.
- The Japanese appliance producer Hitachi redesigned its products in 1991 in order to comply with a new law that required products to be easier to recycle. The number of components in each product was cut significantly, e.g. by 16% for a washing machine or even 30% for a vacuum cleaner. As a result, these products became not only easier to disassemble, but also easier to assemble in the first place, thereby reducing production costs.

Even in spite of these success examples, one important factor that significantly affects the outcome of a business' reaction is the way a specific regulation is designed. One example is a comparison between U.S. and Scandinavian regulations with regard to the pulpandpaper industry. In the U.S., companies were forced to comply very rapidly with certain strict regulations, which lead to hastily installed treatment technology at the end of the process. The Scandinavian approach was more flexible, focusing on the entire production process itself, giving companies enough time to develop innovative pulping and bleaching technologies, which in the end also lowered the firms' operating costs. As can be seen, the freedom to let companies discover their own best ways to solve certain issues is a critical element of each regulation.

- If this kind of environment exists, firms might even go beyond current requirements and adopt the resourceinefficiency way of thinking, thereby creating benefits not only for the environment, but also for themselves. One of the companies that have implemented this rather holistic approach is Dow Chemical. The company created massive incentives to foster environmental practices by pegging the employees' salaries and bonuses to the fulfillment of environmental goals. Furthermore, an environmental category is part of the firm's job appraisal form, by which the performance of all employees is measured. Just like Dow Chemical, many more American companies have reconsidered their attitude toward environmental issues in the last years and have turned into active problem solvers.21

5. Supply Chain Aspects

As for the impact of environmental aspects on a company's supply chain, the ideal case would be to incorporate these aspects already in the product design stage in the first place instead of producing a certain given good in a environmentally friendly manner. This could e.g. mean that the recyclability of each component of the product should be considered, as is currently being done by the aforementioned German car manufacturers.22 In this context the practice of concurrent engineering is ideal for providing companies with crossfunctional teams that can then simultaneously examine the availability and cost of these components. In some European countries, this approach to product design is already in place in several industries, and it can be expected that in the long run, supply chain decisions will be strongly influenced by these considerations in other countries, too. But the consequences of an increasing environmental awareness do not only relate to product design, but this issue has instead far reaching impacts throughout the entire supply chain.23

Due to the aforementioned aspects like e.g. the decreasing availability of landfills, the implementation of environmentally friendly practices will have a particularly large impact on supply chain managers, as they are responsible for the entire flow of materials from raw materials to the delivery of the finished product to the customer. One important task of supply chain managers is cost control. The relevance of environmental aspects like waste avoidance becomes extremely visible when referring to the following interpretation of total cost:24

Labor, materials, and overhead cost

minus Return from the sale of surplus materials = Total cost

Surplus material can relate to scrap, waste, obsolete or damaged stock, or surplus, obsolete, or damaged equipment. This point of view again reflects Porter's ideas and shows that environmental considerations do not necessarily only have to relate to certain government regulations, but that they instead are an important element of a firm's objective of profit maximization.

As for the supply chain in particular, several authors agree to this interdependence of two important trends in operations management. On the one hand, firms increasingly integrate their supply chain processes in order to lower costs and add more value for the customer. On the other hand, more government regulation and a stronger public awareness require the integration of environmental aspects into a firm's processes. Since companies must involve both suppliers and customers in order to achieve these goals, both trends are clearly not independent of each other.25 There are various studies of more and more wellknown companies that in fact as early as in the mid 90s made their first attempts to involve the supply chain to improve their environmental performance like e.g. British Telecom, Ciba Geigy, the retail company B&Q, Nissan U.K., Nortel, or Pilkington Glass.26

One particularly famous project in this context is the cooperation between the computer company Digital Equipment Corp., GE Plastics, and Nailite. The three companies work together to dismantle obsolete computer products from Digital Equipment customers, then shred the computer housings and reprocess the plastic, which Nailite then uses to manufacture roofing products for McDonald's restaurants.27 This kind of alliance allows each company to focus on its core competency, establish a "smart" supply chain network, and improve operational efficiency and environmental standards simultaneously.

