United States
Protection Agency
Office of Pollution
Prevention and Toxics
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

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
Louis DelGeorge, Commonwealth
   Edison Company
David Eagleson, LFR Technologies
Patrick Ferguson, 3M
Robert Handfleld, Michigan State
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

Katherine O'Dea, Business for Social
Dale Olson, Andersen Corporation
David Peterson, Lynchburg College
Kristin Pierre, U.S. Environmental
   Protection Agency
Robert Pojasek, Pojasek &
Mike Pregent, Ashland Chemical
Ken Sandier, U.S. Environmental
   Protection Agency
Karen Shapiro, Tellus Institute
Tom Tramm, Commonwealth Edison
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.


 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
• Substantially decreasing the costs
  associated with scrap and material
• 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-
• 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
• Commonwealth Edison, a major
  electric utility company, realized
  $25  million in financial benefits
  through more effective resource
• Andersen Corporation implemented
  several programs that reduced waste
  at its source and had internal rates
  of return (IRR) exceeding  50%.

• 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
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
                       tal, health,
                       and safety
                       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
• 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
• The Conclusion summarizes the
  four-step approach to improving
  financial and environmental
• The Glossary, Bibliography, and
  References explain important terms
  and provide additional sources of

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;

  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








Within most companies,
significant opportunities
exist to improve the
overall use and flows of

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

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
	    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
effort to
tal consider-
ations into
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
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

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^
    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).
    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
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.

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.
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


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.

Figure  1: Misallocation of Environmental Costs4
Rent 1
Supervisor ^|
Salaries I (

Materials and 1
Labor (A) J

Product A
1 |

tility 1
;osts J

Materials ar
Labor (B)

Product B
* 	 '
Vater Treat- '
ment (B)


Figure 2: Improved Allocation

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
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

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

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
  (least difficult to quantify)

  Potentially Hidden
Material, labor, other expenses, and revenues
that are commonly allocated to a product or

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.
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.
  (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

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-

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
                   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
managers to
costs and
benefits during
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
                                                   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
 Volume of production
 materials purchased
Purchase price of packaging
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
 Reduced risk of environmen-
 tal incidents by working with
 suppliers that have product
 stewardship programs
Ergonomic and safety issues,
including cuts from razor
Employee exposure to
hazardous materials and
subsequent workers'
compensation claims
 Positive media coverage
 because of partnerships with
 "green" suppliers
Positive public image from
using reusable containers
Improved employee
satisfaction from reduced
exposure to hazardous
 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

Revenues from recovered
Labor and fees associated with
manifesting, hauling, and
dumping solid waste
Reduced material costs
because of components
recovered from returned
Eco-efficiency gains, e.g.,
reduction of materials "lost to
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
Decreased landfill burden
                               Decreased mining or
                               harvesting of raw materials
                               due to lowered overall
                               material requirements
                                                             THE LEAN AND GREEN SUPPLY CHAIN    //


 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^'
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

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

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
                     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
• 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

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
• 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

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

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.

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

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

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
because not all  of
the necessary or
revealing questions
are  asked.
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

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
•  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

             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
             Attribute                       Stream/     Stream/       Stream
             Material Name/ID
             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
             Shelf Life
             Supplier would
              accept expired material  (Y/N)
              accept shipping containers (Y/N)
             Acceptable Substitute (s), if any
             Alternate Supplier(s)
             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.

What is the injury frequency and severity rate among material han-

Are specialized containers or storage facilities required to prevent environmental
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
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
                                                          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

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
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  -
                       Material      Waste    Packaging    Shippings   Purchasing
                       Handling     Disposal              Receiving
                                Materials Management Activities

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
• 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
•  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
• How much labor is necessary to
  meet tracking, record keeping, and
  other regulatory mandated
• How much will employee satisfaction
  be improved by switching from a
  hazardous material to non-regulated
• 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
  material losses
  and associated
In addition, the
factored in the
labor and
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
                  activities further
                  this decision to
                  The payback
                  calculations are
                  relatively straight-
                  forward, as shown below.


                  P = Payback period (months)
                  I  = Investment ($)
                  M = Monthly savings ($/month)

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

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
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
                                                     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

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.


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.


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:

 TaMe 4: Andersen's Financial Analysis
 Installation and other expenses
  Total Investment
                                 (Years 0-5)
 Operating costs
 Total Costs
($115,302)  ($623,197)
($115,302)  ($623,197)
 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
  $113,685   $585,991
   $15,106    $79,497
   $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

        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.

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.^
Annual demand (D)
Setup costs (S)
Holding cost rates (H)h>'
Item cost (C)
Order quantity (Q)
4,000 Ib
1,155 Ib
4,000 Ib
15% (+5% for
$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
 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
m Hazardous waste costs fell

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.


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

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

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


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
accomplished and demonstrates the
step-by-step decision-making

One of ComEd's materials management
successes was its
Inventory Minimi-
zation Program,
which enabled the
company to reduce
the number of
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
              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.

