United States
Environmental
Protection Agency
Office of Pollution
Prevention and Toxics
(MC-7409)
Washington, D.C. 20460
EPA 742-R-00-001
January 2000
The Lean and Green
Supply Chain:
A Practical Guide for
Materials Managers and
Supply Chain Managers to Reduce Costs
and Improve Environmental
Performance
Environmental
Accounting
Project
USERA
-------
ACKNOWLEDGMENTS
This document was prepared for the U.S. Environmental Protection Agency's Office of
Prevention, Pesticides, and Toxic Substances by Battelle Memorial Institute under Contract
Numbers 68-D5-0008 and 68-W-99-033. The primary author was Jeff S. McDaniel of
Battelle. Joseph Fiksel, Battelle's Project Manager, also wrote portions of the report.
Susan Mclaughlin was EPA's Work Assignment Manager and contributed to the
writing of the report.
EPA and Battelle sincerely appreciate the reviews of drafts and other assistance
provided by the following individuals:
Steve Anderson, Kerr, Greiner,
Anderson & April, Inc.
Rick Boike, Endura Software Corporation
John Claussen, Chemical Strategies
Partnership
Louis DelGeorge, Commonwealth
Edison Company
David Eagleson, LFR Technologies
Patrick Ferguson, 3M
Robert Handfleld, Michigan State
University
Sean Harrison, Kaiser Permanente
Ed Huller, Dow Chemical
Dave Kling, U.S. Environmental
Protection Agency
Jeff Lime, Delta Consolidated Industries
Clare Lindsay, U.S. Environmental
Protection Agency
Ed Marien, University of Wisconsin
Peter Moor, LFR Technologies
DISCLAIMER
Katherine O'Dea, Business for Social
Responsibility
Dale Olson, Andersen Corporation
David Peterson, Lynchburg College
Kristin Pierre, U.S. Environmental
Protection Agency
Robert Pojasek, Pojasek &
Associates
Mike Pregent, Ashland Chemical
Company
Ken Sandier, U.S. Environmental
Protection Agency
Karen Shapiro, Tellus Institute
Tom Tramm, Commonwealth Edison
Company
Leanne Viera, IBM Supply Chain
Optimization Practice
David Vogel, The Gauntlett Group
Tom Votta, Tellus Institute
Steve Walton, Emory University
This report refers to environmental accounting activities at several companies in
North America. These examples by no means exhaust the many laudable efforts
under way at firms in multiple industries. Moreover, EPA and the report's reviewers
do not necessarily endorse the example approaches, the terminology, or the
products mentioned in the document.
-------
OVERVIEW
Companies are changing how they
manage their supply chains.a Rigid,
arms-length, customer-supplier
relationships are giving way to alliances
with upstream and downstream trading
partners. For example, many compa-
nies have suppliers automatically
replenish their inventory. Other
companies outsource product design
and development to key suppliers.
Direct interaction with supply
chain partners can enable a
company to reduce total inventory
levels, decrease product obsoles-
cence, lower transaction costs,
react more quickly to changes in
the market, and respond more
promptly to customer requests.
Essential to supply chain performance
is improving the effectiveness of
materials management—the set of
business processes that support the
complete cycle of material flows from
purchasing and internal control of
production materials, through planning
and controlling work in process, to
warehousing, shipping, and distributing
finished products.l Managers can
improve their materials management
performance by first understanding
how their decisions affect the purchas-
ing, storage, handling, and asset
recovery activities throughout their
"Several key terms are defined in the Glossary.
The first usage of each term is italicized.
organization. Another key component of
supply chain management is logistics—
the activities to obtain incoming materials
and distribute finished products to the
proper place, at the desired time, and in
the optimal quantities. Companies can
greatly improve business performance by
working with suppliers, shippers,
distributors, and customers to better
coordinate logistics activities.
Companies of all sizes are further
enhancing these fundamental supply
chain changes by considering the
environmental impact — and
related bottom-line effects — of
their decisions and actions. They
have increased their competitiveness by
engaging in such environmental perfor-
mance-enhancing activities as
• Reducing the obsolescence and waste
of maintenance, repair and operating
(MRO) materials through enhanced
sourcing and inventory management
practices
• Substantially decreasing the costs
associated with scrap and material
losses
• Lowering the training, material
handling, and other extra expenses
associated with hazardous materials
• Increasing revenues by converting
wastes to by-products
• Reducing the use of hazardous
materials through more timely and
accurate materials tracking and
reporting systems
THE LEAN AND GREEN SUPPLY CHAIN I
-------
• Decreasing the use and waste of
solvents, paints, and other chemicals
through chemical service partner-
ships
• Recovering valuable materials and
assets through efficient product take
back programs.
Yet, despite the potential for
significant financial gains, most
supply chain managers currently
do not focus on environmental
concerns. One reason for this is
that cost accounting systems
typically hide the frequency and
magnitude of the "environmental
costs" that companies incur. While
raw material and labor costs are
directly allocated to the appropriate
product or process, other costs are
accumulated into overhead accounts,
which are allocated proportionally
(e.g., based on the number of units
manufactured) to all products,
processes, or facilities. This allocation
method might be appropriate for many
overhead costs, such as rent and upper
management salaries. However, this
approach can lead to inaccurate
costing and ineffective decisions when
significant costs—waste disposal,
training expenses, environmental
permitting fees, and other environmen-
tal costs—are not allocated to the
responsible products and processes.
For these reasons, supply chain
managers often cannot achieve their
overall objectives unless they tackle
important environmental concerns.
Many companies have tackled
this issue by using environmental
accounting techniques to substan-
tially reduce supply chain costs.
With these costing methods, companies
can systematically identify environmental
costs throughout the supply chain, e.g.,
costs associated with management of
hazardous materials, which typically are
not captured through conventional
accounting methods. Once the costs
(or potential benefits) have been
identified, companies can analyze the
cost drivers and evaluate alternative cost
reduction opportunities.
A number of companies have success-
fully applied environmental accounting
methods to supply chain management
decisions. Some examples from well-
known companies include:
• GM reduced its disposal costs by
$12 million by establishing a
reusable container program with its
suppliers.
• Commonwealth Edison, a major
electric utility company, realized
$25 million in financial benefits
through more effective resource
utilization.
• Andersen Corporation implemented
several programs that reduced waste
at its source and had internal rates
of return (IRR) exceeding 50%.
(V THE LEAN AND GREEN SUPPLY CHAIN
-------
• Public Service Electric and Gas
Company saved more than
$2 million in 1997 by streamlining
its inventory process to avoid
product obsolescence and disposal.
On a similar note, many companies are
also benefltting from chemical service
programs through which they
outsource such responsibilities as
chemical
inventory
management,
distribution,
training, and
waste manage-
ment. Compa-
nies in indus-
tries as varied as
the semiconductor, automotive, and
aerospace industries have achieved
enormous materials management cost
reductions, reduced production
downtime, and significantly decreased
solid waste and air emissions.2
Significant savings are possible because
the costs to manage chemicals often
range from 100% to 1000% (and
sometimes up to 1500%!) of the costs
to buy these materials.3 With the help
of the chemical service provider's
expertise, environmental gains are
coupled with substantial operating cost
savings to achieve win-win improvements.
The key to achieving these improve-
ments is changing the company
decision-making processes to incorpo-
rate environmental information. This
guidebook provides a four-step
framework for identifying and
using environmental information
to improve financial performance.
Supply chain efficiency and cost
reduction programs will not fully
succeed
unless
managers
consider
critical
environmen-
tal, health,
and safety
activities.
These steps
include leveraging existing processes
and systems, such as materials
resource planning (MRP II) systems.
Some helpful models and checklist
questions are also provided. For
example, to improve inventory manage-
ment, supply chain managers can apply
an improved inventory management
model, the Revised Economic Order
Quantity (pages 2 6-2 7). By applying
the four-step framework and supporting
tools, managers can enhance efforts to
improve operational efficiency and
increase stakeholder satisfaction.
This guidebook synthesizes the best
practices of leading U.S. companies
who have saved millions of dollars
while reducing or eliminating signifi-
cant environmental impacts.
THE LEAN AND GREEN SUPPLY CHAIN
-------
The purpose of this guidebook is
to demonstrate the opportunities
for improving both financial and
environmental performance and
to briefly review specific tools and
methods. To achieve this goal, the
guidebook is organized into eight
sections:
• The Introduction presents some of
the most significant opportunities for
simultaneously improving environ-
mental and financial performance.
• In Environmental Costs &
Benefits, problems of traditional
accounting systems are described
and environmental costs and
benefits are delineated.
• The Decision-Making Frame-
work defines the four-step process
to improve environmental account-
ing efforts.
• The Materials Management
Success Story illustrates some of
the benefits achieved and specific
actions taken by one leading
company.
• The Conclusion summarizes the
four-step approach to improving
financial and environmental
performance.
• The Glossary, Bibliography, and
References explain important terms
and provide additional sources of
information.
w THE LEAN AND GREEN SUPPLY CHAIN
-------
TABLE OF CONTENTS
Introduction 1
Environmental Costs & Benefits 6
Decision-Making Framework 12
The Four Steps: An Overview 12
A Good Start 13
Step 1: Identify Costs 14
Step 2: Determine Opportunities 17
Step 3: Calculate Benefits 20
Step 4: Decide, Implement, and Monitor 24
Materials Management Success Story 29
Materials Tracking 30
Team Approach 31
Life Cycle Cost Analyses 32
Results! 32
Conclusion 33
Glossary of Key Terms 3 5
Bibliography and References 39
Index 46
THE LEAN AND GREEN SUPPLY CHAIN w;
-------
TABLES AND FIGURES
Table 1: Supply Chain Improvements
Figure 1: Misallocation of Environmental Costs
Figure 2 : Improved Allocation
Table 2 : Cost Hierarchy
Table 3 : Examples of Environmental Costs and Benefits
Figure 3 : Decision-Making Framework
Figure 4 : Pareto Diagram
Table 4 : Andersen's Financial Analysis
4
7
7
8
10
12
20
25
viii THE LEAN AND GREEN SUPPLY CHAIN
-------
Within most companies,
significant opportunities
exist to improve the
overall use and flows of
materials.
INTRODUCTION
The materials management activities
within most companies are undergoing
fundamental changes. Companies are,
among other
things, reducing
their supplier
base, forming
partnerships with
key suppliers, and
implementing lean
manufacturing
methods.
The purpose of these supply chain
initiatives is to reduce both costs and
wastes. Conventional decision-making
approaches commonly overlook or
inadequately represent the costs and
benefits that may occur in departments
outside the decision-maker's area. For
example, a purchasing agent can often
reduce material procurement costs by
switching to a new, lower-price
supplier. In some cases, this change
increases overall production costs,
even though the engineering group may
approve the switch. For example, if the
new supplier uses excess packaging,
the increased disposal costs could
exceed the procurement savings. In
contrast, proactive purchasing
managers are reducing costs by
conducting value analyses of
materials to minimize the firm's
overall costs, forming cost-
reducing supplier partnerships,
demanding less or reusable
packaging and influencing the
material specification processes.