Another prominent example is the aforementioned transportation company UPS. Operating in a highly competitive environment, this firm regards efficiency improvements in its physical supply chain as one of the last chances to create a competitive advantage, and they furthermore claim to always look simultaneously at this physical supply chain and envir onmental process improvement. A profound understanding of what the company calls the "environmental supply chain" is one of three factors that are supposed to ensure economic opportunities in the future,28 and the large impact of these environmental aspects particularly on the transportation industry and other issues regarding the transportation of goods is being confirmed by various other authors. In this context, some of the arising problems are not always easy to solve. One particular risk is to analyze the many affected aspects in isolation, while instead, it is necessary to taking a strategic look at the issue on the background of the entire supply chain management, i.e. taking into consideration also the aspects that are not affected immediately.29

As for transport, at first sight the situation appears to be clear, i.e. each movement of goods has a negative environmental aspect. For Western Europe, the transportation costs to society regarding congestion, pollution, and accidents amount to some 5% of the GDP, the energy consumption from the transport sector represents one third of all energy used in the whole European Union, with 85% of this energy being used by road. On the company leve l, one of the efficiency issues with regard to transportation is the fact that congestion decreases productivity due to delays, potential stockouts, or overstocking.30 A possible solution to both issues could be an increased usage of organizations that ship the products of many companies together (socalled "consolidators") so that loading efficiencies can be maximized.31 This suggestion goes hand in hand with the current trend to not only increasingly integrate suppliers. Instead it would mean the implementation of the networking idea of the virtual integration philosophy into supply chain management. Improved information technology might be able to handle such complex processes in the future, so that e.g. one single transportation company handles the supply of components for several different companies that are located next to each other, without negative impacts on the efficiency of either of the companies' operations.

Although this appears to be an appropriate solution for some of the problems, in other cases the implications reach even further into the relationship between the movement of goods within the supply chain and the actual production process. One example is JIT production, which raises fuel consumption, because many small trucks consume more gas per transported unit than larger trucks, and which also increases congestion. Moreover, in some countries it is prohibited to have trucks driving on the streets around the clock. For JIT production, this means also a potential risk to efficiency due to even more increased congestion, which in turn again pollutes the environment. A logical consequence of one of these problems would be to allow 24 hour transports, but although this would increase fuel efficiency due to decreased congestion, problems with local communities are likely to arise. Thus, companies might want to consider the increased use of combined transportation options, which would mean a mixture of road and rail transport systems, which again requires the use of sophisticated information technology in order to coordinate these operations.32

Although these described options must be evaluated on a casebycase basis, it already becomes obvious that a holistic approach toward a simultaneous improvement of efficiency and the environment is indispensable and that oftentimes a lot of different factors influence these decisions which result in very complex decisionmaking processes.

For UPS, a lot of steps have already been undertaken to master these challenges. The company now considers aspects like energy efficiency, waste minimization, process engineering, and environmental design as parts of their mainstream processes. Moreover, they even claim that supply chain management "does not mean moving goods, information, and money up and down the supply chain", but instead "developing environmental efficiencies for themselves and the next link in this chain". In particular, this means e.g. that they demand clean but affordable fuels from oil and energy companies, and cars that can operate these fuels from car manufacturers.33

Apart from the transportation aspect, Handfield identified four general key areas in supply chain management that can also be regarded as potential candidates for the implementation of environmental elements:34

1. Supplier selection and evaluation
2. Surplus and scrap disposition
3. Carrier selection and transportation of hazardous materials
4. Process design, product design, and packaging

In the following, these aspects will be discussed in further detail. Also, the characteristics of an either proactive or reactive orientation of companies with regard to these aspects will be described. In this context, the term "reactive" refers to policies that are aimed at meeting minimum requirements or expectations, whereas "proactive" firms try to benefit both the environment and the firm's financial performance. Furthermore, the various aspects will be accompanied by specific case studies in order to provide some examples for the successful integration of these issues into firms' supply chains.

5.1. Supplier Selection and Evaluation

The first aspect relates to the fact that an increasing number of companies selects its suppliers not only on the basis of quality, cost, or service, but also based on an environmental record of the supplier. This record might e.g. relate to the supplier's source of raw material, his disposal methods, his efforts to reduce surplus packaging or fuel usage, or whether environmentally friendly practices are in place in order to reduce costs.

