Designing theGreen Supply Chain

Benita M. BeamonUniversity of Washington

Industrial EngineeringBox 352650

Seattle, WA 98195-2650Phone: (206) 543-2308Fax: (206) 685-3072

Logistics Information Management (1999)Vol. 12, No. 4, pp. 332-342

Abstract

The supply chain has been traditionally defined as a one-way, integrated manufacturingprocess wherein raw materials are converted into final products, then delivered tocustomers. Under this definition, the supply chain includes only those activitiesassociated with manufacturing, from raw material acquisition to final product delivery.However, due to recent changing environmental requirements affecting manufacturingoperations, increasing attention is given to developing environmental management (EM)strategies for the supply chain. This research: (1) investigates the environmental factorsleading to the development of an extended environmental supply chain, (2) describes theelemental differences between the extended supply chain and the traditional supply chain,(3) describes the additional challenges presented by the extension, (4) presentsperformance measures appropriate for the extended supply chain, and (5) develops ageneral procedure towards achieving and maintaining the green supply chain.

Keywords

supply chain, logistics, environment, environmental management

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1 Introduction

Years ago, the concept of environmental quality was almost non-existent in the United States.Then, the concept came to mean cleaner air and cleaner water. Now, environmental quality hascome to mean ��safe drinking water, healthy ecosystems, safe food, toxic-free communities,safe waste management, and the restoration of contaminated sites (Council on EnvironmentalQuality, 1996).� Concurrently, there has been increasing public attention placed on the overallcondition of the natural environment. This attention may be largely attributed to informationprovided by the media, through growing numbers of environmental and consumer interestgroups (Fiksel, 1996). The most commonly perceived enemy to environmental protection ismanufacturing and production operations. That is, manufacturing and production processes areviewed as the culprits in harming the environment, in the forms of waste generation, ecosystemdisruption, and depletion of natural resources (Fiksel, 1996). Indeed, waste generation andnatural resource use, primarily attributed to manufacturing, contribute to environmentaldegradation by outstripping the earth�s ability to compensate and recover, and thus are notsustainable by the earth�s ecosystem.

The current state and trend of environmental degradation (from regulatory, consumer, and moralstandpoints) indicate a need for a change in manufacturing philosophy. That is, there must be afundamental shift in the way production systems operate. There must be a move towardssustainability, achieved through vast reductions in resource use and waste generation, and amove away from one-time use and product disposal. The first step in such a move is to extendthe structure of the current one-way supply chain to a closed loop, including supply chainoperations designed for end-of-life product and packaging recovery, collection, and re-use (in theforms of recycling and/or remanufacturing). The objectives of this research are to: (1) describethe current state of the natural environment, (2) investigate the environmental factors leading tothe development of an extended environmental supply chain, (3) describe the additionalchallenges presented by the extension, (4) present performance measures appropriate for theextended supply chain, and (5) develop a general procedure towards achieving and maintainingthe green supply chain.

2 The State of the Environment

2.1 Solid and Hazardous Waste

The amount of solid waste generated in the United States has been growing steadily over the past30 years and is expected to continue to grow (Council on Environmental Quality, 1996).According to the United States Environmental Protection Agency (EPA), approximately 12billion tons of industrial waste (and approximately 208 million tons of municipal waste) isgenerated every year in the United States. Over 4 billion tons of the total waste generated ishazardous waste, and is increasing at a rate of 10% annually (Environmental Protection AgencyOffice of Solid Waste, no date, and Fiksel, 1996). This translates into approximately 10 poundsof total waste per person per day (approximately 4.3 pounds of municipal waste per day).Although disposal fees vary by region, the national average waste disposal fee has increased

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dramatically during the span of 1985 to 1995, rising from $8.20 per ton in 1985 to $32.19 per tonin 1995 (Council on Environmental Quality, 1996). These costs are largely a result of the factthat, according to EPA estimates for municipal solid waste, only 56 million tons (27%) wasrecovered by recycling or composting and 33.5 million tons (16%) was incinerated, while 118.5million tons (57%) was landfilled (Environmental Protection Agency Office of Solid Waste, nodate).

2.2 Natural Resource Use

The United States extracts an increasing amount of material from United States lands andterritories annually, currently in excess of ten tons of material per person (United StatesCongress Office of Technology Assessment, 1992). In fact, material consumption has increasedby a factor of four since the turn of the century (while population has increased by a factor ofthree during the same period) (United States Congress Office of Technology Assessment, 1992).During this time, the largest increases in natural resource extraction were derived from miningoperations (metals and non-metallic ores) and from organics (plastics, and petrochemicals)(United States Congress Office of Technology Assessment, 1992). Additionally, the types ofresources extracted have shifted from agricultural and forestry resources in the early 1900�s tomining and organics today (United States Congress Office of Technology Assessment, 1992). Itis important to note here that modern product designs are generally more efficient (requiringmuch less material to produce) and result in products that are lighter in weight; however, thesemodern products are also highly complex, making them generally more difficult to repair,recycle and/or remanufacture.

2.3 Water and Air Pollution

WaterAlthough the rivers, lakes, and coastal waters of the United States are cleaner today than theywere in the early 1970�s, water pollution is still a very real concern. For example (Council onEnvironmental Quality, 1996):

∑ Nearly 40% of all U.S. waters are still too polluted to support all of their designatedfunctions.

∑ Contaminated fish advisories or bans were issued in 1995 for over 1,700 bodies of water(representing a 14% increase over the previous year) to protect the public from eatingcontaminated fish.

∑ More than 4,000 beaches were closed in 1995 due to harmful levels of bacteria and otherpollutants.

∑ Approximately 20% of the population receive water from a facility that is in violation ofat least one national safety requirement.

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AirSimilar to water quality, air quality in the United States has undergone considerableimprovement in recent years. However, also similar to air quality, some troubling facts stillremain:

∑ In excess of 2/3 of the global urban population (primarily in developing countries)breathes air that has unhealthy particulate levels at least part of the year (Percival, et. al.,1992).

∑ It has been estimated that air particulate levels in the United States are responsible forapproximately three percent of all deaths in the U.S. (corresponding to 60,000 deaths peryear) (Percival, et. al., 1992).

∑ In November of 1993, the EPA designated 42 U.S. areas as non-attainment areas forcarbon monoxide (41 of which were classified as moderate; Los Angeles was classifiedas serious) (Council on Environmental Quality, 1993).

∑ Approximately 59 million people in the U.S. live in counties in which pollution levelsfailed to meet at least one air quality standard in 1993 (Council on EnvironmentalQuality, 1993).

3 Environmental Policy

3.1 Public Pressure

In the United States of America, an estimated 75% of consumers claim that their purchasingdecisions are influenced by a company�s environmental reputation, and 80% would be willing topay more for environmentally friendly goods (Lamming and Hampson, 1996). On a worldwidelevel, a recent 22-country survey of environmental attitudes found that (Elkington, 1994):

∑ In half of the countries surveyed, the environment was considered one of the three mostserious problems.

