Manufacturers are under increasing pressure to document their impact on the environment. This pressure is coming—for North American manufacturers—primarily from the private sector. Major manufacturers are asking their upstream supply chain partners to document its environmental impact as part of green supply chain initiatives. Green supply chain programs may be initiated in order to help manufacturers position themselves to its own customers or investors, or to facilitate environmental compliance.
This focus on green extends well beyond the simple carbon footprint, which in and of itself can be a challenge to track given that almost any business activity, from turning on the lights to running a metal press, results in consumption of at least some fossil fuels. In coming to grips with an environmental footprint, a number of other impacts including discharges to waterways, landfills, and other gas emissions must be monitored. The life cycle impact of a product—ranging from shipability, energy consumption, offgassing, service requirements, and end-of-life disposal or recycling, must be taken into consideration.
In this article, I will address the various drivers for this green supply chain trend, share important considerations for satisfying a customer’s green supply chain initiative or initiating your own green supply chain initiative, and discuss the role of enterprise software like enterprise resource planning (ERP) in keeping pace with this industry trend.
Why Green Your Supply Chain?
From a practical standpoint, green supply chains are smart moves for manufacturers because they can present a marketing advantage. Here are more pressing and immediate reasons for green supply chain management (SCM):
Investor demand for sustainability data is increasing. This should be a serious consideration for public companies and their suppliers. In February of 2010, the Securities and Exchange Commission (SEC) issued guidance requiring publicly-held companies to disclose their environmental liabilities that could become problematic if cap and trade regulation came into effect.
The concern for sustainability of public companies from an investor perspective is not driven by altruism, but rather by a need to increase the degree of transparency and visibility of potential risks and liabilities that could harm long-term returns. While manufacturers can expect more rather than less in the way of environmental reporting requirements, substantial rules are already in force, including several statements of position (SOP) from the Accounting Standards Executive Committee (AcSEC) of The American Institute of Certified Public Accountants (ACPAs):
• Guidance on "Accounting for Contingencies" requires that liabilities be recognized in the financial statements if a loss is probable and the amount is estimable. At the very least, even if the loss is not estimable, the likely loss must be accounted for in footnotes to financial reporting.
• These position statements also require that environmental contamination costs be expensed as incurred unless they extend the life or increase capacity of the property, mitigate or prevent future environmental contamination, or are realized while preparing the asset for sale.
• The standard operating procedure (SOP) for Environmental Remediation Liabilities details the responsibilities of corporations involved in mandated environmental cleanup, and responsibilities of corporations to avoid environmental destruction.
Regulation is advancing. While myriad regulations impact North American manufacturers, touching on discharge to the air, water, and landfills, perhaps the area of environmental regulation that is advancing most quickly is in the area of Restriction of Hazardous Substances (RoHS). In the European Union (EU), RoHS already governs the allowability of certain hazardous substances in a variety of products.
RoHS generally restricts the use of hazardous substances in electrical and electronic equipment, while associated regulation, Waste Electrical and Electronic Equipment (WEEE) regulates the disposal of these products. RoHS and WEEE focus on "certain heavy metals," specifically lead, mercury, cadmium, and hexavalent chromium. In Europe, these regulations also cover the flame retardants polybrominated biphenyl (PBB) and polybrominated diphenyl ethers (PBDE), while states like California do not, as of yet, deal with these substances in their RoHS regulations. California does, however, already have separate regulations that make it illegal to manufacture, process, or distribute products containing more than one-tenth of 1 percent of these substances by mass, which once again has green supply chain implications.
California’s RoHS regulation currently applies to a very narrow set of products, including computer monitors, televisions or other products that involve cathode ray or liquid crystal display (LCD) screens, but bills have been advanced through the state legislature that would expand that state’s RoHS initiative to mirror that of the EU in scope.
This means you will need to roll up in each of your assemblies the materials that are in each product with great detail. Some companies are also already manufacturing distinct product lines for Europe that, for instance, use mechanical electrical connectors instead of solder joints or welds. Manufacturers will need excellent functionality for tracking of the raw materials going into component parts sourced through a supply chain and for decision support in the area of product design.
You may need to provide documentation for your customers’ green supply chain. This is actually a more daunting task than is reporting for regulatory compliance because a manufacturer can expect individual requirements from each of its customer with a green supply chain program. Each of these customers cares about certain things that they track for their supply chain and their green emphasis. So, because most manufacturers have more than one customer, there is the need for a great deal of flexibility in an environmental footprint solution. Each customer with a green supply chain program is likely to have unique requirements for tracking different hazardous materials and environmental impacts depending on what it is that they are purchasing from you and what industry they are in. The six heavy metals included in RoHS, like lead and cadmium, may be typical and broadly of interest. But beyond that there will be other needs based on what customers want. Therefore, manufacturers need flexibility to track environmental impact by product, and also need the ability to customize the queries and reports so they can display what that customer cares about.
The takeaway here is that you will need the flexibility and the ability to track and report on a variety of rapidly changing metrics rather than one standardized set of environmental metrics.
The most advanced ERP tools may allow you to break down your environmental impact by discrete part, so you can document the environmental impact of each item you sell customers.