These expenses are critical, because
the costs to purchase,
handle, store, and
dispose of materials
represent some of the
largest operating
expenses for most
manufacturing
companies. Compa-
nies can increase
their competitiveness by develop-
ing more efficient, responsive
supply chain processes. This is
evident from the massive efforts that
automotive, chemical, and other
companies are expending to implement
enterprise resource planning (ERP)
systems and to change their relation-
ships with both suppliers and customers.
Many companies are striving to
improve their logistics and materials
management processes, but important
environmental burdens usually are
not addressed. While these consider-
ations may seem to be a more appro-
priate focus for the Environmental,
Health, and Safety (EH&S) group than
for materials managers, a number of
companies have saved millions of
dollars by addressing difflcult-to-spot
materials management expenses such
as inefficient material handling steps
that unnecessarily lose excessive
materials to air and water. In fact, the
THE LEAN AND GREEN SUPPLY CHAIN /
-------
bulk of the activities that are consid-
ered the responsibility of EH&S are
actually due to the operational activities
under the purview of supply chain
managers. Those managers who
overlook the EH&S elements of
their activities are probably
overlooking opportunities to
increase the responsiveness and
efficiency of the supply chain. As
highlighted in Table 1 (page 4), Intel,
Andersen Corporation, 3M, Common-
wealth Edison (ComEd), and other
leading companies have improved their
purchasing, material handling, storage,
material recovery, disposition, and
product take back processes through
environmental accounting initiatives.
While these success stories are drawn
from several industries, the common
thread is a
proactive,
rigorous
effort to
incorporate
environmen-
tal consider-
ations into
decision-
making
processes.
Substantial
V
improvements
are feasible because environmental
management problems are, to a large
degree, material-driven. For example,
the types and costs of wastes, the
significance of regulatory constraints,
Andersen Corporation, Intel,
Commonwealth Edison, GM,
and 3M have improved their
operating efficiency by
integrating environmental
considerations into key
materials management
decisions.
and the risks of improper handling are
all dependent upon which materials are
purchased and used within a facility.
This guidebook is intended to help
companies adopt these emerging
practices in order to improve both
economic and environmental perfor-
mance. A four-step decision-
making framework is presented
that can guide a company's effort
to address the costs and benefits
occurring not only in a specific
facility or functional area, but also
throughout the supply chain.
These practices can be integrated with
other high-priority initiatives, including
programs to form supplier partner-
ships, improve overall quality levels,
and reduce inventory carrying costs.
For example, a
number of companies
have worked with
suppliers to eliminate
unnecessary packag-
ing and reduce
hazardous materials
quantities. In fact,
some companies are
significantly improv-
ing both their
environmental profile
and profit margins by
taking a strategic approach to purchas-
ing. They are asking suppliers (and
their suppliers' suppliers) to evaluate
and lower environmental costs. These
approaches show that environmental
THE LEAN AND GREEN SUPPLY CHAIN
-------
insights can improve core business
processes. Table 1 illustrates how
strategic innovations in several core
business practices have improved both
the financial and environmental
performance of their supply chain.
In each of the Table 1 illustrations, the
roles of purchasing, inventory, or other
supply chain managers were pivotal.
For example, at Public Service Electric
and Gas (PSE&G), the Materials
Management Team led the effort to
reduce disposal and other costs.4 The
team determined that the utility
company was overpurchasing numer-
ous products and inefficiently storing
them in several locations within each
facility. The net result was unused,
excess materials that wasted storage
space and eventually required disposal.
The PSE&G Materials Management
Team first analyzed its inventory supply
chain, particularly for its chemical
commodities and paints. The inventory
analysis revealed that each facility
purchased materials separately from
many suppliers. Since most suppliers
encouraged purchasing in bulk, the
facilities often had excess product.
Leftover inventory was eventually sent to
PSE&G's central resource recovery
facility where materials were sorted,
sent to disposal facilities, or, if possible,
sold. The company realized that it
could avoid the costs of sorting,
disposing, and finding buyers for excess
inventory by simply improving its
purchasing practices.
The Materials Management Team
narrowed PSE&G's fist of suppliers from
over 2 70 to only nine. As part of the
long-term agreements that the company
established with these select suppliers,
the suppliers agreed to track the
inventory that each PSE&G facility
purchased. Thus, whenever purchasing
agents from one plant called to order
products, the vendor would check to
see if another PSE&G facility already
had the material in stock. The suppli-
ers also committed to take back any
extra, obsolete, or discontinued
products. (Usually they are able to sell
these materials to other customers.) By
placing the responsibility on its
suppliers, PSE&G eliminated the
disposal of unused, excess products
and, in doing so, reduced operating
costs and environmental burdens.
THE LEAN AND GREEN SUPPLY CHAIN
-------
Table 7; Supply Chain Improvement^
INNOVATION
RESULTS
Purchasing
Several electronics companies,
including Nortel and Intel, have moved
away from purchasing materials
toward receiving chemical services via
chemical management programs.
These services can include procure-
ment, inventory management, data
tracking, and waste management.
By providing incentives for suppliers to
reduce material quantities and by
leveraging the suppliers' expertise,
these companies have achieved
substantial savings and reduced wastes.
Chemical management providers are
no longer compensated based on the
volume of chemicals they sell to their
customers, but on value-added services
instead. With appropriate incentives,
providers are rewarded for reducing
chemical usage (and costs), increasing
productivity, or decreasing waste.
Materials Handling
A number of companies are switching
to reusable packaging systems. 3M
recently launched an Eco-Efficient
packaging business, and GM has a well-
established reusable pallets and
containers program.
By working closely with suppliers, GM
successfully switched to reusable
packaging systems and reduced its
disposal costs by $12 million between
1987 and 1992. Additionally, reusable
containers can reduce solid waste,
decrease product damage during
shipping, and eliminate ergonomic and
safety problems (e.g., cuts while
slicing open boxes).
Storage
Several companies have changed their
inventory storage procedures for
maintenance, repair, and operating
(MRO) materials by consolidating
storage areas and requiring suppliers
to adhere to stringent material return
policies.
Public Service Electric and Gas
Company streamlined its purchasing
and storage processes and saved more
than $2 million in 1997. The changes
significantly decreased the disposal of
obsolete paint and other materials,
reduced storage space requirements,
and lowered carrying costs. Previously,
these costs had been hidden in
overhead accounts.
''While this guidebook focuses on environmental improvements, the framework and tools are equally
applicable to health and safety issues, e.g., injuries and subsequent workers' compensation claims that
result from materials handling.
THE LEAN AND GREEN SUPPLY CHAIN
-------
INNOVATION
RESULTS
Materials Recovery
By focusing on their high volume material
flows and striving to eliminate wastes,
several companies have justified material
recovery projects by applying environ-
mental accounting methods.
Andersen Corporation (manufacturer of
Andersen Windows and Patio Doors)
developed a composite material from
wood wastes generated during its
manufacturing processes. This innovation
is expected to yield a 50% return on
investment and has already enabled
Andersen to decrease solid lumber
purchases by 750,000 board-feet.
Disposition
Many companies are saving money by
ensuring that major waste disposal costs
are made explicit and attributed directly
to the responsible product or business
unit. Companies use this cost informa-
tion to identify more financially attractive
alternatives to disposal.
Environmental accounting techniques
enabled Commonwealth Edison, a
Midwestern electric utility company, to
greatly reduce its landfill disposal volume.
A life cycle accounting approach
highlighted the indirect costs created by a
variety of activities, including disposal.
Once these costs were made explicit, the
company began developing a cost-effective
method for grinding tree limbs. ComEd
netted $2 million annually by making and
selling tree mulch instead of sending the
tree limbs to landfills.
Product Take Back
A variety of companies have developed
cost-effective ways to recover products
from their distributors and customers.
By working with product designers and
other functions, supply chain managers
can establish systems that enable them to
recover these assets and reduce
manufacturing costs.
Kodak's logistics system currently
recovers 70% of the cameras sold to
consumers. Since its inception, over 200
million FunSaver cameras have been
returned to Kodak facilities. Kodak
reduces operating costs by recycling or
reusing 77 to 86% of each camera's
materials. One of its significant
accomplishments has been developing a
system that overcomes the financial and
nonfinancial barriers that initially limited
product returns from photo processors.
THE LEAN AND GREEN SUPPLY CHAIN
-------
ENVIRONMENTAL COSTS &
BENEFITS
Materials management decisions affect
many dimensions of company perfor-
mance, including operating costs,
investment requirements, product
quality, and meeting delivery schedules.
While materials managers typically
address these business objectives
during the decision-making process,
environmental concerns are commonly
overlooked. Unfortunately, failure to
incorporate these "hidden costs" not
only hinders a company's efforts to
reduce a variety of environmental
burdens, but also hinders efforts to
improve financial performance.
Materials managers typically do
not address environmental con-
cerns due to the structure of
traditional cost accounting sys-
tems. While raw material and labor
costs are directly allocated to the
appropriate product or process, other
costs are accumulated into overhead
accounts. These overhead costs are in
turn allocated proportionally to all
business units, product lines, or
facilities, typically based on gross sales
or output. When significant costs are
not allocated to the responsible
products and processes, this approach
may lead to inaccurate costing data and
ineffective decision making.
Environmental costs often are
misallocated in this manner. For
example, take the case of a company's
wastewater treatment facility. The costs
of operating the facility are predomi-
nately caused by a few of the company's
products whose production generates
significant quantities of wastewater. If,
as shown in Figure 1, the costs of
operating the treatment facility are
accumulated into an overhead account
and allocated equally to all of the
company's products, the wastewater
costs are obscured and product
cost information is misleading. In
this case, product B appears to be less
expensive to produce than it actually is.
Figure 2 demonstrates a correction to
the allocation problem and depicts the
primary goal of many environmental
accounting efforts: to track environmen-
tal costs directly to the responsible
product, process, or facility.
When environmental costs are hidden in
overhead accounts, business decisions
are made without sufficient consider-
ation of the potentially costly environ-
mental impacts downstream of the
decision. For example, product design
decisions that specify the use of
hazardous materials inherently increase
the risk of employee exposure or other
incident. Lack of awareness can be
financially detrimental to a company.
6 THE LEAN AND GREEN SUPPLY CHAIN
-------
Figure 1: Misallocation of Environmental Costs4
Rent 1
Supervisor ^|
Salaries I (
Materials and 1
Labor (A) J
|
1
Product A
1
Overhead
1 |
tility 1
;osts J
Materials ar
Labor (B)
Product B
* '
Vater Treat- '
ment (B)
[JT
Figure 2: Improved Allocation
nt)
r Supervisor ] Utility
Salaries J 1 Costs J
Water Treat-]
ment(B) J
Materials and ] f ;> f Materials and 1
. Labor (A) J [Overhead] | Labor m j
1 1 1
1
r - - J
[Product Aj [Product B J
Table 2 presents a hierarchy that
classifies costs based on how easy they
are to measure in financial terms. This
hierarchy is a useful framework for
ensuring that a complete range of costs
(including environmental costs) is
considered.
While Table 2 shows clear delinea-
tions among the categories, consider-
able overlap exists, especially between
the first two categories. Whether or
not a cost is "conventional" or
"hidden" depends upon the facility's
accounting practices. For example,
the costs to landfill waste materials are
generally accumulated into an over-
head account and would therefore be
"hidden" and not incorporated into
product pricing or other decisions.