∑ In most countries, the majority of the citizens surveyed said that the state of theenvironment affects their health, and an even greater majority say that the environmentaffects the health of their children.

∑ In 16 of the 22 countries, citizens said that they avoid products that are harmful to theenvironment.

Thus, in the USA, and worldwide, there is an overall awareness of the worsening state of theenvironment, as well as a desire to reverse that trend, even if it costs more to do so.

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3.2 Environmental Legislation

In response to growing worldwide concern regarding the state of the environment, includingpollution and resource conservation, new environmental legislation was adopted in the UnitedStates. The primary pieces of legislation are : (1) the Clean Air Act (CAA), (2) the Clean WaterAct (CWA), (3) the Resource Conservation and Recovery Act (RCRA), (4) the ComprehensiveEnvironmental Response, Compensation, and Liability Act (CERCLA), (5) the Toxic SubstancesAct (TSCA), and (6) the Amendment Acts to CERCLA, called the Superfund Amendments andReauthoriztion Acts (SARA), which includes the Emergency Planning and Community Right-to-Know Act (EPCRA), as Title III. Table 1 below lists each of these major pieces ofenvironmental legislation and the year of original enactment (shown in boldface), the years ofsubsequent amendments (if any), and the primary provisions it contains.

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ActYear of

Enactment,Amendments

Primary Provisions

CAA 1967, 1970,1977, 1990

National Ambient Air Quality Standards (NAAQSs)

Hazardous Air Pollution Standards

Motor Vehicle Emissions Standards

Fuel and Fuel Additive Standards

Aircraft Emission Standards

Ozone Protection Provisions

CWA 1972, 1977,1981, 1987

Regulation of wastewater discharges from manufacturing facilities

Provisions for federal aid for municipal sewage treatment systems

Identification and permit requirements for non-point discharges

RCRA 1976, 1984 Regulation of generation, storage, transportation, treatment, disposal, and storage of hazardous waste

Ban on landfilling untreated hazardous waste

Ban on burning hazardous waste for energy recovery

CERCLA(�Superfund�)

1980 Provisions for federal funding to clean up sites contaminated from prior unregulated disposal

TSCA 1976 Provisions for testing, regulating and screening all substances produced or imported to the UnitedStates prior to use

Provisions for banning and reporting any chemical substance posing unreasonable risk to health or tothe environment

SARA 1986 Provisions for increased pace of cleanup

Provisions for increased public participation

Provisions for more stringent and better defined cleanup standards

EPCRA(SARA, Title III)

1986 Provisions requiring companies to report the release and storage of specified chemicals and chemicalcompounds above certain threshold limits (called �release reporting�)

Provisions allowing public access to release reports, including chemicals used, and the amount andnature of the releases to the environment

Table 1. Environmental Regulations

RCRA represented the first legislative step away from isolated �command and control� policiesand towards more integrated life cycle approaches. That is, RCRA was the first piece oflegislation that made landfill disposal of hazardous waste cost ineffective, since RCRA

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established that although the short-term cost of hazardous waste landfill disposal may be small,the long-term environmental cost of such a move is far greater. In fact, the current philosophy ofpollution and waste reduction and resource follows this model; environmental management ismoving away from risk management and pollution prevention, and towards life cyclemanagement and industrial ecology, as shown below in Table 2.

Stage of Environmental Policy Primary Characteristic(s) Year(s)Risk Management Waste management and pollution

control.1970�s -mid 1980�s

Pollution Prevention Process improvement to reducematerial use, minimize waste, andimprove efficiency.

mid 1980�s -early 1990�s

Life Cycle Management andIndustrial Ecology

Systematic product and processmanagement to maximize profitabilityand ensure environmental quality.

Focus on life cycle environmentaleffects of processes and products.

mid 1990�s - ?

Table 2. Evolution of Environmental Management

3.3 Environmental Management Standards (ISO 14000 Series)

In response to more stringent environmental regulations and changes in environmentalmanagement philosophy, there has been a corresponding need to develop operational guidelinesand standards to assist organizations in moving towards ecologically sustainable businesspractices. The ISO 14000 series standard is designed to address these needs.

Objectives and Structure

Recently, the International Organization for Standards (ISO) adopted ISO 14000 Series as itsinternational specification standard for environmental management systems, with the objectivesof (Alexander, 1996 and Pratt, 1997):

1. Encouraging an internationally common approach to environmental management.

2. Strengthening companies� abilities to improve and measure environmental performance,through continual system audits.

3. Improving international trade and removing trade barriers.

The ISO 14000 Series documentation is comprised of five basic components, and is structured asshown in Table 3 below:

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ISO 14001 Specifies minimum requirements for achieving ISO 14000 Certification.ISO 14004 Sets guidelines for developing an environmental management (EM) system.ISO 14010 Establishes the general principles of environmental auditing.ISO 14011 Establishes auditing procedures for the auditing of EM systems.ISO 14012 Establishes qualification criteria for environmental auditors.

Table 3. The ISO 14000 Series(source: (International Organization for Standardization, 1996))

Primary Requirements

ISO 14000 addresses these three objectives by requiring that organizations develop (Pratt, 1997and Sarkis, et. al., 1995):

1. An advance environmental impact analysis of all new activities, products, and processes.

2. A continuous environmental impact assessment of current activities, products, andprocess.

3. Standards and objectives, that include policies for pollution prevention and wasteminimization, that are defined for and continuously improved at every organizationallevel.

4. Numerical targets and monitoring procedures for each identified objective.

5. Procedures to be followed in the event of non-compliance with established environmentalpolicies, and in cases of accidental discharge.

6. Procedures to ensure that suppliers and contractors working within or associated withorganizational facilities apply environmental standards equivalent to organizationalstandards.

Thus, ISO 14000 is indicative of the recent shift in environmental philosophy; ISO 14000focuses on procedures and systems, and says nothing of discharge standards, limits, or testmethods (Pratt, 1997).

4 The Supply Chain Re-Defined

The new environmental era represents a new challenge to manufacturing and productionenterprises worldwide. The challenge is to develop ways in which industrial development andenvironmental protection can symbiotically coexist. The first step in meeting this challenge is tore-define the basic structure of the entire supply chain, by accommodating environmentalconcerns associated with waste and resource use minimization.

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4.1 The Traditional Supply Chain

The traditional supply chain is defined as an integrated manufacturing process wherein rawmaterials are manufactured into final products, then delivered to customers (via distribution,retail, or both). Figure 1 below illustrates the structure of the traditional supply chain.