Whether you are manufacturing something yourself, or purchasing it from a supplier, the single most important thing to keep in mind when planning to measure and manage your environmental footprint is that it has equal impact on the total environmental footprint of the product you sell. In some cases, your supplier may be liable for reclamation costs for components of subassemblies they sell you, but unless this is covered specifically in a contract, you should count on being solely responsible for what you sell when it comes to environmental impact. This means that you need excellent integration between your supply chain solution and your ERP system.
You will want to document what your suppliers are consuming for the products you are buying from them. For example, let’s say you are buying a printed circuit board from a supply chain partner; you will still want to know by weight how much lead it has in it before you can sell that product in the EU. Plastic components will need to comply with regulations on the amount of PBDE, and so on. The degree of post consumer waste incorporated in materials, subassemblies, and products can also be something that must be documented and managed.
Apart from constituent parts and materials and their impact, there is also the environmental impact of logistics and transportation to consider. There will be an increasing need to factor in the environmental impact of different transportation methods and the distance of supply chain partners from your own location, along with the ability to roll that data up into the environmental impact for each individual product.
There are real implications not only for external vendors and suppliers but for multi-site companies because you are not just tracking the amount of potentially hazardous materials in your product but the impact of getting them, and their component parts, from one place to the next. For companies with multiple sites or business units located any distance apart, this can be a major factor for your internal supply chain. Enterprise applications that combine environmental footprint management with multi-site capabilities will be essential for companies with more than one site as they quantify their impact on the environment.
The environmental impact of transport logistics between your own sites and between your site and your customers and vendors also has implications for product design. Can products, subassemblies, or parts nest in shipping, or otherwise fit into a truck more effectively?
Product design is only one area where environmental footprint management in ERP is important for decision support. But perhaps a more critical area for environmental decision support in ERP software is risk management. An enterprise application ought to be able to help you evaluate the risks from an environmental standpoint when it comes to getting involved with a particular supplier—or even the risk of working with an internal supplier like a different location or subsidiary.
In implementing a green supply chain or participating in the green supply chain of a customer organization, it will also be important to document and track the history of your environmental impact program. The ability to look back on where you were in the past will allow you to respond intelligently to changing legislation and other mandates that impact life cycle and end of life cycle products in the field. In the case or durable and complex assets like capital manufacturing equipment and aircraft, changing environmental rules could have implications for ongoing support, maintenance and sustainment, and for spare parts and life cycle extensions of these assets.
The Role of ERP
It quickly becomes clear that the depth and breadth of information required to track an environmental footprint is substantial. While manufacturers might look at third-party products that purport to offer some degree of environmental management functionality, it probably makes more sense for them to look at whether their central ERP package carries enough information about each of the components that they buy or manufature to help them towards their initial environmental reporting or decision support goals. It is a simple matter of determining how your ERP package tracks what goes into each product and how it tracks what comes out of the product when it is disposed of, so you can ensure that it is disposed of in a manner appropriate for the environment.
A next level of sophistication is an ERP product with environmental footprint tracking tool already embedded in the package. This delivers a level of futureproofing and simplicity that will become more and more demand in the market as manufacturers continue to document their impact on the environment.
According to a survey conducted for IFS North America, the vast majority of respondents said they wanted ERP vendors to offer embedded environmental footprint management capabilities, eliminating the cost and hassle of integrations.
In a recent survey commissioned by IFS, a sizable majority of respondents said they would like to see ERP vendors offer embedded environmental footprint management in their products, and would consider this in future software selection cycles. In these selection processes, manufacturers will have to determine first of all whether this embedded functionality even exists in the package they are looking at.
An ERP system with built-in environmental footprint management functionality also delivers data that is more accurate than data that might originate from several point solutions and then go through a series of manual processes in spreadsheets, as is the case in most companies today. Manual changes to data can of course result in more errors than an automated process. Moreover, a CPA firm, auditor or institutional investor may question to degree to which the “books have been cooked” during those manual processes. Within a modern ERP system, however, there is an indelible record of what data has been accessed and changed by who, and security and privacy rules can be set up to mitigate against the risk that environmental data may be tampered with.
Any manufacturer is under increasing pressure to measure, manage, and report on its environmental footprint, and this footprint by necessity extends beyond its four walls and into its supply chain. For practical reasons, and in order to arrive at data that is accurate and inspires the confidence of downstream trading partners, a centralized ERP solution is a better technology tool for these purposes than a collection of point solutions or, for that matter, manual record keeping.
About the Author
Bill Leedale is responsible for knowledge transfer in North America for the manufacturing product suite within IFS Applications. He has over 20 years of hands-on experience in the manufacturing arena from leading large-scale implementation projects to managing business process reengineering engagements for global companies. Leedale holds a Bachelor of Arts (B.A) in Business and Economics from Wittenberg University in Springfield, Ohio (US) and a Master of Business Administration (M.B.A.) from Ohio State University, Columbus, Ohio (US). He is an author of the current APICS Operations Management Body of knowledge and a contributor to APICS’ current Lean Enterprise Workshop. His certifications include Certified Fellow in Production and Inventory Management (CFPIM), and Certified in Integrated Resource Management (CIRM), and a Certified Supply Chain Professional (CSCP).