However, several firms have applied
activity-based costing methods to make
these costs "conventional" and are
allocating the landfill fees directly to the
products or processes that generate
them.
In addition, interrelationships exist
between the cost categories. For
example, if a new production process
THE LEAN AND GREEN SUPPLY CHAIN
-------
Table 2: Cost Hierarchy5
COST CATEGORY
Conventional
(least difficult to quantify)
Potentially Hidden
DEFINITION
Material, labor, other expenses, and revenues
that are commonly allocated to a product or
process.
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
External
(most difficult to quantify)
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.
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.
required 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 ecosystem. The purpose of the
cost framework is to help to identify
and address the full set of conse-
quences that might result from materi-
als management decisions.
This cost framework is not limited
to analyzing environmental costs
and benefits but rather is univer-
THE LEAN AND GREEN SUPPLY CHAIN
-------
sally applicable to any type of
financial impact. For example, a
purchasing agent might be able to
lower the company's conventional costs
by switching to another approved
supplier that provides a lower-priced
material. However, this switch could
lead to increased waste disposal costs,
a potentially hidden expense, if the new
supplier shipped materials in contain-
ers with excess packaging. Similarly,
delivery missteps by the new supplier
could inadvertently cause a variety of
contingent costs if these breakdowns
resulted in significant production
delays.
Decision makers are at
least intuitively aware of
the different cost and
benefit categories, but a
formal structure helps
ensure that the full range
of financial considerations
is addressed.
It is easy for
materials
managers to
overlook
environmental
costs and
benefits during
decision
making
because they
tend to occur
upstream or downstream of the
immediate decision, e.g., a purchasing
action can have materials handling,
storage, and disposition repercussions.
This focus on a single functional area is
not limited to environmental consider-
ations, and the resulting problems are a
primary motivation for supply chain
integration efforts. However, an
increasing number of companies have
discovered ways to reduce operating
costs or otherwise improve perfor-
mance by implementing practices that
optimize supply chain, rather than
functional area, performance.6
While this guidebook highlights
financial benefits, improved
materials management practices
can also improve environmental,
health, and safety performance. For
example, converting to reusable
containers can reduce the solid waste
burdens associated with primary and
secondary packaging materials, and can
minimize the number of injuries caused
by using razor knives to
open packages. Similarly,
chemical management
service providers closely
track material consump-
tion and can quickly spot
production floor inefficien-
cies that lead to material
losses and resulting waste
disposal.
Table 3 lists a number of
financial and nonfinancial environmental
considerations associated with supply
chain activities. As shown, purchasing,
material handling, and several other core
materials management functions can
substantially affect environmental
performance. The table demonstrates how
better materials management decisions
can result from a more complete
understanding of the costs that a company
incurs throughout the Me cycle of its
products, processes, and facilities.
THE LEAN AND GREEN SUPPLY CHAIN 9
-------
Table 3: Examples of Environmental Costs and Benefits
PURCHASING
MATERIAL HANDLING
STORAGE
Conventional
Volume of production
materials purchased
Purchase price of packaging
materials
Specialized storage space for
hazardous materials
Potentially Hidden
Activities to certify suppliers
Efficiency gains from
automated handling of
reusable containers
Costs of cleaning up spills
Contingent
Reduced risk of environmen-
tal incidents by working with
suppliers that have product
stewardship programs
Ergonomic and safety issues,
including cuts from razor
knives
Employee exposure to
hazardous materials and
subsequent workers'
compensation claims
Image/Relationship
Positive media coverage
because of partnerships with
"green" suppliers
Positive public image from
using reusable containers
Improved employee
satisfaction from reduced
exposure to hazardous
materials
External
Improved ecosystems through
eliminating the use of
hazardous materials
Accidental emissions to air
and water due to spills
Decreased releases to
ecosystems because of fewer
and less severe spills
10 THE LEAN AND GREEN SUPPLY CHAIN
-------
MATERIAL RECOVERY
DISPOSITION
PRODUCT TAKE BACK
Revenues from recovered
materials
Labor and fees associated with
manifesting, hauling, and
dumping solid waste
Reduced material costs
because of components
recovered from returned
products
Eco-efficiency gains, e.g.,
reduction of materials "lost to
scrap"
Decreased environmental
insurance premiums by
decreasing the quantity and
hazard of disposed materials
Increased shipping costs due
to product returns
Decreased remediation
liability due to lower volume
of waste sent to landfills
Potential liabilities for cleaning
up hazardous wastes that leak
out of landfills
Ability to attract investors and
insurers because of savings
from material efficiencies
Positive public image by
avoiding the community
backlash related to leaks from
inadequate disposal sites
Increased customer concern
about the quality of products
Reduced exposure-related
medical expenses for local
residents
Decreased landfill burden
Decreased mining or
harvesting of raw materials
due to lowered overall
material requirements
THE LEAN AND GREEN SUPPLY CHAIN //
-------
DECISION-MAKING
FRAMEWORK
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 begin
to explore this opportunity.
The following four-step framework
allows companies to pinpoint and
understand the costs and environmental
impacts that result from materials
management decisions. This deci-
sion-making framework is based
upon the best practices of several
companies that have successfully
initiated and implemented envi-
ronmental accounting practices.
Ideally, companies will customize this
approach to best suit their own
organizational needs and culture.
Figure 3: Decision-Making Framework
1. Identify
,^ Costs *
4. Decide, 2. Determine
Implement, Opportunities
and Monitor
» j
^>3. Calculate^'
Benefits
The Four Steps: An Overview
The four steps of the framework are
discussed in detail in the following
pages. To give readers a general
understanding of the process, the four
steps are briefly described here.
In Step 1, Identify Costs, a systematic
review of the facility or process is
conducted to determine if and where
significant environmental costs occur.
This analysis enables the team to
later focus where the probability
for significant improvement is
greatest.
During Step 2, Determine Opportuni-
ties, the identified functional areas and
processes are evaluated to determine
which changes will likely yield signifi-
cant cost savings and reduce environ-
mental impacts. Potential changes are
evaluated with criteria that can include
the magnitude of potential cost improve-
ment, the types of environmental
burdens, and the barriers to change.
Step 2 yields a set of possible
alternatives with significant
potential for improving costs
savings and reducing environmen-
tal impacts.
These initial screening steps lead to Step 3,
Calculate Benefits, where quantitative,
and sometimes qualitative, analyses of
the costs and benefits of a selected
12 THE LEAN AND GREEN SUPPLY CHAIN
-------
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 evalua-
tions. The result is a summary of
the merits of the current
process and any pro-
posed alternatives.
In Step 4, Decide, Imple-
ment, and Monitor, the
team shifts from evaluation
to implementation. First, a
decision is made to
continue with the status quo
or to pursue a new approach. Financial
benefits and/or environmental improve-
ments then occur as changes are put
into action. The new practices are
institutionalized as information collec-
tion 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. The
best practices and implementation
guidelines of Step 4 can enable
companies to integrate key con-
cepts into their routine materials
management practices.
A Good Start
As a company begins to apply the
decision-making framework, organiza-
tional challenges will often arise.
Several business practices commonly
used in change
N management can
be helpful in
addressing these
challenges and
assuring
successful
implementation.
These practices
This simple four-step
framework can be the
foundation of a company's
materials management
improvement effort.
are as follows:
Use cross-functional teams that
include members from different
divisions such as operations, pur-
chasing, EH&S, accounting, and
engineering. Due to the broad scope
of these projects, insights and support
from all of the groups affected by the
changes are necessary.
Obtain management support to the
extent possible. As with any change
effort, there is likely to be passive
resistance that senior management
support can help overcome. A timely
and enthusiastic response by those
who are affected by the changes is
necessary to the success of the effort.
THE LEAN AND GREEN SUPPLY CHAIN 13
-------
• Benchmark the best practices of
other facilities in your own company
and other companies to minimize the
risk of failure and the cost of
implementation.
• Employ total quality management
(TQM) tools (e.g., Pareto analyses,
cause and effect diagrams, etc.) to
identify and evaluate improvement
opportunities. Since the goals and
principles behind environmental
accounting dovetail with those of
TQM, these efforts can be integrated
into and increase the effectiveness of
existing TQM initiatives.
These TQM and related business
practices will position the company
for initial and sustainable success
as it pursues changes to reduce
resource use, lower other costs,
and improve environmental
performance.
Step /: Identify Costs
Regardless of the industry, companies
are being pressured by competitors,
customers, and financial stakeholders to
become more efficient. The first step in
achieving efficiency improvements is to
review materials management practices
to identify areas and activities that incur
significant environmental costs. These
initial evaluations will shape the course
of future steps and help ensure that
company resources are invested wisely.
Step 1 can range from the evaluation of
a specific product or process to an
entire corporation. A common applica-
tion is at an individual production
facility. Key questions include
• Are significant material losses caused
by spills or other material handling
problems?
• Do ergonomic or other EH&S impacts
result from poor or nonreusable
packaging designs?
• Are substantial quantities of materials
discarded because of quality,
obsolescence, or inventory problems?
• Can material specification or other
easy-to-implement changes reduce
suppliers' costs (and subsequently
our costs)?
• Are there valuable materials in waste
streams that could be salvaged
through internal recycling or sold as
by-products?
There are two stages to this step: First,
the organization studies its waste
streams and identifies the activities that
lead to environmental costs. Second,
the organization attaches costs to those
wastes and activities. Two common
approaches to identifying sources
of environmental costs are materi-
als tracking and EH&S performance
reviews.
Materials tracking is an assessment of
what, where, why, and how much
material is used, incorporated into
products and coproducts, and chan-
neled into waste streams.
14 THE LEAN AND GREEN SUPPLY CHAIN
-------
The initial analyses are often limited to
the largest or most regulated material
streams because these are most likely to
generate the highest costs. Regardless of
the scale of analysis, the result is a
better understanding of material flows
through the facility.
Materials tracking depends on the
preparation of process maps. Process
mapping is typically a team exercise
where all of the production steps
associated with or required by a specific
materials management
process are visually
diagramed. As an ex-
ample, a team might
analyze the steps necessary
to receive, store, handle,
and dispose a high-volume,
regulated material.
study at a semiconductor manufacturing
facility revealed that roughly 12% of
chemical inputs were wasted during
machine setups and other nonproduc-
tion uses.9
Another approach to uncovering
sources of environmental costs is to
routinely conduct EH&S performance
reviews of facilities' processes to
determine levels of waste and pollution,
health and safety risks, and effectiveness
Material losses incurred
during each step should be
depicted on process
maps.7'8 Mass balances,
MRPs, dispensing records,
and other sources can
provide information on
materials usage and point
to the activities that
generate waste.
Materials tracking
activities commonly
highlight larger than
anticipated material
losses and uncover unexpected
waste streams. For example, a recent
PSE&G observed that the cost to
dispose of obsolete paint and
other waste MRO materials was
substantial. To address this
problem, PSE&G
^Consolidated its purchasing
process for MRO materials,
^Decreased the number of
suppliers, and
m Implemented a material return
policy.