Supply Manufacturing

Distribution

Retail

Consumer

Figure 1. The Traditional Supply Chain

Design, modeling, and analysis of the traditional supply chain has primarily focused onoptimizing the procurement of raw materials from suppliers and the distribution of products tocustomers. The issues considered within this scope of analysis include (Beamon, 1998):

• Production/Distribution Scheduling: Scheduling the manufacturing and/or distributionschedule.

• Inventory Levels: Determining the amount and location of every raw material, sub-assembly,and final assembly storage.

• Number of Stages (Echelons): Determining the number of stages (or echelons) that willcomprise the supply chain. This involves either increasing or decreasing the chain�s level ofvertical integration by combining (or eliminating) stages or separating (or adding) stages,respectively.

• Distribution Center (DC) - Customer Assignment: Determining which DC(s) will servewhich customer(s).

• Plant - Product Assignment: Determining which plant(s) will manufacture which product(s).

• Buyer - Supplier Relationships: Determining and developing critical aspects of the buyer-supplier relationship.

• Product Differentiation Step Specification: Determining the step within the process ofproduct manufacturing at which the product should be differentiated (or specialized).

• Number of Product Types Held in Inventory: Determining the number of different producttypes that will be held in finished goods inventory.

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4.2 The Extended Supply Chain

The ultimate objective of extending the traditional supply chain is to allow consideration of thetotal immediate and eventual environmental effects of all products and processes (known asproduct and process stewardship, respectively). The stewardship concept is based on therecognition that the environmental effects of an organization include the environmental impactsof goods and processes from the extraction of raw materials, to the use of goods produced, to thefinal disposal of those goods (Lamming and Hampson, 1996).

The evolution of manufacturing enterprises from traditional, problem-solving environmentalmanagement techniques to fully integrated environmental management (EM) is described inTable 4 below.

Evolutionary Stage Characteristics1. Problem Solving Traditional approaches

View regulatory compliance as a burdensome cost ofdoing business

2. Managing for Compliance Primitive attempts at EM coordination and integration

Compliance-oriented3. Managing for Assurance Visionary/long-range planners

Utilize risk management to balance potential futureenvironmental liabilities versus costs

4. Managing for Eco-efficiency Pollution prevention instead of pollution control

Waste minimization and source reduction5. Fully Integrated Environmental quality viewed as an aspect of Total

Quality Management (TQM)

Global concern about processes and entire product lifecycle

Table 4. Stages of Environmental Management(adapted from (Fiksel, 1996))

Thus, in the earliest evolutionary stages of environmental management, organizations separateenvironmental performance from operational performance. However, as organizations evolve,they begin to integrate environmental objectives within the framework of their existingoperational objectives. In this way, the following potential benefits may be realized:

• Reduced product life cycle costs ⇒ increased profitability. More specifically, effectiveenvironmental management results in the avoidance of the following costs (Cattanach, et.al., 1995):

♦ Cost avoidance of purchasing hazardous materials as inputs, which reflect theinternalized costs associated with environmental harm.

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♦ Cost avoidance of storing, managing, and disposing process waste, particularly as wastedisposal becomes increasingly expensive.

♦ Cost avoidance of stigmatization or market resistance to environmentally harmfulproducts.

♦ Cost avoidance of public and regulatory hostility towards environmentally harmfulorganizations.

• Reduced environmental and health risks ⇒ reduced liability risks (Cattanach, et. al., 1995and Zhang, et. al., 1997).

• Safer, cleaner factories (Zhang, et. al., 1997).

The fully-integrated, extended supply chain contains all of the elements of the traditional supplychain (Figure 1), but extends the one-way chain to construct a semi-closed loop that includesproduct and packaging recycling, re-use, and/or remanufacturing operations. The extendedsupply chain is illustrated below in Figure 2. Figure 2 represents the traditional supply chainlinks as solid lines, and the links corresponding to the extended supply chain as dashed lines.The �W��s enclosed by diamonds represent waste (or disposed) materials.

Supply Manufacturing

Distribution

Retail

Consumer

W W

W

Recycling

W

Legend:

W Waste (or disposed) materials

W Collection

Remanufacturing/Re-use

W

W

W

Figure 2. The Extended Supply Chain

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4.2.1 Recycling and Re-use

Recycling is the process of collecting used products, components, and/or materials from thefield, disassembling them (when necessary), separating them into categories of like materials(e.g., specific plastic types, glass, etc.), and processed into recycled products, components,and/or materials. In this case, the identity and functionality of the original materials are lost.(Thierry, et. al., 1995). The success of recycling depends on: (1) whether or not there is amarket for the recycled materials, and (2) the quality of the recycled materials (since mostrecycling processes actually reduce the value of the material from its original value, as thematerial itself has degraded). Re-use is the process of collecting used materials, products, orcomponents from the field, and distributing or selling them as used. Thus, although the ultimatevalue of the product is also reduced from its original value, no additional processing is required.

4.2.2 Remanufacturing

The process of remanufacturing consists of collecting a used product or component from thefield, assessing its condition, and replacing worn, broken, or obsolete parts with new orrefurbished parts. In this case, the identity and functionality of the original product is retained.The resulting (remanufactured) product is then inspected and tested, with the goal of meeting orexceeding the quality standards of brand new products. Thus, in some cases, the remanufacturedproduct can exceed the original product in quality and/or function. This is due to the fact thatduring the remanufacturing process, the design of the replaced parts and/or components mayhave been improved since the original product was manufactured. The unique advantage ofremanufacturing is that, unlike recycling and re-use, the process of remanufacturing does notdegrade the overall value of the materials used.

4.3 The Extended Supply Chain: Operational and Strategic Issues

Extending the supply chain to include recovery operations, such as remanufacturing, recycling,and re-use adds an additional level of complexity to supply chain design, and a new set ofpotential operational and strategic considerations. These new considerations arise from twobasic problems: (1) uncertainty associated with the replacement/recovery process (in timerequirements, quality, and quantity of returned products, packaging, and/or containers), and (2)the reverse distribution process itself (collection and transportation of used products, packaging,and/or containers).

Examples of operational and strategic issues associated with recoverable product systems are:

∑ Inventory control policies (including lot-sizing, scheduling, and safety stocks) given highlyuncertain timing, quality, and quantities of replenishments (Guide, et. al., 1997a, Guide, et.al., 1997b, Haynsworth and Lyons, 1987, and Perry, 1991).

∑ Impact of uncontrollable recovery processes on inventory composition, production planning,and scheduling (i.e., the demand and recovery processes are not perfectly correlated,potentially resulting in uncontrolled growth of unwanted parts and non-availability of criticalparts) (Van der Laan, et. al., 1996a and Van der Laan, et. al., 1996b).

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∑ Disassembly planning (including scheduling, sequencing, and disassemblability analysis) formaterial recovery (Gupta and Taleb, 1994 and Johnson and Wang, 1995).

∑ The number and location of collection/recovery facilities.

∑ Collection procedures and customer incentive systems for retrieval operations.