The two different approaches to this issue can be characterized as follows:35

illustration not visible in this excerpt

36 In fact, a study found that already in 1997, more than 40% of the analyzed supply chain managers included such an environmental performance of suppliers into their formal supplier monitoring.37 Some of the questions that a firm's purchasing manager should ask the supplier in order to test his environmental competence might be the following:38

- What is the supplier's level of commitment to environmental quality? Has he developed an adequate environmental management and auditing system? Does he practice lifecycle environmental accounting?
- What evidence is provided of his improvement efforts in resource conservation, recovery and recycling, elimination of toxics, ozonedepleting substances and greenhouse gases?
- What efforts has a component supplier made to enable product modularity and component recovery and reuse? Has he adopted engineering practices such as simplified joining or fastening technology, part identification and separability, and avoidance of labels, paints and finishes?
- Has he demonstrated a commitment to reducing energy use, both in his manufacturing operations and in the power requirements of his products?
- Is he working toward pollution prevention through programs such as process waste minimization or packaging reduction and recycling? Does he take a collaborative approach toward supporting our own product takeback and recycling efforts?
- Does he provide helpful information regarding safe and environmentally benign use, handling and disposal of his products?
- Are the supplier's costs higher than those of competitors, potentially signifying that he has had to pay environmental cleanup fines in the past?39

But the role of the purchasing manager goes even beyond these questions. In fact, the purchasing department must be seen as the gatekeeper of the company who has a major influence on the quality of the materials that enter the firm, both in terms of technical and environmental quality.40 Therefore, it is also his job to analyze whether a specific material or supplier bears certain risks such as a raw material no longer being available in the near future or being prohibited for environmental reasons.

Especially in processintensive industries, these monitoring activities are crucial to lowering the own firm's risk, as sometimes the usage of certain materials or processes by a supplier might even cause a certain liability for the purchasing company, which might result in expensive lawsuits.41 On a more abstract level, this transfer of environmental concerns from the purchasing to the supplying company represents a normative conceptualization of the supplier / buyer relationship.42 This shift is again comparable to some of the ramifications of quality philosophies, which require the supplier to make necessary technological adaptation, so that the purchaser can rely on a certain quality level (in this case, an environmental quality level).

A further consequence of this behavior is the socalled "green multiplier effect".

This describes the idea that a certain customer requires his supplier to have a certain environmental standard, and in order to meet this standard, this supplier himself must apply this standard to his own suppliers and so forth. This phenomenon corresponds to the socalled "quality chain" in the TQM literature. As a consequence, Preuss therefore regards the purchasing department as a more powerful change agent than any other corporate function.43 Especially in the light of the similarity of TQM concepts and environmental management, one important aspect is the fact that the repercussions from using inferior inputs may lead to higher costs in the future, outweighing the shortterm savings at initial purchase.44

5.1.1. Case Study: Directive on Waste Electric and Electronic Equipment

The first case study relates to a multinational manufacturer of test equipment for the telecommunications industry and his reaction to the Directive on Waste from Electric and Electronic Equipment (WEEE) from the European Commission in 1998.45 The case is an example for a supplier educating its customer, instead of the "usual" way, where environmental initiatives in the supply chain are mandated from above.

The respective Directive required the ban of certain heavy metals, including hexavaliant chromium. The aforementioned U.S.based manufacturer of test equipment for the telecommunications industry had a manufacturing site in Scotland and was therefore subject to the Directive. The casing of the test equipment he produced received a chromate treatment to insulate it against outside radiation. Without this treatment, the devices inside could not be calibrated.

Because of the new legal requirements, the manufacturer considered ways to solve the problem, while the supplier also took the initiative due to his desire not to get locked out of certain markets, because its product might no longer be acceptable there, and in order to avoid paying the increasing disposal costs for chromate. The supplier worked together with a sheetmetal supplier, and the two companies finally installed a new treatment plant. Although this new plant was built around an entirely new process, which had only been tested for flat surfaces so far, but not for more complex shapes, the concept worked.