These process changes yielded a
$2 million costs savings in 1997.
Additionally, the company
greatly reduced its hazardous
waste disposal volumes.
THE LEAN AND GREEN SUPPLY CHAIN 15
-------
of EH&S management systems. These
reviews consist of interviews with
appropriate personnel, observa-
tions of day-to-day operational
practices, and reviews of account-
ing and manufacturing records.
The abbreviated questionnaire on the
pages 18 and 19 contains some key
questions drawn from existing review
checklists.
In comparison to materials tracking, the
drawback of performance reviews is that
they usually evaluate the extent to which
the facility is in conformance with pre-
established criteria. If the criteria are
developed prior to
a thorough study of
the facility, it is
possible that some
problems may be
overlooked
because not all of
the necessary or
revealing questions
are asked.
Consequently,
reviews may be
less thorough and
informative than
materials tracking
efforts. Neverthe-
less, if review
checklists are
An extensive study of the
electroplating industry
focuses attention on stor-
age costs. Because electro-
plating companies' waste
treatment areas typically
are large (25% of the size
of production areas) and
contain numerous storage
facilities, storage costs
present a significant oppor-
tunity for improvement.10
designed well, they can be very useful in
determining opportunities for improving
materials management and environmen-
tal performance.
Whether materials tracking, EH&S
performance reviews, or other
proven methods are used to
identify the sources of costs, the
next stage is to conduct an activity-
based costing analysis to attribute
costs to the appropriate activities
or problems.
For each of the activities or wastes
identified in the first step , create a fist
of the associated
x environmental
costs. Refer to
[Table 3 (page 10)
for examples of
the types of costs
to consider.
Consider also the
variety of environ-
mental require-
ments that follow
from the identified
activities. Then
estimate the dollar
value of wastes
and related
activities. This
16 THE LEAN AND GREEN SUPPLY CHAIN
-------
effort often reveals a variety of expensive
(non-value-added) overhead costs,
ranging from training and paperwork
activities to hazardous waste treatment
and disposal, that have not been
attributed to the responsible products
or processes.
Information Gathering
It will probably be necessary to consult
a wide variety of information sources to
collect the necessary cost and opera-
tional data. Commonly used sources
include11
• Production records for material
usage rates
• Invoice records for disposal rates
and quantities
• Observations of activities and
discussions with operators
• Training records for personnel
training hours
• Maintenance logs for both labor
costs and the frequency and length of
production shutdowns
• Utility bills for the costs and usage of
water and energy
• Facility blueprints for warehouse
space requirements
• Procurement records for the costs of
specialized handling equipment.
Step 2: Determine Opportunities
Once a company has completed the
initial identification step, the next step is
to determine which areas offer the
greatest opportunities for improvement
and then develop specific solutions
that reduce costs and negative
impacts. Many companies have
found that the Pareto, or 80/20,
principle applies, i.e., that a few
supply chain improvements
provide most of the achievable
gains. At this point only preliminary
evaluations have been completed, so
the challenge is discerning the high-
value opportunities with the limited
information that has been collected.
Two procedures that can be used to
sort and analyze the activity and cost
information obtained in Step 1 are to
• Use Pareto diagrams and other bar
charts to display environmental
costs by supply chain activity and
to rank opportunity areas by value.
(See Figure 4). n
m Identify root causes of wastes by
constructing cause-and-effect
diagrams or by continually asking
why certain problems or proce-
dures exist.
Once these procedures are followed,
the solutions to the problems may
become obvious. Other methods for
identifying specific solutions are to
• Interview production personnel to
understand potential opportunities
for (and barriers to) change.
• Approach suppliers of the key
materials and request their
support to lower costs and reduce
impacts. Some suppliers have
developed this expertise internally
and can provide this service.
THE LEAN AND GREEN SUPPLY CHAIN 77
-------
FHS Performance Review—Sample Questions1
Purchasing
Have suppliers supported the company's efforts to reduce the facility's
quantities and costs of waste?
Are environmental, health, and safety performance criteria (e.g., flammability
biodegradability toxicity, recyclability and other environmental or
regulatory requirements) clearly articulated in new product specifications
to suppliers?13
Does the plant accept samples from chemical suppliers?
Are suppliers required to take back unused samples they provide?
Input Materials Summary
Description
Attribute Stream/ Stream/ Stream
Material Name/ID
Source/Supplier
Hazardous Component
Annual Consumption Rate
Purchase Price, $ per
Overall Annual Cost
Material Flow Diagram
available (Y/N)
Delivery mode
Shipping Container Size & Type
Storage Mode
Transfer Mode
Control Mode
Empty Container
Disposal/Management
Shelf Life
Supplier would
accept expired material (Y/N)
accept shipping containers (Y/N)
Acceptable Substitute (s), if any
Alternate Supplier(s)
Handling
Are all raw materials tested for quality before being accepted from suppliers?
Are plant material balances routinely performed?
Does the company's personnel training program include information on the
safe handling of raw materials, spill prevention, proper storage techniques,
and waste handling procedures?
cThe questions and tables in this list are taken largely from a series of Guides to Pollution Prevention
published by the U.S. Environmental Protection Agency. The Guides span a wide array of industrial
sectors and each includes waste minimization assessment worksheets. (Various publication numbers,
all with the format EPA 625/7-9X/OXX). See www.epa.gov/ttbnrmrl/Guides.htm.
18 THE LEAN AND GREEN SUPPLY CHAIN
-------
What is the injury frequency and severity rate among material han-
dlers?
Storage
Are specialized containers or storage facilities required to prevent environmental
damage?
Is inventory used in first-in first-out order?
Is there a computerized inventory system to track inventory and material waste (e.g.,
barcoding, MRPII, etc.)?
What information do(es) the system(s) track?
Are all storage tanks routinely monitored for leaks?
If yes, describe the procedure and monitoring frequency for above-ground/vaulted
and underground tanks:
Disposition and Material Recovery
Is your solvent waste segregated from rinse-water streams and other wastes?
Does the plant generate waste streams that contain valuable process chemicals or
metals?
Are all empty bags, packages, and containers that contained hazardous materials
segregated from those that contained nonhazardous wastes? Are containers
properly cleaned prior to disposal?
Waste Sources
Hazardous obsolete raw materials
Nonhazardous obsolete raw materials
Spills & leaks (liquids)
Empty container cleaning
Container disposal
Evaporative losses
Off-spec materials
Pipeline/tank drainage
Laboratory wastes
Contaminated wipes and gloves
Other
Significance at Plant
High Medium Low
THE LEAN AND GREEN SUPPLY CHAIN 19
-------
• Review the successes of other
companies in the same industry.
• Apply the best practices available
from trade associations and public
institutions.
Since the next step, Calculate Benefits,
can be time-consuming, selecting the
most viable options for improvement is
important. By using proven, simple
ranking methods, a company can
quickly focuses on its most significant
opportunities.
Step 3: Calculate Benefits
Once a set of high-priority alternatives
has been developed, the analytical
exercise of calculating the costs and
benefits of the various options begins.
One approach to the calculation
process is to conduct quantitative
evaluations, which rely on empiri-
cal data. Two specific quantitative
approaches are Internal Rate of Return
(IRR) (Table 4 on page 25) and
Economic Order Quantity calculations
(pages 26-27).
Figure 4: Pareto Diagram
200 -
46%
175
Material Waste Packaging Shippings Purchasing
Handling Disposal Receiving
Materials Management Activities
20 THE LEAN AND GREEN SUPPLY CHAIN
-------
A second approach is to conduct
qualitative evaluations, which are
based on observation and judg-
ment. These evaluations provide
valuable insights when credible data are
not available or quantification would be
too resource-intensive.
Often, both approaches are taken.
Environmental costs and impacts are
quantified when possible within the
project budget and schedule and
qualitatively evaluated otherwise. For
example, a project team could probably
find the data to answer the following
questions:
• How much of a particular material
was landfilled last year and what were
the disposal costs?
• How many pounds of hazardous
materials are purchased for a specific
process, e.g., painting? What portion
of the company's cleaning and other
MRO materials must be treated as
hazardous waste? What were the
medical expenses attributable to
injuries caused by poor ergonomic
design?
• How many times will a reusable
container be used?
In addition to these environmental
costs, a team will also determine the
operational benefits. Increased
production line efficiency and other
performance improvements can greatly
increase the total cost savings.
In contrast, precise quantification of
the following costs and benefits may be
less straightforward:
• What were the total costs due to
overtime, lowered efficiency, quality
defects, and other issues related to
ergonomics?
• How much labor is necessary to
meet tracking, record keeping, and
other regulatory mandated
requirements?
• How much will employee satisfaction
be improved by switching from a
hazardous material to non-regulated
compound?
• How does the use of specialized
containers and other EH&S-driven
activities affect the overall productiv-
ity of manufacturing operations?
Many times, the activity-based analysis
methods suggested in Step 1 answer
the above questions. However,
producing definitive answers is
sometimes not achievable within time
and resource constraints. Simply
estimating a range of costs and
benefits, or qualitatively describing
them, often is sufficient to justify an
eco-efficiency improvement investment.
Example Analyses from
Andersen Corporation14
Andersen Corporation, the manufac-
turer of Andersen Windows and Patio
Doors, applied several quantitative
methods when evaluating an automated
paint blending system. As the regulatory
THE LEAN AND GREEN SUPPLY CHAIN 21
-------
pressures and costs associated with its
painting lines became more significant,
Andersen began searching for ways to
reduce emissions and material costs.
After reviewing several alternatives,
managers conducted an in-depth
analysis of the most promising
approach: a point-of-use paint mixing
system. This "meter mix" system
replaced the existing batch system.
They evaluated several cost and
material usage areas, including:
• Paint materials: purchasing and
shipping costs
• Waste: treatment, transport, and
disposal costs
• VOC emissions: associated fees
• Solvent materials: purchasing and
shipping costs
• Solvent
emissions:
material losses
and associated
fees.
In addition, the
managers
factored in the
labor and
expenses
associated with
the following:
• Raw material handling and storage
• Waste handling, storage, and
disposal, as well as related training
activities to ensure that waste
materials were properly handled
and disposed
Andersen Corporation is one
company that has saved
several hundred thousand
dollars by incorporating envi-
ronmental considerations,
qualitatively as well as quanti-
tatively, into its materials
management decision-making.
• Analysis, reporting, and record keeping
associated with the paint line
• Material obsolescence.
In each of the above four cases, the
team determined material usage rates
or described the financial impacts.
However, the team did not calculate
actual dollar figures for these costs, but
rather simply recognized that the total
financial impacts were significant. This
qualitative information provided
important insights that supplemented
the more precise calculations.
As shown below, installation of the
meter mix system was attractive
because the quantified costs yielded
an 18-month payback and 58%
internal rate of
return. The
qualitatively
evaluated
activities further
strengthened
this decision to
proceed.
The payback
calculations are
relatively straight-
forward, as shown below.
P=I/M
Where
P = Payback period (months)
I = Investment ($)
M = Monthly savings ($/month)
22 THE LEAN AND GREEN SUPPLY CHAIN
-------
Based on the forecasts in Table 4, the
initial investment (I) was $130,100 and
the monthly savings (M) during the first
two years averaged $7, 146. With these
values, the payback period was 18
months.