∑ Effects of traditional supply chain strategies (e.g., decentralized versus centralized businessfunctions, facility location, purchasing strategies) on environmental performance (e.g.,energy use, solid waste, pollution, product recovery).

∑ Simultaneous operational/environmental supply chain optimization; merging environmentaland operational goals into traditional analysis.

∑ Level and location of buffer inventories must be considered on both sides of the extendedsupply chain (forward and reverse) (Fleishmann, et. al., 1997).

∑ New criteria for vendor selection and certification.

5 Performance Evaluation

An important component in supply chain design and analysis is the establishment of appropriateperformance measures. A performance measure, or a set of performance measures, is used todetermine the efficiency and/or effectiveness of an existing system, or to compare competingalternative systems. Performance measures are also used to design proposed systems, bydetermining the values of the decision variables that yield the most desirable level(s) ofperformance.

5.1 Traditional Supply Chain Performance Measures

Available literature regarding traditional supply chain systems identifies a number ofperformance measures as important in the evaluation of supply chain effectiveness andefficiency. These measures are typically concerned with: (1) customer satisfaction, service, orresponsiveness or (2) cost. The interested reader is referred to Beamon (1996) and Beamon(1998) for a discussion of these measures.

5.2 Performance Measures for the Extended Supply Chain

Although a number of performance measures appropriate for traditional supply chains have beendeveloped, these existing measures are inadequate for use in the extended chain. The existingmeasures are inadequate in capturing the dual extended supply chain objectives of economicefficiency and environmental protection. This identifies a need to develop new, more inclusive,measures to describe supply chain performance. ISO 14000 identifies the need for these

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measures implicitly in its certification requirements. In fact, these certification requirements (aspreviously identified), refer directly to requiring environmental impact analysis and assessment,continuous measurement, targets, and monitoring procedures. Table 5 below describes andclassifies the existing performance measures for the extended supply chain.

PerformanceMeasureClassification

Performance Measure(Measured over Product and Process Life Cycle, except where indicated)

Resource Use Total energy consumedTotal material consumed (e.g., water, timber, steel, etc.)

Product Recovery Remanufacturing Re-use Recycling

Time required for product recovery% recyclable/reusable materials (volume or weight) available at end of product life% product volume or weight recovered and re-usedPurity of recyclable materials recovered% recycled materials (weight or volume) used as input to manufacturing% product disposed or incineratedFraction of packaging or containers recycledMaterial Recovery rate (MRR)1

Core Return Rate (CRR)2

Ratio of virgin to recycled resourcesRatio of materials recycled to materials potentially recyclableMaterials Productivity: economic output per unit of material input

ProductCharacteristics

Useful product operating lifeTotal mass of products produced

Waste Emissions andExposure Hazard

Total toxic or hazardous materials usedTotal toxic or hazardous waste generatedSolid waste emissions% product (weight or volume) disposed in landfillsConcentrations of hazardous materials in products and by-productsEstimated annual risk of adverse effects in humans and biotaWaste ratio3: the ratio of wastes to all outputs.

Economic Average life-cycle cost incurred by the manufacturerPurchase and operating cost incurred by the consumerAverage total life-cycle cost savings associated with design improvements

Economic/Emissions Ecoefficiency4: adding the most value with the least use of resources and the leastpollution. Generally, �The ability to simultaneously meet cost, quality, and performancegoals, reduce environmental impacts, and conserve valuable resources�

Table 5. Extended Supply Chain Performance Measures(sources: (Fiksel, 1996, Guide, et. al., 1997b, Krupp, 1992, and Schmidheiny, 1992)

The types of performance measure(s) used by an organization will largely depend on theirevolutionary stage in Environmental Management. Table 6 below lists each of the organizationalevolutionary stages (as previously shown in Table 4) versus the performance measure type(s)with which that stage is most likely associated.

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Evolutionary Stage Performance Measure Classification1. Problem Solving Waste Emissions and Exposure Hazard; Economic2. Managing for Compliance Waste Emissions and Exposure Hazard; Economic;

Product Characteristics3. Managing for Assurance Economic; Product Characteristics; Economic/Emissions4. Managing for Eco-efficiency Product Characteristics; Economic/Emissions; Resource

Use5. Fully Integrated Product Characteristics; Economic/Emissions; Resource

Use; Product Recovery

Table 6. Evolutionary Stage vs. Performance Measure Classification

6 Towards the Green Supply Chain

In general, the impact of manufacturing operations on the environment may be categorized asfollows: (1) waste (all forms), (2) energy use, and (3) resource use (material consumption). Inorder to achieve the green supply chain, manufacturing organizations must follow the basicprinciples established by ISO 14000. In particular, organizations must develop procedures thatfocus on operations analysis, continuous improvement, measurement, and objectives. Animplementation procedure for extending the supply chain includes the following tasks.

Identify Processes. For each product within the supply chain, identify all inputs, outputs, by-products, and resources.

Develop a Performance Measurement System. Given the complexity of most supply chains, asingle performance measure will likely be inadequate in assessing the true performance of thesupply chain. Thus, a system of performance measures will be necessary. Such a performancemeasurement system must include measures for the three environmental categories given above,as well as existing operational measures. The interested reader is referred to Beamon (1998) fora discussion of performance measure criteria and selection.

Measure the Supply Chain System. Calculate the actual composite performance at each step inthe supply chain process for each product. The composite performance, as calculated at eachsupply chain process step, will be a function of the performance measures developed above. Thecomposite performance, therefore, may be a single numerical value, or (more likely) a vector ofnumerical values.

Prioritize. After all processes for all products have been measured, prioritize the process stepsin order of increasing composite performance, as calculated above.

Develop Alternatives and Select Approach. Develop alternatives for performanceimprovement (targeting first those process steps exhibiting the worst composite performance,based on prioritization above), and select a preferred approach.

Establish Auditing and Improvement Procedures. Establish schedules and procedures forauditing and continuous improvement, including emergency and non-compliance procedures.

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7 Conclusion

The supply chain concept grew out of the recognition that the process of transforming rawmaterials into final products and delivering those products to customers is becoming increasinglycomplex. As such, it became increasingly apparent that analysis (and subsequent improvement)of the individual supply chain stages did not lead to improvement of the chain as a whole. Thus,the concept of the supply chain emerged to describe all production stages from raw materialacquisition to final product delivery. Changes in the state of the environment, leading tosubsequent public pressure and environmental legislation have necessitated a fundamental shiftin manufacturing business practices. No longer is it acceptable or cost-effective to consider onlythe local and immediate effects of products and processes; it is now imperative to analyze theentire life cycle effects of all products and processes. Therefore, the traditional structure of thesupply chain must be extended to include mechanisms for product recovery. This extensionpresents an additional level of complexity to supply chain design and analysis; more specifically,the addition of the product recovery mechanism gives rise to numerous issues affecting strategicand operational supply chain decisions. Consequently, the extension of the traditional supplychain requires the establishment and implementation of new performance measurement systems.These new measurement systems will serve as the centerpieces of environmentally-consciousimplementation plans, based on continuous improvement, that will enable organizations tobecome and remain competitive while achieving sustainable processes.