As a result, the supplier saved the increasing disposal costs for chromate. Moreover, direct cost savings were obtained, as chemicals could be used more efficiently because there was no overcarry from one chemicals tank into the next anymore. Furthermore, product quality improved, and the new technology was more productive than its predecessor, resulting in a decrease in labor costs. Other positive factors for the supplier are an enhanced marketing positioning as an environmentally friendly company, which might lead to more business. As for the customer, the achieved cost savings on the supplier side could also have a lowering impact on the component prices.

5.1.2. Case Study: Office Furniture Industry

Another case study can be found in the office furniture industry.46 The relevant aspect is the procurement policy with regard to wood. Especially tropical forests are mostly to be found in developing countries, which in some cases even tolerate the destruction of entire ecosystems for commercial reasons. In order to comply with his own, voluntary environmental standards, a major furniture manufacturer participated in several initiatives with suppliers and customers to establish industrywide environmental practices. To be more specific, this manufacturer took the following steps in order to avoid contributing to the environmental problems in the developing countries:

- Eliminate all rosewood from lounge chair
- Purchase tropical woods only from suppliers who can document that they are respons ible foresters
- Cooperation between the company's supply chain managers and suppliers in order to develop and use management practices that consider environmental, economic, political, and social issues to ensure longterm viability of the forest Although there is no direct increase in efficiency

5.2. Surplus and Scrap Disposition

The second supply chain issue that is highly relevant for the implementation of potential environmental programs addresses the challenge for companies to find ways to reduce their scrap and waste. As mentioned earlier, more specific aspects relate to e.g. the problem of the decreasing availability of landfills and the resulting mechanisms like certain raw material requirements or recycling. Just as before, the following table shows different kinds of firms' behavior that reflect either a proactive or a reactive mindset:47 P212_41414

illustration not visible in this excerpt

Several ramifications of this aspect have already been addressed in some of the preceding sections of this paper. Especially with regard to surplus and scrap disposition, Porter's idea of resource inefficiency becomes very obvious. The main idea should not be to "clean up", but instead to fin d alternative uses for items that are of no direct value for a firm anymore and derive the best possible financial recovery for these items. Again, it is the companies' supply chain managers that have the responsibility for these items, and oftentimes it's also them who are the best qualified for finding selling or other sophisticated disposal options for them. One example for such an option is a wool production facility of Burlington Industries, which extracts the grease from raw wool and sells it as a raw material to other industries such as lipstick manufacturers.48

However, in cases where such a "smart disposal" is not possible, i.e. where scrap must simply be dumped, supply chain managers might face some more demanding challenges, especially in the United States. As mentioned earlier, landfills are a highly political issue, and especially on the East coast, tipping fees have risen significantly in the past relative to those in the Midwest. Tipping fees at a landfill in New York city have e.g. risen from $80 to $150 a ton in the early 90s. Two of the largest importers of waste are Ohio and Indiana, where the average tipping fee is $21 a ton. As a consequence, it costs less for companies in New York to send their waste through the entire country than to dump it in their own state. All of these factors must be taken into account by supply chain managers, and even though this aspect does not directly involve any efficiency gains, an appropriate coordination of tipping activities might however entail significant cost effects.49

5.2.1. Case Study: Furniture Maker Herman Miller

The first case study with regard to this aspect relates to the U.S. furniture company Herman Miller.50 The company found a way to recycle or reuse nearly all the waste that is left over after its manufacturing process.

- Fabric scraps are sold to the auto industry to reuse as lining for cars
- Leather trim is sold to luggage makers for attach cases
- Vinyl is sold to stereo and auto manufacturers for sounddeadening material
- The company's headquarter is powered by a cogeneration facility that turns Miller's wood scraps into energy, which cuts the firm's energy bill by $450,000 each year

Moreover, Miller has a secondhand furniture business, which buys back its old furniture and refurbishes and resells it. Here, the simultaneous improvement of cost and resource efficiency becomes clearly visible, while it must be noted that all the described activities were based on the firm's own initiative instead of some government regulations.