The IRR calculations are more complex,
but fortunately a variety of software
packages, including standard spread-
sheet packages can compute these
values. The internal rate of return is the
interest rate at which the net present
value (NPV) of the investment is zero. It
takes into consideration the amount and
timing of the costs, savings, and
revenues of the investment.11
The higher the IRR, the better the
project. A money-saving project will
have a high IRR because it will have a
positive value even if the future cost
savings are discounted heavily. The IRR
calculations are shown below.
; / (1 + IRR)'
NPV = 0 = C
For the meter mix system,
NPV=0=-$130,100 + $85,6557(1 + IRR)
+ $85,8637(1 + IRR)2 + $82,5797
(1 + IRR)5 + $80,9217(1 + /PJ?)4
+ $80,4197(1 + IRR)5
Similarly, companies can directly calculate the
investment's NPV. The NPV is based on the
company's cost of capital and considers the
amount and timing of the investment's capital
outlays, savings, and revenues. An NPV greater
than zero indicates a profitable investment,
and, as with IRRs, the higher the NPV, the
better.
Solving this equation by trial and error
shows that the IRR is 58%. The trial and
error approach is somewhat tedious,
but again, many software packages can
quickly compute IRR values.
These and other analyses demonstrated
the operating and environmental
benefits of making this investment.
Andersen Corporation has since applied
this approach to numerous decisions
and thereby improved its operating
efficiency and reduced environmental
burdens. Environmental accounting
approaches helped the company achieve
its goal of reducing high-priority
emissions by 90%.
Most cost-estimation efforts focus on
conventional and potentially hidden
costs, since quantifying contingent and
image/relationship costs is considerably
more challenging. For example,
eliminating an ergonomic problem will
probably improve employee satisfaction,
but what is the economic value of that
increased satisfaction? The recom-
mended approach is to quantify costs
when feasible, and then to identify and
qualitatively value those other costs that
will better inform the decision-making
process.
THE LEAN AND GREEN SUPPLY CHAIN 23
-------
As the Andersen case demonstrates, by
gathering and evaluating production and
cost data through the use of activity-
based costing, internal rate of return,
net present value, and other financial
analysis techniques, companies can
demonstrate the economic benefits of
more eco-efficient practices.
The payback and IRR methods that
Andersen applied are commonly used in
industry. For their purposes, the
company was able to use a well-
established calculation method. In
other cases, managers might need to
slightly modify a method to address
environmental costs. For example, as
shown on pages 26-27, the standard
inventory management model can be
easily adapted to include the costs
associated with material obsolescence
and subsequent disposal costs.
Step 4: Decide, Implement, and
Monitor
Once the financial and environmental
improvements have been estimated, the
fourth and final step is to make a
decision, implement the changes, and
monitor progress.
Decide
Approaches to decision-making vary
significantly among companies. The
objective is to select the option that
improves both dimensions of perfor-
mance. Some companies have
adopted team decision processes
that involve individuals from
several different functions. Other
firms have more conventional,
unilateral decision processes in
which the responsible manager
chooses the alternative that he or
she believes will be most advanta-
geous. A formal weighting methodol-
ogy can help decision makers trade off
the strengths and weaknesses of one
alternative against another.
Regardless of the methodology, the
preceding steps provide the financial
and nonfinancial information that
improves the effectiveness of this effort.
The environmental and financial
information is considered with a variety
of other strategic concerns to enable
decision makers to select the best
solution for their company.
Implement
Once a decision has been made, the
final challenge is implementing the
change. Many good ideas are
implemented poorly or not at all.
In either case, the potential
savings and environmental benefits
are not realized.
The beginning organizational steps
(page 13), including use of a cross-
functional team, also support the
implementation effort. Some additional
recommendations to ensure a success-
ful implementation include:
24 THE LEAN AND GREEN SUPPLY CHAIN
-------
TaMe 4: Andersen's Financial Analysis
Investment
Equipment
Installation and other expenses
Total Investment
YearO
(Installation)
($115,541)
($14,559
($130,100)
Total
(Years 0-5)
($115,541)
($14,559)
($130,100)
Costs
Operating costs
Total Costs
($109,355)
($109,355)
($115,302) ($623,197)
($115,302) ($623,197)
Savings
Paint Use and Waste Reductions
Paint purchase and shipping
Waste treatment, transport, disposal
VOC emissions and associated fees
Dilute Solvent Use & Waste Reductions
Solvent purchase and shipping
Solvent emission losses and fees
Flush Solvent Use & Waste Reductions
Solvent purchase and shipping
Solvent emission losses and fees
Total Savings
Net Benefit
$110,374
$14,387
$162
$58,710
$560
$10,687
$130
$195,010
$113,685 $585,991
$15,106 $79,497
$170
$60,471
$588
$311,699
$3,094
$11,008 $56,739
$137 $718
$201,165 $1,038,633
($130,100) $85,655 $85,863 $415,436
Notes and assumptions
• "Operating costs" are additional costs
required to operate point-of-use system
• 3 % annual increase in material and
labor costs
• 5 % annual increase in all other costs,
e.g., waste management
THE LEAN AND GREEN SUPPLY CHAIN 25
-------
A Revised Economic Order Quantity:
Improving the Inventory Management Model
As companies establish just-in-time and other lean inventory systems, they
reevaluate the lot sizes of purchase orders and production runs. This
hypothetical example demonstrates how a company could increase
its overall efficiency by changing a common inventory practice—
determining the economic order quantity.
Commonly hidden in inventory management decision making are the costs to
dispose of obsolete, hazardous materials. Several factors, especially ordering
costs and inventory carrying costs, are typically considered when companies
determine what quantity of specific materials to order. In contrast, companies
rarely incorporate the risk of obsolete materials.
This example illustrates how two environmental considerations, material
losses and waste disposal, can be included in this common inventory manage-
ment model. This example does not address other hidden and contingent
costs, such as those related to spills and worker exposure. The basic equation
for determining the order quantity that minimizes total costs is
Q = V2DS/HC
Where
Q = Optimal order quantity (units)
D = Annual demand for material (units)
S = Procurement and setup costs per order ($)
H = Inventory holding cost rate, often 10 - 35%
C = Cost of inventory item ($/unit)
Holding costs are the costs to maintain inventory and include cost of capital
(that could be invested elsewhere), warehousing costs, insurance, and other
expenses. For hazardous materials, the costs of disposing obsolete materials
should be considered because disposal costs, on a per unit basis, can be
comparable to the initial purchase costs.
26 THE LEAN AND GREEN SUPPLY CHAIN
-------
For example, many industrial paints cost approximately $3/lb, while
disposal costs for these materials can exceed $ l/lb.e If a company
analyzed its hazardous waste disposals and observed that -5% of its paint
was eventually disposed of instead of used, then the company should
increase its holding costs considerably.^
r
Annual demand (D)
Setup costs (S)
Holding cost rates (H)h>'
Item cost (C)
Order quantity (Q)
Conventional
4,000 Ib
$50
10%
$3/lb
1,155 Ib
Revised
4,000 Ib
$50
15% (+5% for
disposal)
$3/lb (+ $l/lb
for disposal)
895 Ib
For this hypothetical case, the economic order quantity decreases by 23%
when material obsolescence and the accompanying costs of lost materials
and waste disposal are considered. With this approach, a company could
reduce the environmental burdens and decrease the overall costs associ-
ated with paint disposal.
eSeveral options, including recycling and energy recovery, can reduce these costs. In this
case, assume that disposal is required.
tosses include the purchase cost of the lost material (5% x material price) and the
disposal cost due to obsolescence (5% x disposal cost).
^The disposal ratio (5%) could be determined empirically and would depend upon the
types of materials, purchase quantities, and consumption rates. Periodic reevaluation of
this ratio would be warranted.
hFor a conventional case, assume that material price = $3/lb and that holding costs =
(10% x material price).
'For a revised case, assume that disposal cost =$l/lb and that revised holding costs
= [(10% + 5%) x material cost] + [5% x disposal cost].
THE LEAN AND GREEN SUPPLY CHAIN 27
-------
i Review previous organiza-
tional change efforts within
the company to gain valuable
insights on the reasons behind
those efforts' successes and
failures.
i Establish a group that is
solely committed to conduct-
ing the cost analyses, imple-
menting the changes, and then
ensuring and reporting the
successes. This group may
only be necessary for an
interim period.
i Conduct one or more pilot
studies to demonstrate the
benefit of this initiative and
gain support for broader
implementation. Pilots also
enable the team to adapt to
unexpected problems.
i Provide appropriate training
for employees so that they begin
developing the necessary skills.
An aerospace electronics com-
pany saved $1.1 million by
successfully implementing a
chemical management program.
Moreover, the company tracked
its performance in a number of
areas and realized other impres-
sive results. For example,
m Procurement cycle time
dropped from fifteen days to
one
m Hazardous waste costs fell
75%.
These results demonstrate how
monitoring can reveal environ-
mental and operating gains.15
These implementation guidelines are
particularly helpful and important during
the initial changes. Since most companies
concurrently pursue a variety of improve-
ment initiatives, early, substantive results
may be necessary to compete against the
other initiatives and increase the probabil-
ity of long-term acceptance and success.
Monitor
As these new materials management
practices become established, they
should be periodically monitored to
ensure continued progress. The
monitoring effort is often part of the
company's broader quality program
and ensures that any performance
problems are promptly addressed.
Additionally, the rapid pace of
technological and environmental
change necessitates an effort to
continuously identify opportuni-
ties to further reduce costs and
lower potential impacts.
The team should also periodically
review overall progress toward
28 THE LEAN AND GREEN SUPPLY CHAIN
-------
reducing the wastes and costs identified
in the first step. As part of this review,
and to improve the accuracy of data,
gaps in information and information
systems should be analyzed and
communicated to those responsible for
the development and maintenance of
the information systems. For example,
because ERP and MRP II systems
already closely track the flow of
materials and other information
throughout a company, they present
opportunities for improving and
institutionalizing the collection of
material loss and environmental cost
information. Material managers,
through their understanding of
and influence over materials
information systems, have access
to information on wastes and costs
that others throughout the
organization (e.g., engineers) may
need for their own quality and
efficiency-building efforts. ERPs,
MRPs, and even traditional ac-
counting systems can be designed
or modified to pull material,
handling, disposal, and other
environmental costs out of over-
head accounts and charge them
directly back to the responsible
departments. This will facilitate
reporting this information and will
make the information quickly acces-
sible to a wide variety of decision
makers.
A rigorous review process supports
another crucial activity—communicat-
ing results. Success begets more
success. Demonstrating accomplish-
ments to senior management will help
secure continued resources for the
supply chain effort and may help
improve other core business decisions.
Results should be shared with other
colleagues, especially design and
manufacturing engineers. The cost and
material information collected in Steps
1 and 2 could be key to other effi-
ciency-improving efforts. For ex-
ample, product designers might specify
less burdensome materials if they
understood the full costs associated
with handling and disposing harmful
materials. By monitoring implementa-
tion of the cost-reduction efforts,
sharing information, and communicat-
ing results, supply chain managers can
support further gains and justify future
improvements.