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[23]. Sarkis, J., Darnall, N.M., Nehman, G.I., and Priest, J.W. (1995), �The Role of Supply Chain Managementwithin the Industrial Ecosystem�, IEEE International Symposium on Electronics and the Environment, pp.229-234.

[24]. Schmidheiny, S. (1992), �The Business Logic of Sustainable Development�, Columbia Journal of WorldBusiness, Vol. 27, No. 3/4, pp. 18-24.

[25]. Thierry, M., Salomon, M., van Nunen, J. and van Wassenhove, L. (1995), �Strategic Issues in ProductRecovery Management�, California Management Review, Vol. 37,No. 2, pp. 114-135.

[26]. United States Congress, Office of Technology Assessment (1992), Green Products By Design: Choicesfor a Cleaner Environment, OTA - E - 541, Washington, DC, US Government Printing Office. Available:http://www.wws.princeton.edu/~ota/ns20/year_f.html [1997, November 5].

[27]. Van der Laan, E., Dekker, R., and Salomon, M. (1996a), �Product Remanufacturing and Disposal: aNumerical Comparison of Alternative Control Strategies�, International Journal of Production Economics,Vol. 45, No. 1-3, pp. 489-498.

[28]. Van der Laan, E., Dekker, R., Salomon, M., and Ridder, A. (1996b), �An (s,Q) Inventory Model withRemanufacturing and Disposal�, International Journal of Production Economics, Vol. 46-47, pp. 339-350.

[29]. Zhang, H. C., Kuo, T.C., and Lu, J. (1997), �Environmentally Conscious Design and Manufacturing: AState-of-the-Art Survey�, Journal of Manufacturing Systems, Vol. 16, No. 5, pp. 352 - 371.

19

Appendix: Extended Supply Chain Performance Measures

1 The Material Recovery Rate (MRRj) for a product j is defined as: MRRS

Nj

iji

n

j

= − =∑

1 1 , where Sij

is the number of units of item j scrapped in time period i, and Nj is the total number of item jinducted into the process (Guide, et. al, 1997a).

2 The Core Return Rate (CRR) is defined as CRR = r Fy yy

n

=∑

1

, where ry is the discrete return rate

and Fy is the forecast or actual usage during year y (Krupp, 1992).

3 The Waste ratio is given by (Fiksel, 1996):

Waste ratio = wasteproduct + by - products + waste

4 Ecoefficiency is defined as (Schmidheiny, 1992):

Ecoefficiency = ValueResource Use + Pollution

The Supply Chain Response to Environmental Pressures

Discussion Paper

Julie Paquette

Engineering Systems Division

Massachusetts Institute of Technology

June 2005

This paper is written as part of Supply Chain 2020, a research initiative investigating the critical factors

shaping supply chains of today and tomorrow.

1

Table of Contents Table of Contents..........................................................................................................................................2 I. Introduction ................................................................................................................................................3 II. Supply chains must respond to four sources of environmental pressures. ..............................................4

A. Regulations ...........................................................................................................................................4 Directives ...............................................................................................................................................5 Taxes and fees ......................................................................................................................................9 Liability ...................................................................................................................................................9

B. Consumers and Ethical Responsibility................................................................................................10 Quality ..................................................................................................................................................10 Cost......................................................................................................................................................12

C. Resources...........................................................................................................................................14 D. Summary.............................................................................................................................................15

III. The supply chain response involves a distinct operating model, objective, and processes..................16 A. Integral part of strategy .......................................................................................................................16 B. Distinct operating model .....................................................................................................................16 C. Balanced operational objectives .........................................................................................................17 D. Best business processes ....................................................................................................................19

Plan......................................................................................................................................................19 Source..................................................................................................................................................20 Make ....................................................................................................................................................21 Deliver ..................................................................................................................................................22 Return ..................................................................................................................................................22

IV. Conclusion .............................................................................................................................................24 Bibliography ................................................................................................................................................25

2

I. Introduction

Supply chains represent the integration of hundreds of decisions, each with discrete economic and

environmental implications. While delivering the “right product at the right time” and unprecedented

corporate profitability, supply chains have operationalized a linear production path that extracts

resources, uses energy, releases emissions, and produce wastes at volumes and rates that place

increasing burdens on the natural environment. However, as supply chains mature into sophisticated

networks of material and information flow, so does the ability to carefully trace the environmental impacts

of individual products along the supply chain and address these impacts proactively. Today, supply

chains must respond to an array of environmental pressures, including regulations, consumer demands,

and limited resource availability. This response involves the development of distinct operating models,

objectives, and new supply chain processes that are expanding the scope of supply chain management

within organizations. This discussion paper draws from supply chain and environmental management

literature as well as industry case studies to characterize the current state of supply chain environmental

activity and form a basis for future research.

3

II. Supply chains must respond to four sources of environmental pressures.

As supply chains grow to accommodate ever-increasing market demands, so do the environmental

implications of linear production and public concerns for protecting the natural environment and human

health. Concerns are most visibly translated into environmental regulations that shape the behavior and

economics of industry. However, regulations represent just one source of environmentally-motivated

pressure, which affects supply chain decision-making. Though significant, this narrow frame of reference

may be expanded to include three additional sources: resource availability, ethical responsibility of

corporations, and consumer demands for environmentally-advanced products and services. It is critical to

understand the context and influence of pressures on the supply chain in order to respond effectively with

technical and organizational innovation.

Figure 1. Sources of environmental pressures affecting the supply chain

resources

consumers

regulations

ethical responsibility

market

defines behavior within constraints

defines constraints

resources

consumers

regulations

ethical responsibility

market

defines behavior within constraints

defines constraints

A. Regulations Governments use a variety of regulatory instruments to address the environmental and health

externalities associated with industrial production. These instruments include environmental directives,

taxes and fees, and liability. All three affect the pricing and availability of products and services, and

warrant consideration at the supply chain level. This section will describe the changing nature of

environmental regulatory instruments as they may be applied to supply chain management.

4

Directives

The most commonly recognized examples of environmental regulation come in the form of directives,

such as pollution limits, material bans, and fuel-economy standards. Regulatory directives set

requirements for industry practices and performance. In the United States, more than a dozen statutes

form the primary legal basis for federal environmental regulations, including1 2:

▪ Clean Air Act (1967, 1970, 1977, 1990, 1999) requiring development of National Ambient Air

Quality Standards, Hazardous Air Pollution Standards, Motor Vehicle Emissions Standards, Fuel

and Fuel Additive Standards, Aircraft Emission Standards, and authorizing provisions for ozone

protection

▪ Clean Water Act (1972, 1988, 1981, 1987) authorizing regulation of wastewater facilities and non-

point discharges and provisions for federal funding of municipal sewage treatment systems.