5.2.2. Case Study: Dow Chemicals

Another example for the elimination of waste is Dow Chemical's WRAP51 program, which was initiated in 1986.52 At one of the firm's latex plants, teams of workers and supervisors made a few simple changes in pipes and production equipment and improved housekeeping techniques such as making sure that valves were shut. As a result, it was possible to eliminate 60% of the waste that had been going to landfills before, which saved the company some $310,000 in fees annually. Another benefit from those changes was a more efficient latex production, which saved an additional $420,000 each year. From WRAP's initiation until 1993, some 200 teams have discovered similar savings throughout the entire company.

5.3. Carrier Selection and Transportation of Hazardous Materials

According to Handfield, the third relevant supply chain issue is the carrier selection and transportation of hazardous materials. Although certain precautionary measures are without doubt more expensive, they oftentimes prove to be more costefficient in the long run due to the risk of litigation or cleanup costs in case of an accident. Regarding the different approaches that companies might chose, for the reactive approach the myopic endofprocess view becomes evident:53

Carrier Selection and Transportation of Hazardous Materials

illustration not visible in this excerpt

5.3.1. Case Study: Dow Chemical

The case study regarding this aspect again relates to Dow Chemical.54 The company considers transportation as one of the most critical aspects of its supply chain. Also, the firm has devoted itself to responsibility regarding communities' concerns regarding the manufacture, transportation, use, and safe disposal of chemicals on the basis of the "Responsible Care" program. Thus Dow Chemical first carefully analyzes each company's capabilities regarding the distribution, safety, incidents, health records, and adherence to "Responsible Care" before choosing it as a carrier. If the company considers a product to be save, the carrier may transport it on his own, otherwise, transportation and distribution is additionally controlled by Dow Chemical. Furthermore, the company has designed special characteristics regarding the transportation facilities, especially for rail transport:

- Railcars have been redesigned. They have become especially apt to carry hazardous chemicals so that no spill will occur.
- All cars have extra thick steel armor to prevent punctures from releasing toxic liquids and gases in case of a derailment.
- Special couplings reduce the likelihood that they would puncture the tanks.
- A special tank reduces the amount of material left over after pumping it out.

As mentioned earlier, all these measures might be more expensive than using the conventional equipment. However, litigation or cleanup cost, or lost reputation in case of an accident are likely to exceed this investment.

5.4. Process Design, Product Design, and Packaging

Finally, the fourth aspect refers to a lifecycle analysis of a company's products, i.e. the environmental aspects are being integrated into products from "cradle to grave", and especially in countries other than the U.S., companies are forced to take care of their products even after the end of ther useful lives. The following table again addresses some of the issues that have already been discussed above in more detail:55

Product Design, Process Design, and Packaging

illustration not visible in this excerpt

Particularly the term "cradle to grave" reflects the holistic concept that should underlie a company's efforts, i.e. the attempt to identify all of the potential environmental effects of using a certain product or process. The entire life cycle from raw materials over manufacturing, distribution, service, to recycling and disposal during product and process designs requires thorough examination for successful environmental management.56 As it affects nearly all operational levels, this aspect is probably the most farreaching of all analyzed issues. Not only is it necessary to consider one particular part of the supply chain, instead a complete rethinking of a firm's operations strategies and processes might be necessary in order to meet both environmental and effic iency goals in the most sophisticated way. Also, indirect effects must be taken into consideration.

One example is AnheuserBusch, which integrated the manufacturing process into a recycling program. As a result, cans that are 33% lighter were developed, thus saving the company some $200 million each year.57 Another example for the significant effects of a different product design is Volvo, which increased the fuel efficiency for its trucks. As a result, the company was able to increase its market share by 35% in three years, thereby increasing the truck segment's contribution to the firm's overall operating from 30% to 56%.

5.4.1. Case Study: Mobile Phone Manufacturer

The first case study deals with the packaging policy of a mobile phone manufacturer.58 While receiving about 5,000 deliveries each day, the biggest challenge to the company turned out to be cardboard packaging.

Originally, the company had actually tried to minimize the introduction of contaminants on the production line. The firm's products were very sensitive to dust contamination of the display lenses between the lens and the display itself. A lot of phones had to be reworked to clean off visible dust at the end of the manufacturing line, resulting in a decrease in manufacturing yield.