MATERIALS MANAGEMENT
SUCCESS STORY
One company that has markedly
improved its materials management
processes by applying environmental
accounting tools and techniques is
Commonwealth Edison (ComEd), a
major midwestern electric utility. The
company's cost reduction activities
yielded over $25 million in cumulative
savings and afforded the company a
number of important environmental
benefits.17 This abridged case study
reveals how these results were
THE LEAN AND GREEN SUPPLY CHAIN 29
-------
ComEd saved over
$25 million and achieved
a number of important
environmental benefits
by improving its materi-
als management
processes.
accomplished and demonstrates the
step-by-step decision-making
framework.
One of ComEd's materials management
successes was its
Inventory Minimi-
zation Program,
which enabled the
company to reduce
the number of
hazardous
materials pur-
chased, decrease
the quantity of
waste, and
concurrently lower
the costs of buying, storing, using, and
disposing solvents at its facilities. The
key steps are highlighted below.
Materials Tracking
In 1993, ComEd recognized that its total
cost of managing materials was greater
than its initial purchasing expenses. In
particular, a significant portion of the
company's waste disposal costs were
caused by inefficient purchasing,
storage, and other materials manage-
ment practices. Based upon this
realization, the company initiated a
materials tracking effort to identify and
characterize the waste and by-product
streams from its generating facilities.
At several facilities, engineering teams
used a waste accounting software
package to evaluate five high-priority
material categories: chemicals and oils,
coal by-products, PCBs, recyclables, and
solid waste. The teams did not conduct
extensive mass balances, but rather
addressed some key questions:
• Which types of wastes
were being generated at
the various facilities?
What quantities of each
material were being
disposed?
What were the waste
disposal costs or
recycling revenues for
each material?
The goal of the first
step, Identify Costs, was to identify
the waste streams that were
significant enough to justify
additional evaluation. Thus, the
initial evaluation was limited to identify-
ing the waste streams and completing
preliminary analyses at a few facilities.
The teams did not track emissions,
spills, or other types of environmental
burdens, nor did they estimate purchas-
ing, storage, or other costs.
The approach pinpointed three high-
volume and high-cost waste streams:
coal ash, contaminated soil, and solvent
waste. In particular, the ComEd
team discovered that the facilities
annually disposed of over 500,000
pounds of solvent-contaminated
materials. Since these waste solvents
were regulated and accordingly
disposed of as hazardous wastes, the
disposal costs were substantial.
30 THE LEAN AND GREEN SUPPLY CHAIN
-------
Team Approach
The waste stream evaluation revealed a
number of significant opportunities for
reducing waste at its source. ComEd
then focused on the company's use of
solvents and alternative cleaning
materials, and broadened its scope of
analysis to include the complete set of
materials management activities. Action
committees were formed with members
from all of ComEd's key materials
management processes: procurement
and contracting, receiving and testing,
warehousing and distribution, opera-
tions, and recovery and distribution.
The team began by evaluating
requirements that could constrain
its ability to replace a solvent with
a less costly, less burdensome
cleaning material. Three questions
were answered for each cleaner:
• For which applications is the solvent
best suited?
• Does the cleaner leave a residue?
• Is the cleaner corrosive to metals,
vinyls, plastics, or insulations?
These questions helped the team
determine which cleaners could be
easily substituted and which ones could
not, e.g., obviously, a cleaner that
corroded metal could not be used on
steel or other metallic surfaces. After
determining which cleaning materials
were viable substitutes for each other,
the team then evaluated the product
performance of each cleaner. A cross-
section of personnel who used or
managed the solvents rated the materi-
als in five categories:
• Operating
• Purchasing and Supply
• Environmental and Regulatory
• Safety and Health
• Analytical.
The survey participants rated each
cleaner on several criteria within each
category. For example, the Purchasing
and Supply criteria were
• Cost
• Vendor Performance
• Shelf Life
• Packaging Safety
• Availability of Various Sized Packages
• Storage Ease
• Dispensing Ease.
The solvents were ranked from 1 to 10
(1 being the worst rating, and 10 the
best). Since some factors were consid-
ered significantly more important than
others, the team assigned a weighting
factor to each criteria. A final prod-
uct rating was determined by
calculating a sum of the weighted
criteria scores.
The screening questions enabled the
identification of substitute cleaners, and
the product ratings revealed which
cleaning materials had superior
operating and environmental perfor-
mance. Thus, during the second
THE LEAN AND GREEN SUPPLY CHAIN 31
-------
step, Determine Opportunities, the
team uncovered numerous oppor-
tunities to replace solvents with
equivalent or superior performing
cleaners.
Life Cycle Cost Analyses
The third step of the Inventory Minimi-
zation Program, Calculate Benefits, was
a life cycle cost evaluation. The team
quantified three categories of cost:
• Purchase Costs
• Inventory Carrying Costs
• Waste Disposal Costs.
Since the team had already determined
the last category of costs, the team
focused on the first two categories and
obtained data by reviewing purchasing
and warehouse records. The analyses
revealed that the cost reduction
opportunity was spread across several
of ComEd's materials management
processes. In fact, disposal cost
savings were less than one-third of
the total cost savings obtainable.
The team was also concerned about
hidden and contingent costs. Since
these costs were more difficult to
estimate, the team qualitatively evalu-
ated several additional cost categories,
including:
• Solvent Specification Cost
• Record Keeping Cost
• Cost of OSHA and EPA Citations
• Training Costs
• Cost of Solvent Misuse.
These cost evaluations enabled the
team to address the full spectrum
of solvent performance, from
purchasing cost to environmental
considerations to operating
effectiveness.
The life cycle cost analyses confirmed
the opportunities to replace ComEd's
current cleaning materials with lower
cost, better (or at least equivalent)
performing alternatives.
Results!
The Inventory Minimization Program
proved to be quite successful at the two
facilities that first implemented it. The
teams' recommendations led to cost
savings and environmental gains. ComEd
changed its procurement decision
process and reduced the number of
solvents from fifteen to three.
Based upon this initial success, the
program was implemented and
transferred to other generating
facilities. The overall results were:
• Replacement of over 100 solvent
products with nonhazardous
materials
• Reduction of hazardous solvent
waste by 88% during a two-year
period
• Five-year estimated cost savings
of over $1,000,000
32 THE LEAN AND GREEN SUPPLY CHAIN
-------
• Considerable reduction of
difficult-to-estimate costs,
including those for record
keeping and training.
This initial improvement effort has since
evolved into a continuous improvement
effort— the New Product Evaluation
Process. The purpose of this process is
to ensure that ComEd continues to
reduce the life cycle costs and the
environmental concerns of cleaning
activities. After some initial screening
steps (e.g., determining if the material
has special handling or storage require-
ments), new solvents are evaluated as
described in Steps 2 and 3 with a
performance evaluation and life cycle
cost evaluation. This effort has
enabled ComEd to continue reduc-
ing its hazardous material use,
accompanying waste, and overall
costs, while helping operating
personnel perform their jobs
quickly and effectively.
Since this initial success, ComEd has
monitored its progress and successfully
expanded its program to address several
other materials management activities.
CONCLUSION
Materials managers can simultaneously
improve both the financial and environ-
mental performance of their supply
chain systems. This guidebook has
recommended a four-step approach to
implement environmental accounting
methods that can identify hidden costs
or benefits and reveal opportunities to
increase overall efficiency and produc-
tivity. This approach is part of a
broader paradigm that has
emerged among leading corpora-
tions around the world—the
realization that environmental
considerations should be inte-
grated into each and every core
business process.
Over the past few decades, there has
been a gradual progression in the
environmental performance of indus-
trial firms. The old view of pollution as
a "cost of doing business" has given way
to a more enlightened view—namely,
preventing pollution at its source makes
good financial sense. This trend has
culminated in the concept of "eco-
efficiency," which involves minimi-
zation of waste, conservation of
scarce resources, and avoidance of
persistent, toxic by-products. The
World Business Council on Sustainable
Development, an influential group of
corporations formed in 1990 by their
chief executives, has published a series of
reports demonstrating how eco-efficiency
can contribute to competitiveness.18
A number of U.S.-based multinational
companies have recognized the
importance of environmental excellence
to long-term success, and are position-
ing themselves to derive advantage from
the introduction of eco-efficient
products and technologies. In the
THE LEAN AND GREEN SUPPLY CHAIN 33
-------
electronics industry, companies such as
Hewlett Packard, Xerox, and IBM have
embarked upon pioneering initiatives to
design environmentally conscious
products and to communicate these
benefits to their customers. In the
chemical industry, companies such as
Monsanto, Dow, DuPont, and Rohm &
Haas have sought new market opportu-
nities through the introduction of
environmentally preferable processes
and the exploration of biotechnology-
based products. Another notable
example is Interface Corporation, a
manufacturer of industrial carpets,
whose CEO, Ray Anderson, has made a
personal commitment to transform the
company into an eco-efficient, sustain-
able enterprise.19
A number of recent success stories
demonstrate that reducing pollution at
the source and designing products and
processes in ways that enhance environ-
mental quality will generally result in
higher productivity and reduced
operating costs, and may also increase
market share.20 For example:
• Proactive management of supplier
environmental performance, as
practiced by Hewlett Packard, can
lead to product and process simplifi-
cation, more efficient resource
utilization, product quality improve-
ment, liability avoidance, and an
enhanced leadership image.
• Adoption of eco-efficient manufactur-
ing methods, as practiced by 3M, can
lead to more flexible plant configura-
tion, enhanced productivity, improved
community support, and a stronger
influence on the evolving regulatory
regime.
• Attention to the environmental
services aspect of customer satisfac-
tion, as practiced by Ashland Chemi-
cal, can lead to reduced cost of
ownership, more convenient product
handling and disposal, and a percep-
tion of supplier commitment.
• Finally, attention to "end-of-life"
product disposition issues, as
practiced by Xerox in its photocopier
business, can lead to diminished
waste liability, reduced cost of
materials, improved asset utilization,
and a strengthened linkage with
customers.
By focusing on an appropriate set of
these sources of competitive advantage,
a company can use environmentally
beneficial strategies selectively to
become more competitive over the long
run. Obviously, implementation of these
strategies will require fundamental
changes in core business processes
such as product development, market-
ing and sales, manufacturing, supply
chain management, and customer
service. In each case, environmen-
tal accounting methods are useful
for systematically identifying and
assessing opportunities to increase
shareholder value.
34 THE LEAN AND GREEN SUPPLY CHAIN
-------
GLOSSARY OF KEY TERMS'
Activity-Based Costing
Business Process
Disposition
Environmental Burden
Eco-Efficiency
Environmental Accounting
Ergonomics
'Definitions adapted primarily from the
following sources:
• APICSDictionary, Ninth Edition, APICS,
1998.
• Joseph Fiksel, Design for Environment:
Creating Eco-Efficient Products and
Processes, McGraw-Hill, 1996.
Accounting method that accumulates
costs based on activities performed and
then allocates these costs to products,
customers, or processes.
A set of logically related tasks or
activities performed to achieve a
defined business outcome.
Process of discarding waste materials
or obsolete products.
A release or modification to the
environment, due to an industrial
process, that may have adverse effects.