▪ Resource Conservation and Recovery Act (1976, 1984, 1986) authorizing regulation and banning

of the generation, storage, transport, treatment, and disposal of hazardous waste, as well as

management of non-hazardous wastes.

▪ Toxics Substance and Control Act (1976) authorizing regulation and banning of industrial

chemicals that pose “unreasonable risk” to human health or the environment.

▪ Comprehensive Environmental Response, Compensation and Liability Act (1980) allowing federal

funding to remediate sites contaminated from prior unregulated disposal.

▪ Superfund Amendments and Reauthorization Act (1986) authorizing the development of clean-up

standards and provisions for increased public participation.

▪ Emergency Planning & Community Right-To-Know Act (1986) authorizing the EPA to publicly

report the release and storage of specified chemicals, and requiring emergency planning at the

state level.

▪ Pollution Prevention Act (1990) allowing provisions for agencies to support “cost effective”

changes in production, operation, and raw material use through technical assistance and

voluntary partnerships.

Though this list comprises only a few of the more influential statutes from the supply chain perspective, it

represents a discernible shift in the federal government’s regulatory approach. Stringent “command and

control” regulation of industrial point-source releases has given way to agency support for continuous

environmental improvement and community risk management. While this shift has moved targets from

“end-of-pipe” pollution control to process pollution prevention, current environmental regulations within the

United States focus primarily on the facility. Facility personnel are responsible for implementing

environmental health and safety activities, efficiency measures, and emergency planning. No formal

5

mandate requires that environmental management processes and improvements extend beyond this

domain. Further, while facility-focused regulations impact the cost of operations which very well may

change the decisions of supply chain managers, they do not require that any factor beyond cost be

explicitly considered.

Environmental regulations are increasingly focused on consumer products. Products embody the

cumulative environmental impacts from production, use, and disposal. Therefore, regulatory directives

aimed at improving the environmental attributes of individual products effectively impact industry as a

whole. In fact, product-focused regulation is ostensibly supply chain regulation, because changes to

products drive changes to the design and operation of supply chains. Whereas regulations targeting

manufacturing and transport activities at the facility level largely encourage either compliance or

relocation of facilities (both of which are reflected in operation costs), regulations at the product level

require new business processes both within the facilities that make up the supply chain and between

them.

Today, there are at least three categories of regulatory directives that are focused on consumer products:

▪ Performance requirements. Standards that address the environmental impact of products during their

“use” phase are relatively established regulatory instruments, including product fuel economy, energy

efficiency, and emissions standards. In the United States, sequential acts for National Energy Policy

(1975, 1978, 1992) authorize the Department of Energy to regulate energy (and to a lesser extent)

water efficiency in end-use equipment, appliances, and building systems, notably including Corporate

Average Fuel Economy (CAFÉ) standards for passenger cars and light trucks. Use of such standards

is increasing across the globe. The European Union recently passed the Directive on the “eco-design”

of Energy Using Products3 which will harmonize and advance the already strict energy and water

efficiency standards across the EU. It is likely that performance targets, as well as labeling and

reporting requirements, will grow more stringent with time. These requirements place significant

demands on product designers and also affect architectural, material, and process choices. Although

it may appear that a change in product attributes has limited impact on the design and operation of

the supply chain, a large body of research suggests that end-product design alterations affect the

entire production system.4 Therefore, product innovation to meet mounting performance standards

will affect fundamental supply chain functions – planning, sourcing, manufacturing, and marketing.

▪ Material mandates. Research increasingly correlates damage to the environment and human health

to the use of toxic and hazardous materials. Accordingly, mandates in the United States have moved

beyond manufacturing emissions controls to regulate the use of select materials in consumer

products. In concept, material mandates are nothing new. The Food and Drug Administration has

6

been regulating the materials of food, drugs, cosmetics, medical devices, and radiation-emitting

electronics for over a century, representing a large portion of products that consumers purchase5.

The Consumer Product Safety Commission sets guidelines for material use in consumer goods such

as appliances, toys, clothing, and paint. Past mandates have focused on materials that may directly

harm human health due to direct exposure, and include a variety of state and federal-level restrictions

on products containing asbestos, lead, and mercury.6 Today, material mandates are being applied to

a broader range of materials, products, and industries with arguably less direct health impacts. For

instance, the European Union’s Restriction on Hazardous Substances (RoHS) Directive is one of the

more aggressive bans of materials in history.7 The directive specifically targets the electronics

industry and requires the phase out of lead, mercury, cadmium, hexavalent chromium and two groups

of flame retardants in all products by 2008. This type of material mandate not only challenges the

technical capabilities of product designers, but also the organizational capabilities across the

electronics industry. Although materials for electronics are often selected far up the supply chain for

commodity components, RoHS places responsibility for a complete bill of materials and certification

on the final producers, requiring a level of information exchange and data management

unprecedented in the electronics industry. Supply chain managers will be called upon to manage

data, monitor supplier activity, and provide quality control while coordinating material transitions in

existing product lines.

▪ Extended producer responsibility legislation. In an effort to reduce material waste, conserve

resources, and prevent hazardous disposal, several countries have enacted the principle of extended

producer responsibility (EPR) within statutory frameworks. EPR directives place financial

responsibility for the collection and disposal of products at the end of their useful life on

manufacturers, thereby aiming to create incentive to redesign products for reuse and recycling. EPR

legislation, also referred to as “take-back,” is attractive to policy-makers not only because it is a

market-oriented instrument for environmental improvement, but also because it reduces the burden of

waste disposal from individual municipalities.8 While deposit schemes for the recovery of aluminum

cans and car batteries represent variations of “take-back” directives, EPR as discussed here has

approximately a fifteen-year history beginning with packaging initiatives in Europe. The early efforts

of several European countries were formalized in 1994 by the EU’s Packaging and Packaging Waste

Directive that stipulates national collection systems and recycling quotas.9 A variety of public and

private systems have developed in response, including Germany’s Dual System which collects waste

and coordinates recycling at a profit for producers who pay an upfront fee to display the “green dot”

logo on their packaging.10 EPR directives have since targeted more complex products, including

automobiles, appliances, and electronics. The more aggressive legislative efforts are coming out of

East Asia and Europe, and include Japan’s End-of-Life Vehicle Recycling Initiative (1996) and Home

Appliance Recycling Law (2001), and the EU’s Directive on End-of-Life Vehicles (2000) and Directive

7

on Waste Electrical and Electronic Equipment (2002). Although, regulations have been adopted or

proposed in Korea, China, India, Brazil, Venezuela, Chile, and some states within the United States

as well. In order to comply with EPR requirements, companies must design, implement, and possibly

operate comprehensive reverse supply chains.11 Representing no small endeavor, reverse supply

chains may involve collection facilities, reverse logistics, partnerships with disassembly and recycling

providers, integrated remanufacturing and reuse plans, and marketing initiatives to encourage

consumer participation. Altogether, “take back” requires considerable organizational, technical, and

financial commitment from industry.