A more detailed analysis of those contaminants found that the actual problem was the cardboard packaging, which was the origin of that dust. Finally, the firm established a new policy of not using cardboard at the site anymore. For most items, such as plastic housings and lenses, the company switched to recyclable plastic boxes with vacuumformed trays. The corporation started to buy the packaging itself and issue it free of charge to the suppliers, thereby eliminating the original dust problem and simultaneously improving the firm's environmental performance.

5.4.2. Case Study: AT&T

The next example relates to the process design at AT&T.59 The company's main pollution problem was too much paper. The company approached this problem by turning to TQM principles. First, a corporate paper reduction goal of 15% within one year was established; then a corporate TQM team was created to figure out how to meet it. Following classic TQM techniques, the team identified AT&T's heaviest paper users. These heavy paper users then in turn formed TQM teams on their own to help meet the companywide goal. The internal information management unit, which was the second largest paper user behind copying centres, used about a quarter of AT&T's total paper use for such things as marketing and financial reports. The department's TQM teams suggested such simple ways to decrease paper consumption as eliminating cover pages and using electronic rather than printed media. Within a year the department was consuming 22% less paper, thereby again increasing efficiency and the environmental performance.

5.4.3. Case Study: Dutch Flower Industry

Another example that relates to a complete redesign of a production process is the Dutch flower industry.60 In the Netherlands, intense cultivation of flowers in small areas was contaminating the soil and groundwater with pesticides, herbicides, and fertilizers. Eventually, regula tion on the release of chemicals became stricter, thus the Dutch started to develop a closedloop system, which appeared to be the only effective way to master the problem.

Today, flowers grow in advanced greenhouses in water and rock wool instead of soil.

Thereby, not only the soil is prevented from damage, also the risk of infestation is lowered, reducing the need for fertilizers and pesticides, which are delivered in water that circulates and is reused. Since the closedloop system can also be monitored much closer than before, variation in growing conditions decreased, thus improving product quality. Handling costs have gone down because the flowers are cultivated on specially designed platforms.

As a conclusion, in addressing the environmental problem, the Dutch have innovated in ways that have raised the productivity with which they use many of the resources involved in growing flowers. The net result is not only significantly lower environmental impact but also lower costs, better product quality, and enhanced competitiveness.

6. Environmental Standard ISO 14000

As for the earlier described relationships between a company and its suppliers, it was already said that supplier screening for environmental aspects is an important issue. One of the tools that might facilitate this screening process is the "International Standard on Environmental Management Systems" (ISO 14000). This standard might enable customer firms to better understand their suppliers' processes and environmental performance level.61

ISO 14000 was introduced in 1996 and formally adopted by 50 countries so far. The addressed issues deal mainly with a socalled environmental management system (EMS). The requirements of a company's information technology are specified that must be in place if this company applies for certification of the EMS according to ISO guidelines. The basic elements of an effective EMS include creating an environmental policy, setting objectives and targets, implementing a program to achieve those objectives, monitoring and measuring its effectiveness, correcting problems, and reviewing the system to improve it and overall environmental performance.62

In general, ISO 14000's standards are rather processoriented than performanceoriented. This means that the standards do not prescribe organizations which level of environmental performance they must achieve. Instead, they describe a system that helps an organization to achieve its own objectives and targets.63

As for the effects of ISO 14000, a recent study found the standards to have a large, positive impact on the perceived efficiency and effectiveness of the EMS. The conformance to the standard was found to improve almost every dimension of the companies' performance. This means in particular that firms with a certification were not only more environmentally responsible but also more efficient.64

7. Conclusion

As for the degrees of activity across different industries, it is the computer industry that has the most companies on the "best and most improved" list of Fortune magazine's "green index". In the same ranking, the worst positioning was obtained by companies from the oil and paper industries.65

Regarding the various environmental strategies, a recent study revealed that recycling materials, reducing consumption, and reusing materials appear to be the three most commonly used strategies. The same study concludes that environmental regulations tend to be more beneficial than harmful to organizational performance.66