The ability to simultaneously meet cost,
quality, and performance goals; reduce
environmental impacts; and conserve
valuable resources.
Management accounting practices that
enable the incorporation of environ-
mental cost and benefit information
into business decisions.
Approach to job design that focuses on
the interactions between employees
and their work environment, which
includes tools, equipment, heat, light,
sound, and possible pollutants.
THE LEAN AND GREEN SUPPLY CHAIN 35
-------
Hazardous Waste
Life Cycle
Life Cycle Costs
Logistics
Mass Balance
Materials Handling
A waste such as chemicals or nuclear
material that is hazardous to humans
or animals and requires special
handling.k Hazardous waste costs are
typically substantially higher than other
waste costs due the special handling,
training, and recording as well as
higher disposal fees that are required.
A sequence of stages spanning the
lifetime of a product, process, service,
facility, or enterprise from inception to
final use and disposition; in the case of
materials, includes extraction,
acquisition, manufacturing, and
ultimate reuse or disposal.
Financial impacts associated with the
fife cycle stages of a material, product,
process, service, facility, or enterprise.
Activities to move incoming materials
and distribute finished products to the
proper place, at the desired time, and
in the optimal quantities.
A quantitative or engineering
assessment of material flows and
transformations.
Process of developing and implement
ing manual, mechanized, and auto
mated systems to provide movement of
materials throughout a facility.
^Please note that this APICS definition is different
than the definition included in the Resource
Conservation and Recovery Act. The latter should
be used as the basis for hazardous waste
regulatory compliance activities.
36 THE LEAN AND GREEN SUPPLY CHAIN
-------
Materials Management
Materials Recovery
Materials Tracking
Net Present Value
Product Take Back
Purchasing
The grouping of management functions
supporting the complete cycle of
material flow, from the purchase and
internal control of production materials
to the planning and control of work-in-
process to the warehousing, shipping,
and distribution of the finished product.
Activities to prevent the release of
materials into air, water, or solid waste
streams and incorporate these materials
back into the manufacturing process.
Assessment of what, where, why and
how much material is acquired,
incorporated into products and co-
products, and channeled into waste
streams throughout the materials life
cycle.
The discounted value of future earnings
(cash flows minus initial investment) for
a given number of time periods. The
discount rate reflects the company's
time value of money and commonly
ranges from 10% to 15% per year.
Activities to obtain used products from
industrial customers or consumers, and
then recycle or reuse these products.
Process of determining specifically
which materials, supplies and services
must be procured, and then obtaining
those resources from suppliers.
THE LEAN AND GREEN SUPPLY CHAIN 37
-------
Recovery
Sourcing
Supply Chain
Value Analysis
Process of obtaining a valuable
resource from a potential waste
material.
Process of determining the types of
products and services required and
establishing purchasing relationships
with capable suppliers.
The functions inside and outside a
company that enable the value chain to
make products and provide services to
the customer.
A systematic approach that identifies a
required function of a product or
service, establishes a value for that
function, and finally provides that
function at the lowest overall cost.
38 THE LEAN AND GREEN SUPPLY CHAIN
-------
BIBLIOGRAPHY
The following references are suggested
for readers interested in obtaining more
in-depth information.
Environmental Accounting—General
Bartlett, K.L.; Lester, R.R.; and Pojasek,
R.B. "Prioritizing P2 Opportunities with
Activity-Based Costing," Pollution
Prevention Review, pp. 17-26, Autumn
1995, www.pollutionprevention.com.
Cooper, Robin; and Kaplan, Robert.
"Activity-Based Systems: Measuring the
Costs of Resource Usage," Accounting
Horizons, Vol. 6, pp. 1-13, September
1992.
Epstein, Marc. Measuring Corporate
Environmental Performance: Best
Practices for Costing and Managing
an Effective Environmental Strategy,
Irwin Professional Publishing and
Institute of Management Accountants,
1996.
Kennedy, Mitchell. "Critical Issues of
Total Cost Assessment: Gathering
Environmental Cost Data for P2,"
Pollution Prevention Review, Spring
1998.
Pojasek, Robert B. "Practical Pollution
Prevention: Using Cause and Effect
Diagrams in Your P2 Program,"
Pollution Prevention Review, Summer
1996, pp. 99-105,
www.pollutionprevention.com.
Description
Demonstrates how activity-based costing
enables companies to quickly identify
their largest environmental cost
generators.
Provides a broad overview of activity-
based costing, one of the primary
methodologies for determining environ-
mental costs.
Presents findings of a study of how
corporations are measuring, reporting,
and otherwise dealing with environmen-
tal impacts, costs, and benefits. Based
on reviews of documents from more
than 100 leading corporations and visits
to at least 30 of those corporations.
Gives tips on locating sources of data
within companies and on compensating
for missing data.
Describes methods for identifying the
root causes of such operational
problems as losses of raw materials or
hazardous constituents from a manufac-
turing process.
THE LEAN AND GREEN SUPPLY CHAIN 39
-------
Environmental Accounting—
General (Continued)
Pojasek, Robert B. "Practical Pollution
Prevention: Understanding a Process
with Process Mapping," Pollution
Prevention Review, Summer 1997, pp.
91-101, www.pollutionprevention.com.
Tellus Institute. P2/FINANCE Version
3-0, Pollution Prevention Financial
Analysis Cost Evaluation Spreadsheet
Software Application, December 1996,
www.epa.gov/opptintr/acctg.
U.S. Environmental Protection Agency.
An Introduction to Environmental
Accounting as a Business Manage-
ment Tool: Key Concepts and Terms,
EPA 742-R-95-001, June 1995,
www.epa.gov/opptintr/acctg.
Materials Management/Supply
Chain Management
Beveridge, IS. "Materials Management
Means Dollars," Coal, pp. 137+, April
1981.
Bierma, Thomas; and Waterstraat,
Frank. Innovative Chemical Supply
Contracts, A Source of Competitive
Advantage, TR-31, Illinois Waste
Management & Research Center,
Champaign, IL, September 1997,
www.wmrc .uiuc.edu/Ubrary/
hwrictr.htm.
Description
Defines and describes benefits of
process mapping, including tracking
material flows, improving costing, and
identifying opportunities for improving
efficiency. Details a team approach to
conducting process mapping.
Provides spreadsheets for use with
Microsoft Excel for Windows and Lotus
1-2-3 for incorporating environmental
costs into financial evaluations for
capital investment and other decision-
making.
Defines the key terms and explains
fundamental concepts of environmental
accounting.
Explains the benefits of materials
management approaches for the coal
industry.
Demonstrates that traditional chemical
supply relationships are inherently
wasteful and documents successful
chemical management programs in the
automotive industry.
40 THE LEAN AND GREEN SUPPLY CHAIN
-------
Materials Management/Supply
Chain Management (Continued)
Boike, Rick. "Material Planners Bear
Weight of Supply Chain," APICS—The
Performance Advantage, February
1999.
Handfleld, Robert; and Nichols, Ernest,
Jr. Introduction to Supply Chain
Management, Prentice Hall, New
Jersey, 1999.
Melnyk, Steven; and Denzler, David.
Operations Management; A Value-
Driven Approach, Irwin, Chicago,
1996.
Thayer, Ann. "Supply-Chain Manage-
ment," Chemical & Engineering News,
pp. 12-16, January 5, 1998.
Use of Environmental Information
in Supply Chain Management
Callahan, Michael S.; and Sciarrotta,
Terry. "Pollution Prevention Using
Materials Management and Product
Substitution at a Power Facility,"
Pollution Prevention Review, Winter
1993-94.
Chemical Strategies Partnership. Tools
for Optimizing Chemical Manage-
ment Manual: Strategies for Reducing
Chemical Use and Cost, San Fran-
cisco, Chemical Strategies Partnership,
1999, www.chemicalstrategies.org.
Description
Argues that minimizing total costs while
meeting production demands requires
tools, policy guidance, and organiza-
tional backing from a high level.
Synthesizes the successful approaches of
many companies into a perspective on
managing supply chains.
Provides educational overview of
warehousing, distribution, and other
materials management topics.
Discusses the growing trend toward
integration with suppliers and custom-
ers in the chemical industry.
This article describes two projects
conducted to reduce hazardous wastes.
One project used more effective
materials tracking methods, and the
other developed a framework for
identifying less hazardous substitutes.
Provides detailed guidance on how to
develop strategic partnerships with
chemical service providers who perform
some or all of the activities related to
managing chemicals in the company.
THE LEAN AND GREEN SUPPLY CHAIN 41
-------
Use of Environmental Information
in Supply Chain Management
(Continued)
Freeman, Harry. Industrial Pollution
Prevention Handbook, Chapter 47,
pp. 777-789, McGraw-Hill: New
York, 1995.
Global Environmental Management
Initiative. Environment: Value to
Business, 1999, www.apics.org.
Handfleld, Robert; Sroufe, Robert;
Walton, Steven; and Melnyk, Steven.
"Applying Environmental Criteria to
Commodity Strategy Decisions: Current
Practices and Future Tools," publication
forthcoming, Dept. of Marketing and
Supply Chain Management, Michigan
State University, East Lansing, M, 1998.
Marien, Edward. "Reverse Logistics as
Competitive Strategy," Supply Chain
Management Review, pp. 44-52, Spring
1998.
U.S. Environmental Protection Agency.
Enhancing Materials Management and
Supply Chain Performance with
Environmental Cost Information:
Examples from Commonwealth
Edison, Andersen Corporation, and
Ashland Chemical, EPA742-R-00-XXX,
forthcoming in 2000, www.epa.gov/
opptintr/acctg.
Description
Describes GM's chemical service
program, which has reduced the
number and costs of chemicals used in
the company's assembly plants.
Shows how companies can measure the
value of environmental initiatives.
Describes how a number of companies
have integrated environmental concerns
into their existing purchasing strategies
and presents a model for evaluating and
selecting suppliers.
Describes approaches for supply chain
professionals to address the direct and
indirect costs of rejects, recyclables,
returnables, and other "REs."
Demonstrates the successful application
of environmental accounting to a variety
of supply chain management decisions
within three industries.
42 THE LEAN AND GREEN SUPPLY CHAIN
-------
Use of Environmental Information
in Supply Chain Management
(Continued)
U.S. Environmental Protection Agency.
WasteWise Update: Extended Product
Responsibility, EPA530-N-98-007,
October 1998, www.epa.gov/wastewise.
Votta, Thomas; Broe, Robert; Kauffman
Johnson, Jill; and White, Allen. "Using
Environmental Accounting to Green
Chemical Supplier Contracts," Pollu-
tion Prevention Review, Spring 1998.
Walton, Steve; Handfield, Robert; and
Melnyk, Steven. "The Green Supply
Chain: Integrating Suppliers into
Environmental Management Process,"
International Journal of Purchasing
and Materials Management, pp. 2 -11,
April 1998.
Waste Reduction Institute for Training
and Applications Research (WRITAR).
Applying Environmental Accounting
to Electroplating Operations: An In-
Depth Analysis, EPA-742-R-97-003,
May 1997, www.epa.gov/opptintr/acctg.
Description
Summarizes many successful efforts to
reduce waste by recovering materials
and products.