This discussion of product-focused directives is in no way exhaustive, rather providing a broad overview

of present and future regulatory directions. Altogether, several broad conclusions may be drawn:

First, the global nature of today’s markets and supply chains complicates regulatory compliance efforts.

The broad and sometimes conflicting requirements of various regulatory bodies must be managed

effectively, presenting an additional element of complexity to supply chain management. As such, there is

considerable incentive to standardize environmental processes across the supply chain when possible.

In the past decade, the United States has taken a much different approach to regulating industry than

other nations – favoring environmental improvement through voluntary partnerships with corporations

over more adversarial and legislative measures. While this shift may be preferable for supporting a

market-oriented environmental response, it is likely that the more stringent regulations coming out of

Europe and East Asia will set the standard for performance in all countries for better or worse.

Second, product-focused regulatory directives raise the stakes for industry because they assign chief

responsibility for environmental improvement to the most visible players in the production chain – the final

manufacturers. A requirement that the product embody certain environmental attributes ensures that

some level of improved environmental coordination occurred along the supply chain, regardless of

whether or not the product was imported from a country with little to no environmental regulations. While

regulations that required facility improvements affect operation costs along the supply chain, product-

focused directives change the entire decision framework of the supply chain, influencing cost and adding

environmental criteria to fundamental processes in sourcing, manufacturing, operations, distribution, and

data management.

Third, the optimal supply chain response to product-focused directives will be difficult to determine in the

near future. Not only are global production systems increasingly complex, but such regulatory frameworks

are relatively new, still evolving, and seemingly unclear about ultimate environmental goals. For instance,

it is unclear whether EPR legislation is intended primarily to minimize waste, reduce the toxic constituents

of waste, encourage alternative waste disposal methods, or achieve a combination of these things.

8

Evidence from past governmental initiatives suggests that it is difficult to achieve multiple goals with one

policy instrument (Walls, 2003). For this reason, it may be presumed that future regulations will require

multiple activities as an integrated response to multiple policy goals.

Taxes and fees

Environmental taxes either “impose a tax cost on a product or activity that is environmentally damaging or

they give a tax benefit to some product or activity that is environmentally beneficial.”12 For example, in the

United States, the federal government imposes an excise tax on ozone-depleting chemicals and offers a

tax credit to people who buy electric vehicles. In this sense, environmental taxes do not replace

regulatory directives, but rather help regulate the use of resources by visibly changing the purchase price.

Environmental taxes, if applied aggressively and globally, may transform the way supply chains are

designed and operated. For instance, suppose the United States levied a substantially higher gasoline

tax. Logistics systems might change dramatically in light of escalating transportation costs. This response

could either foster regional supply chains and economic development or irreparably damage international

markets. Environmental fees create the same affect, increasing the cost of select activities to

environmentally-preferable ends. Fees may be applied to landfill, hazardous waste, or raw material

extraction, with ramifications that ripple along the supply chain.

While a large body of literature discusses the use of taxation to shape consumer behavior and raise

government revenue13, the direct impact of various taxation schemes on the management of global

supply chains is not addressed. Environmental taxes and fees may be effective instruments for

environmental progress, though arguably less effective for supply chain progress. In changing the visible

price of a product or activity, supply chain decision outcomes may be different, but the decision

framework and business processes in place may stay the same.

Liability

Liability for environmental damage serves as pressure for performance improvements. Under United

States tort law and environmental statutes such as the Resource Conservation and Recovery Act, “strict

liability places the full burden of environmental costs on the pollution generator, independent of the safety

or precaution taken by the defendant.”14 This liability extends along the supply chain, creating situations

where organizations may be held liable for environmental damage even when that damage is not a direct

consequence of their actions. In the case that larger companies are conducting business with supply

chain partners who have limited assets, it is in the best interest of those large companies to put into place

technical support systems that assure compliance in the use of their products.15 In fact, companies that

9

have “relative advantages in certain risk reduction factors should implement these to reduce the liability of

the entire supply chain.”16 Risk reduction activities may include training initiatives, product redesign,

management of end-of-life products, and service offerings. For example, Greentech Assets, Inc. in Rhode

Island offers recycling services specifically targeted at corporations aiming to limit the environmental and

privacy risks associated with retired electronics.17 Ashland Chemical reduced their own liability and that of

their customers by offering chemical services rather than sales.18 Ashland sells product on a “turn-key

basis, taking on all the responsibilities of providing and disposing chemicals.”19 In this sense, liability

becomes an extremely effective regulatory instrument for several reasons. One, assigning liability to the

most influential player creates incentive for the adoption and diffusion of environmental practices. Two,

liability also invites pressure for environmental practices from insurance providers who underwrite

industrial activities. Third and perhaps most importantly to supply chain processes, liability creates

business opportunities to those companies who have invested in environmental literacy and services

because they are able to reduce the risks associated with the activities of their customers’ and the supply

chain as a whole.20

B. Consumers and Ethical Responsibility Markets create powerful venues for change since a savvy consumer base continually demands more

value from products, services, and the organizations that offer them. In this sense, end consumers drive

fundamental characteristics of the supply chain, including environmental performance. This type of

pressure for environmental attributes and responsibility creates distinct market opportunities for supply

chains that can deliver the “right product at the right time.” This section will describe how consumer

product demands and the ethical responsibilities of corporations are realized through supply chain level

environmental performance.

Quality

Consumers demand quality products. As environmental awareness and expectations increase, so do

demands for products with improved environmental qualities, including energy-efficient appliances,

organic food and fabrics, recycled paper goods, and non-toxic cleaners. Past studies have shown that

pinning down the exact status of environmental consumerism is challenging and subject to debate. Even

as “79% of Americans consider themselves environmentalists and 67% state they would be willing to pay

5-10% more for environmentally compatible goods,”21 actual buying practices have not supported opinion

polls. Consumers rarely accept environmentally-preferred products with inferior performance, and very

few are willing to pay a price premium for environmental attributes.22 While environmental expectations

may be high all around, many companies still view the green consumer as a niche market.