Concerning the direction of companies' supply chain efforts, most firms apparently focus on upstream aspects regarding environmental issues. However, various studies stress the importance of applying environmental criteria to the entire supply chain. This is already being done by some firms that take back their equipment from customers like e.g. IBM, Nokia, BMW, or Rank Xerox. Still, so far no company was found to design a comprehensive system for integrating environmental costs into all management decisions.67

On the one hand, it was stated that environmental aspects offer a lot of benefits. On the other hand, the various case studies have shown that compulsory regulation was the most frequent motivation for companies to take certain steps. Thus, it remains the question why regulation is necessary at all, and why companies do not embrace the opportunities they have on their own, as the expected benefits should cause enough motivation for the businesses. One example for this apparently strange phenomenon is the Environmental Protection Agency's Green Lights program, which works with companies to promote energysaving. It was found that nearly 80% of the projects offered paybacks within two years or less, and yet almost none of the companies considering them had not taken action.68

This issue is also addressed by Michael Porter.69 In his opinion, the idea that companies would discover all profitable opportunities without a regulatory compulsion is based on a wrong assumption about competitive reality. In order for this to happen, all managers would need to have perfect information about these profit opportunities, and organizational incentives would need to be aligned with innovating. In reality, information is incomplete and there are many different barriers to organizational change.

Moreover, Porter specifies several reasons why regulations are still necessary. One of them is the creation of pressure, which motivates companies to innovate. As is also taught in organizational behavior science, outside pressure plays an important role in overcoming organizational inertia and fostering creative thinking. Furthermore, regulations have a signalling effect, they alert and educate businesses about resource inefficiencies that companies have not been aware of before, as could also be seen in some of the mentioned examples in this paper.

Regarding the described parallels between the emergence of quality philosophies and envir onmental issues, the situation was similar also in this regard. Although there was no outside pressure by government institutions on companies, it was instead the success of the Japanese business model that made U.S. companies reconsider their way of doing business. Only after the tremendous success of TQM in Japan and the creation of the Deming award, American and European companies also started to imitate this concept in order to remain competitive.

As for the compatibility of environmental with business goals, the described case studies showed that in fact it appears to be possible to increase both environmental performance and operational efficiency. Of course, there are certainly also a lot of cases, where adverse effects can be observed. However, without doubt the importance of environmental aspects for supply chain management and operations management is likely to increase in the future. For the longterm characteristics of this relationship, the framework and philosophy that is provided by Michael Porter appears to represent a coherent reasoning that will probably materialize in the long run, just as it has been the case for the quality revolution in the 1980s.

8. Bibliography

Cairncross, Frances, "Waste and the environment: Creating incentives", Economist v327n7813, (May 29, 1993), p.SS13SS14.

DeCanio, Stephen J.; "Why Do Profitable EnergySaving Projects Languish?"; Working Paper, Second International Research Conference of the Greening of Industry Network, Cambridge, Massachusetts, 1993.

Eden, Sally E.; "Using Sustainable Development the Business Case,"Global Environment Change, Vol. 4, No. 2 (1994), pp.160 167.

Edwards, Nick, "Here today, green tomorrow", Supply Management v2n25, (Dec 11, 1997), p.2426.

Eskew, Michael L, "Profiting through environmental supply chain management", Executive Speeches 14, no. 1 (Aug/Sep 1999), p. 510.

Fiksel, Joseph, "How to green your supply chain", Environment Today v6n2, (Mar 1995), p.2930.

Gifford, Dun, "The Value of Going Green", Harvard Business Review, Sep/Oct97, Vol. 75 Issue 5, p11.

Handfield, Robert B.; Nichols, Ernest L., "Introduction to Supply Chain Management", Prentice Hall, 1999.

Hartman, Cathy L.; Stafford, Edwin R., "Crafting `enviropreneurial' value chain strategies through green alliances", Business Horizons v. 41 no2 (Mar./Apr. 1998) p. 6272.

Howie, Bill; "Environmental Impacts on Logistics"; An International Review of Logistics Practice and Issues, Ed., G. Brace, Logistics Technology International, (1994), pp. 5355.