Reviews how environmental accounting
methodologies can help electronics
manufacturers develop chemical
services programs.
Compares the efforts of five companies
in the furniture industry to reduce their
environmental burdens via proactive
purchasing practices. Identifies five
primary areas to increase purchasing's
impact on environmental results.
Reveals approaches to and potential
benefits of using environmental
accounting tools in the electroplating
industry.
THE LEAN AND GREEN SUPPLY CHAIN 43
-------
REFERENCES CITED IN TEXT
1. James Cox and John Blackstone, Jr.,
APICSDictionary, Ninth Edition,
APICS, Falls Church, VA, 1998,
www.apics.org.
2. T.J. Bierma and EL. Waterstraat,
Chemical Management: Reducing
Waste and Cost Through Innova-
tive Chemical Supply Strategies,
John Wiley & Sons, Inc., New York,
forthcoming, in Chemical Strategies
Partnership, Tools for Optimizing
Chemical Management Manual.
(See next reference.)
3. Chemical Strategies Partnership,
Tools for Optimizing Chemical
Management Manual: Strategies
for Chemical Use and Cost, San
Francisco, Chemical Strategies
Partnership, 1999,
www.chemicalstrategies.org.
4. U.S. Environmental Protection
Agency, WasteWise Update:
Extended Product Responsibility,
EPA530-N-98-007, October 1998,
www.epa.gov/wastewise.
5. U.S. Environmental Protection
Agency, An Introduction to
Environmental Accounting as a
Business Management Tool: Key
Concepts and Terms, EPA 742-R-
95-001, June 1995, www.epa.gov/
opptintr/acctg.
6. AnnThayer, "Supply-Chain
Management," Chemical &
Engineering News, pp. 12-16,
January 5, 1998.
7. K.L., Bartlett, R.R. Lester, and R.B.
Pojasek, "Prioritizing P2 Opportu-
nities with Activity-Based Costing,"
Pollution Prevention Review,
August 1995, pp. 17-26.
8. Robert B. Pojasek, "Activity-Based
Costing for EHS Improvement,"
Pollution Prevention Review,
Winter 1998, pp. 111-120,
www.pollutionprevention.com.
9. Thomas Votta, Robert Broe, Jill
Kauffman Johnson, and Allen White,
"Using Environmental Accounting
to Green Chemical Supplier
Contracts," Pollution Prevention
Review, Spring 1998, pp. 67-78.
10. Waste Reduction Institute for Training
and Applications Research
(WRITAR), Applying Environmen-
tal Accounting to Electroplating
Operations: An In-Depth Analysis,
May 1997, www.epa.gov/opptintr/acctg.
11. Mitchell Kennedy, "Critical Issues of
Total Cost Assessment: Gathering
Environmental Cost Data for P2,"
Pollution Prevention Review,
Spring 1998, pp. 87-96.
THE LEAN AND GREEN SUPPLY CHAIN
-------
12. Robert B. Pojasek, "Activity-Based
Costing for EHS Improvement,"
Pollution Prevention Review,
Winter 1998, pp. 111-120,
www.pollutionprevention.com.
13. Michael S. Callahan and Terry
Sciarrotta, "Pollution Prevention
Using Materials Management and
Product Substitution at a Power
Facility," Pollution Prevention
Review, Winter 1993-94.
14. U.S. Environmental Protection
Agency, Enhancing Materials
Management and Supply Chain
Performance with Environmen-
tal Cost Information: Examples
from Commonwealth Edison,
Andersen Corporation, and
Ashland Chemical, EPA742-R-00-
XXX, forthcoming in 2000,
www.epa.gov/opptintr/acctg.
15. Chemical Strategies Partnership,
Tools for Optimizing Chemical
Management Manual: Strategies
for Chemical Use and Cost,
San Francisco, Chemical Strategies
Partnership, 1999,
www.chemicalstrategies.org.
16. Robert B. Pojasek, "Practical
Pollution Prevention: Understand-
ing Process with Process Map-
ping," Pollution Prevention
Review, Summer 1997, pp. 91-
101, www.pollutionprevention.com.
17. U.S. Environmental Protection
Agency, Enhancing Materials
Management and Supply Chain
Performance with Environmental
Cost Information: Examples from
Commonwealth Edison, Andersen
Corporation, and Ashland
Chemical, EPA742-R-00-XXX,
forthcoming in 2000, www.epa.gov/
opptintr/acctg.
18. World Business Council for
Sustainable Development, "Environ-
mental Performance and Share-
holder Value," 1997. (Also see the
Eco-Efflciency Case Study Collection
onWBCSD'swebsiteat
www.wbcsd.ch.)
19. Eileen Gunn, "In the Future,
People Like Me Will Go to Jail,"
Fortune, pp. 190-200, May 24,
1999.
20. Joseph Fiksel, "Competitive
Advantage Through Environmental
Excellence,"/o«nw/ of Corporate
Environmental Strategy, Summer
1997.
THE LEAN AND GREEN SUPPLY CHAIN 45
-------
INDEX
accounting vi, 2, 6, 7, 13, 16, 29
See also environmental account-
ing, life cycle accounting
activity-based costing
7, 13, 16, 24, 35, 39, 44, 45.
Andersen Corporation ii, vi, 2, 5, 21, 22, 23,
42,45
business processes iii, 3, 34
c
change management 13
chemical management providers 4
chemical service partnerships vi
ComEd. See Commonwealth Edison
Commonwealth Edison ii, vi, 2, 5, 29, 30,
31,32,42,45
contingent costs
See costs: contingent
conventional costs
See costs: conventional
cost(s)
and benefits 1,2,10,12,20-21
contingent 8, 9, 10, 23, 26, 32
conventional 7, 8, 9, 10, 23, 27
drivers vi
environmental. See environmental costs
permitting vi
external 8, 10
framework 8
image/relationship 8, 10, 23
life cycle 32, 33, 36
operating vii, 1, 3, 5, 6, 9, 25, 34
overhead vi, 4, 6, 17, 29
potentially hidden 8, 9, 10, 23
product 6, 8, 11, 36
reduction vi, vii, 29, 32, 33
training iii,vi, 8, 17, 32, 33
waste disposal 5, 9, 27, 30, 32
wastewater 6
cross-functional teams 13
D
disposal
landfill. See landfill disposal
waste. See waste disposal
disposition 2, 5, 9, 11, 19, 34, 35, 36
Dow ii, 34
DuPont 34
E
eco-efficiency 11, 21, 33, 35, 45
economic order quantity 20, 26, 27
enterprise resource planning 1, 13, 29
environmental
accounting vi, 2, 5, 6,12,14, 23, 29,
33-34, 35, 39,40,42,43, 44
benefits 23, 24, 29
burden(s) 1, 3, 12, 23, 30
burdens 6
cost(s)
2, 6, 8, 12, 14, 15, 16, 17, 21, 24, 29,
39
and benefits 6, 8, 9, 39
health and safety 4, 15
performance iii, 2, 3, 9, 12, 14-
15, 16, 31, 33-34, 39, 45
profile 2
ergonomic(s) 4, 10, 14, 21, 23
excess inventory 3
external costs. See cost(s): external
G
GM vi, 2, 4
H
hazardous
material (s) 8, 21, 33
waste 15, 17, 21, 27, 28, 36
Hewlett Packard 34
46 THE LEAN AND GREEN SUPPLY CHAIN
-------
I
IBM ii, 34
image/relationship costs
See costs: image /relationship
Intel 2, 4
Interface Corporation 34
inventory iii, 2, 3, 4, 14,
19, 24, 26, 30, 32
excess. See excess inventory
management 4, 26, 32
minimization 30, 32
K
Kodak 5
L
landfill disposal 5
life cycle
cost analysis/evaluation 32, 33
cost(s) See cost (s): life cycle
life cycle accounting 5
logistics iii, 1, 5, 36, 42
M
mass balance (s) 15, 30, 36
material (s)
management iii, 1, 2, 3, 6, 8, 9,
12,13, 14, 15, 16, 22, 28-
33, 37, 40, 41, 42, 43, 44, 45
obsolescence. See obsolescence
recovery 2, 5, 11, 19, 37
resource planning (MRP) 13, 15,29
tracking 14, 15, 16, 30, 37, 41
Monsanto 34
MRPII 19. See also material (s): resource
planning
net present value 13, 23, 24, 37
Nortel 4
0
obsolescence iii, 14, 22, 24, 27
operating costs. See cost(s): operating
outsource iii
P
packaging
design 14
materials 9, 10
safety 31
systems 1
systems (reusable) 4
Pareto analysis 14, 17, 20
performance reviews 14, 15, 16
process maps 15
product design 5, 6, 29
product take back vi, 2, 5, 11, 37
profit margins 2
PSE&G 3, 4,15
Public Service Electric and Gas. See PS&EG
purchasing 1, 2, 3, 4, 9, 10, 13,
15, 18, 22, 30, 31, 32, 38, 42, 43
Q
qualitative evaluations 21. See also
evaluations: qualitiative
quality 2, 6, 11, 14, 18, 21, 28-
29, 34-35
R
rate of return 20, 22, 23, 24
raw material vi, 6, 11, 18, 19, 22, 39
recovery iii, 19, 27, 31, 38
energy 27
resource 3
recycling 5, 14, 27, 30
reusable packaging systems. See packaging:
systems (reusable)
Rohm & Haas 34
S
sourcing 38
suppliers 1, 2, 3, 4, 10, 14, 15,
17, 18, 37, 38, 41, 42, 43
supply chain (s) iii, vi, 1, 2, 3, 4, 5,
9, 17, 29, 33-34, 38, 40
T
3M 2, 4, 34
total quality management 14
THE LEAN AND GREEN SUPPLY CHAIN 47
-------
V
value analysis 1, 38
w
waste accounting 30
waste disposal 9, 15, 26, 27
waste stream 14, 15, 19, 30, 31, 37
X
Xerox 34
THE LEAN AND GREEN SUPPLY CHAIN
-------
This document is a product of EPA's Environmental Accounting Project, a collabora-
tive program with industry, trade associations, research institutions, and govern-
ment agencies to increase the incorporation of environmental costs and benefits
into businesses' decision-making. Environmental costs include material losses and
other costs of waste, equipment and facilities used to treat or monitor emissions,
and many costs typically associated with environmental management such as
reporting and disposal. Increased awareness of these costs leads to the identifica-
tion of financially attractive opportunities to prevent pollution and eliminate wastes.
Companies can then make decisions that are both financially superior and environ-
mentally beneficial.
The Environmental Accounting Project offers numerous educational resources that
demonstrate successful approaches to integrating environmental costs into
decision-making. Copies of this document and other Environmental Accounting
Project products can be obtained free of charge through the Project's website
(www.epa.gov/opptintr/acctg) or through the US EPA's Pollution Prevention
Information Clearinghouse (telephone 202-260-1023, fax 202-260-4659, or e-mail
ppic@epamial.epa.gov).
For additional examples of industrial waste reduction efforts, also visit EPA's
WasteWise website at www.epa.gov/wastewise.
This document may be reproduced and distributed without permission from EPA.
> Environmental
Accounting
Project
-------
Environmental
Accounting
Project
USEPA
------- |