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

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,
• 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

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.


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
• Reduction of hazardous solvent
  waste by 88% during a two-year
• Five-year estimated cost savings
  of over $1,000,000

• 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.


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
• 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

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.

Activity-Based Costing
Business Process
Environmental Burden
Environmental Accounting
'Definitions adapted primarily from the
 following sources:
• APICSDictionary, Ninth Edition, APICS,
• 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
 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

 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.

Materials Management
Materials Recovery
Materials Tracking
Net Present Value
Product Take Back
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

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

Supply Chain
Value Analysis
Process of obtaining a valuable
resource from a potential waste

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.


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

Epstein, Marc. Measuring Corporate
Environmental Performance: Best
Practices for Costing and Managing
an Effective Environmental Strategy,
Irwin Professional Publishing and
Institute of Management Accountants,

Kennedy,  Mitchell. "Critical Issues of
Total Cost Assessment: Gathering
Environmental Cost Data for P2,"
Pollution Prevention Review,  Spring

Pojasek, Robert B. "Practical Pollution
Prevention: Using Cause and Effect
Diagrams in Your P2 Program,"
Pollution Prevention Review,  Summer
1996, pp. 99-105,

Demonstrates how activity-based costing
enables companies to quickly identify
their largest environmental cost
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,
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,

Materials Management/Supply
Chain Management

Beveridge, IS. "Materials Management
Means Dollars," Coal, pp. 137+, April

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/

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-

Defines the key terms and explains
fundamental concepts of environmental
Explains the benefits of materials
management approaches for the coal

Demonstrates that traditional chemical
supply relationships are inherently
wasteful and documents successful
chemical management programs in the
automotive industry.

Materials Management/Supply
Chain Management (Continued)

Boike, Rick. "Material Planners Bear
Weight of Supply Chain," APICS—The
Performance Advantage,  February

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,

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

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.

 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

 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

 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/

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.

Use of Environmental Information
in Supply Chain Management

 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.

 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
                                                  THE LEAN AND GREEN SUPPLY CHAIN   43


 1.  James Cox and John Blackstone, Jr.,
    APICSDictionary, Ninth Edition,
    APICS, Falls Church, VA, 1998,

 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,

 4.  U.S. Environmental Protection
    Agency, WasteWise Update:
    Extended Product Responsibility,
    EPA530-N-98-007, October 1998,

 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/
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,

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.

12. Robert B. Pojasek,  "Activity-Based
    Costing for EHS Improvement,"
    Pollution Prevention Review,
    Winter 1998, pp. 111-120,

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,

15. Chemical Strategies Partnership,
    Tools for Optimizing Chemical
    Management Manual: Strategies
   for Chemical Use and Cost,
    San Francisco, Chemical Strategies
    Partnership, 1999,

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/

18. World Business Council for
    Sustainable Development, "Environ-
    mental Performance and Share-
    holder Value,"  1997.  (Also see the
    Eco-Efflciency Case Study Collection

 19. Eileen Gunn, "In the Future,
    People Like Me Will Go to Jail,"
    Fortune, pp.  190-200, May 24,

20. Joseph Fiksel, "Competitive
    Advantage Through Environmental
    Excellence,"/o«nw/ of Corporate
    Environmental Strategy, Summer
                                                 THE LEAN AND GREEN SUPPLY CHAIN   45

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,
business processes iii, 3,  34

change management  13
chemical management providers 4
chemical service partnerships vi
ComEd. See Commonwealth Edison
Commonwealth Edison ii, vi, 2, 5, 29, 30,
contingent costs
          See costs: contingent
conventional costs
         See costs: conventional
   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

  landfill. See landfill disposal
  waste. See waste disposal
disposition 2,  5,  9,  11,  19, 34, 35, 36
Dow ii, 34
DuPont 34

eco-efficiency 11, 21, 33,  35,  45
economic order quantity 20, 26, 27
enterprise resource planning 1,  13,  29
  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
     2, 6, 8, 12, 14,  15, 16, 17,  21,  24, 29,
     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

GM vi, 2,  4

  material (s) 8,  21,  33
  waste  15,  17,  21,  27,  28, 36
Hewlett Packard  34

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

Kodak 5

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

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
net present value  13,  23,  24, 37
Nortel 4

obsolescence iii,  14,  22,  24,  27
operating costs. See cost(s): operating
outsource iii
   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

qualitative evaluations 21. See also
      evaluations: qualitiative
quality 2, 6,  11, 14,  18,  21, 28-
      29, 34-35

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

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

3M 2, 4, 34
total quality management 14
                                                          THE LEAN AND GREEN SUPPLY CHAIN    47

value analysis 1,  38

waste accounting 30
waste disposal  9,  15, 26,  27
waste stream 14,  15, 19,  30,  31, 37

Xerox 34

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

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.
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