McIntyre, Kristie; Smith, Hugh A Henham, Alex Pretlove, John, "Logistics performance measurement and greening supply chains: Diverging mindsets", International Journal of Logistics Management v9n1, (1998), p.5768.

Montabon, Frank.; Melnyk, Steven A. Sroufe, Robert, "ISO 14000: assessing its perceived impact on corporate performance", Journal of Supply Chain Management v. 36 no2 (Spring 2000) p. 416.

Murphy, Paul R; Poist, Richard F, "Green logistics strategies: An analysis of usage patterns", Transportation Journal 516 40, no. 2 (Winter 2000), p. 516.

Porter, Michael E.; van der Linde, Claas, "Green and Competitive", Harvard Business Review, Sep/Oct95, Vol. 73 Issue 5, p120.

Rice, Faye, "Who scores best on the environment", Fortune v128n2, (Jul 26, 1993): p.114122.

Tibor, T.; Feldman, I.; "ISO 14000: A Guide to the New Environmental Management Standards", Irwin Professional Publishing, Burr Ridge, IL, 1996.

Walton, Steve V.; Handfield, Robert B. Melnyk, Steven A., "The green supply chain: integrating suppliers into environmental management processes", International Journal of Purchasing and Materials Management v. 34 no2 (Spring 1998) p. 211

Zsidisin, George A; Hendrick, Thomas E, "Purchasing's involvement in environmental issues: a multicountry perspective", Industrial Management + Data Systems, 313320 98, no. 7 (1998), p. 313320.


1 See Handfield (1999)

2 See Eskew (1999)

3 See Handfield (1999)

4 See Eskew (1999)

5 See Gifford (1997)

6 See Eden (1994)

7 See McIntyre (1998)

8 See Cairncross (1993)

9 See Zsidisin (1998)

10 "Verpackungsverordnung"

11 See Zsidisin (1998)

12 See Cairncross (1993)

13 See McIntyre (1998)

14 See Handfield (1999)

15 See Cairncross (1993)

16 See Cairncross (1993)

17 See Cairncross (1993)

18 See Hartmann (1998)

19 See Porter (1995)

20 See Eskew (1999)

21 See Rice (1993)

22 See Cairncross (1993)

23 See McIntyre (1998)

24 Based on Handfield (1999)

25 See Walton (1998)

26 See Preuss (2001)

27 See Fiksel (1995)

28 See Eskew (1999)

29 See McIntyre (1998)

30 See McIntyre (1998)

31 See Howie (1994)

32 See McIntyre (1998)

33 See Eskew (1999)

34 Based on Handfield (1998)

35 Table based on Handfield (1998)

36 Environmental Protection Agency

37 See Edwards (1997)

38 Questions based on Fiksel (1995)

39 See Handfield (1998)

40 See Preuss (2001)

41 See Fiksel (1995)

42 See Preuss (2001)

43 See Preuss (2001)

44 See Zsidisin (1998)

45 See Preuss (2001)

46 See Handfield (1998)

47 Table based on Handfield (1998)

48 See Zsidisin (1998)

49 See Cairncross (1993)

50 See Rice (1993)

51 "Waste Reduction Always Pays"

52 See Rice (1993)

53 Table based on Handfield (1998)

54 See Handfield (1998)

55 Table based on Handfield (1998)

56 See Zsidisin (1998)

57 See Eskew (1999)

58 See Preuss (2001)

59 See Rice (1993)

60 See Porter (1995)

61 See Zsidisin (1998)

62 See Tibor (1996)

63 See Montabon (2000)

64 See Montabon (2000)

65 See Rice (1993)

66 See Murphy (2000)

67 See McIntyre (1998)

68 See DeCanio (1993)

69 See Porter (1995)

23 of 23 pages


The Incorporation of Environmental Aspects into the Supply Chain
Eastern Illinois University
Operations Management (MBA class)
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ISBN (eBook)
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544 KB
Incorporation, Environmental, Aspects, Supply, Chain, Operations, Management
Quote paper
Marc Nettesheim (Author), 2002, The Incorporation of Environmental Aspects into the Supply Chain, Munich, GRIN Verlag,


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