10

Regardless, the niche market has demonstrated consistent growth in recent years and currently

comprises more products with improved environmental attributes than ever before. Sales in select

product categories demonstrate this phenomenon:

▪ Organic: While the conventional food industry is generating a steady 2-3% per year growth, the

organic industry has grown at rates between 17-20% annually for the past several years.23

▪ Energy-efficient: Energy Star, a labeling program administered by the United States EPA since 1992

to reward the most energy-efficient products, has expanded to include 11,000 different models within

40 product categories, ranging from washing machines to light bulbs.24

▪ Non-toxic: Natural household cleaners, including laundry and dishwashing detergents, have risen in

sales from $140 million in 2000 to $290 million in 2004.25

Industrial sales mirror these trends. Purchasing Magazine reported in 2002 that “the most significant

factor affecting supply, demand, pricing, and availability of solvents is the environmental issue.” While

demand for conventional solvents will be essentially flat at 0.2% per year growth, green solvents will post

robust gains averaging 5.7% per year through 2005.26

The issue of branding adds another element to managing consumer pressures for environmental

performance. Research suggests that environmental expectations are higher when products are

marketed with a strong brand. Since branding efforts essentially encourage consumers to develop an

emotional attachment to a company’s image and reputation, consumers in turn expect a relatively higher

level of social and environmental performance. In fact, one of the most comprehensive surveys

conducted in this area, covering 25,000 individuals in 26 countries, found that “more consumers base

their impression of a company on its corporate social responsibility than do on (product) reputation or

financial factors.”27

A positive “reputation is a valuable corporate asset, hard to build, yet easy to diminish.”28 The higher the

profile of the brand, the more responsibility that that company must take for environmental activities along

its supply chain. Environmental activities, however, represent just one aspect of the broader corporate

social responsibility (CSR) agenda which has gained wide appeal in the past fifteen years. Also referred

to as corporate citizenship, CSR involves the ethical treatment of employees, resources, the natural

environment, communities and nations in which companies operate. Non-profit advocacy organizations

have evoked the concept of CSR to raise awareness and build pressure for more ethical corporate

behavior. For example, Global Exchange launched an infamous campaign against Nike, Inc. for sub-

contracting to “sweatshops” throughout South East Asia that employed children, required long hours, and

maintained no environmental health and safety policies.29 The Silicon Valley Toxics Coalition condemns

brand name electronics manufacturers for toxic components and hazardous waste as a result of

11

irresponsible disposal. Their seminal publication, “Exporting Harm: The High Tech Trashing of Asia,” drew

public attention to the practice of exporting electronic waste to be processed in parts of Asia.30

On the other hand, some companies such as Stoneyfield Farm and Aveda have built a name for

themselves on a basis of CSR. The efforts of these companies may drive both consumer demand for

environmentally advanced products and competitive pressure for more responsible behavior in general.

In a time when marketing, media, and public relations define success for many high profile companies,

pressure to project an image of corporate ethical responsibility is very high. While it may be relatively

easy to pay tribute to CSR in annual reports, it appears considerably more challenging to implement and

enforce practices along the supply chain that yield measurable environmental benefits.

Altogether, consumer demands create serious challenges for supply chain management because while

environmental expectations are high and extend beyond final manufacturers to include multi-tiered

suppliers, consumers are unwilling to sacrifice product performance or price. Improved environmental

performance, whether necessitated by regulatory directives or consumer demand, require product design

changes which ultimately affect supply chain functions in planning, sourcing, manufacturing, and

marketing. In the case of directives, often regulatory agencies provide technical assistance and facilitate

compliance activities to a degree. However, the onus of meeting consumer pressures for environmental

improvement in a time of greater corporate ethical responsibility is on those who sell the products.

Cost

Consumers also demand competitively-priced products. In order to offer the “right price” and maintain

profitability, production system costs must be carefully balanced with performance along the supply chain.

Ample anecdotal and empirical evidence suggests that environmental waste equals financial waste in

production systems.31 High utilities, fuel costs, and waste disposal fees provide incentive for the adoption

of environmental management systems that streamline production and yield greater efficiencies along the

supply chain. An oft-cited paper by Michael Porter and Claas van der Linde published in 1995 presents

basic reasoning for environmental improvements as investments that yield both product and process

benefits and possibly create major competitive advantages in innovation and operations.32 These

mechanisms for efficiency include:

Process

▪ substitution, reuse, or recycling of production inputs;

▪ less downtime through more careful monitoring and maintenance;

▪ better utilization of by-products by conversion of waste into valuable forms;

▪ lower energy consumption during the production process;

12

▪ reduced material storage and handling costs;

▪ savings from safer workplace conditions; and

▪ elimination or reduction of the cost of activities involved in discharges or waste disposal

Product

▪ higher quality, more consistent, safer products;

▪ lower product costs;

▪ lower packaging costs;

▪ lower net costs of product disposal to customers; and

▪ higher product resale and scrap value

This concept of keeping operation costs low through environmental improvements has been plugged by

business environmentalists for years as the illustrious “win-win” situation. As such, there are abundant

anecdotal case studies that endorse the use of environmental management systems and processes both

within individual facilities and as collaborative efforts between supply chain partners.33 In a document

published in 2000, the EPA reported that34:

▪ GM reduced disposal costs by $12 million between 1987 and 1997 by establishing a reusable

container program with its suppliers. Additionally, reusable containers can reduce solid waste,

product damage during shipping, and worker safety problems that come with slicing open boxes.

▪ Andersen Corporation developed a composite material from wood wastes generated during its

manufacturing process. This innovation yielded internal rates of return exceeding 50% and

enabled Andersen to decrease solid lumber purchases by 750,000 board-feet.

▪ Public Service Electric and Gas Company saved more than $2 million in 1997 in storage and

product disposal fees by requiring maintenance and operating material suppliers to adhere to

stringent return policies. These costs had previously been hidden in overhead accounts.

Examples like these may be found in many publications, old and new, along with a wide range of process

tools for organizations to identify and implement tailored environmental strategies. Notably, a tool called

GreenSCOR35 has been developed to merge environmental management with supply chain management

in order to integrate environmental considerations into the entire supply chain process. An offshoot of the

Supply Chain Council’s original Supply Chain Operation Reference model (SCOR), benefits to

GreenSCOR include the ability to reduce environmental impacts and related costs system-wide while

supporting traditional supply chain objectives. The approach also raises the visibility of the financial and

operational benefits of environmental supply chain practices.

While the desire to keep operating costs low is good reason to pursue environmental performance

13

improvements along the supply chain, this desire does not represent a unique environmental pressure

within this framework. It is perhaps more accurate to group the “win-win” situations described here as

either 1) operational improvements motivated by economic pressures that happen to demonstrate

environmental benefits, or 2) environmental improvements motivated by regulatory, consumer, or ethical

responsibility pressures that happen to yield cost-savings. In the future, environmental pressures will

require significant and pervasive changes in supply chain design and operations, changes that will not

likely be motivated by incremental cost-savings.

C. Resources

Escalating global population and affluence create demand for more and more products. The

corresponding rates of production inevitably place strains on the natural environment’s ability to supply

resources and absorb wastes. Traditional supply chains “are based on a linear production paradigm

which relies on constant input of virgin natural resources and unlimited environmental capacity for

assimilation of wastes and emissions.”36 Despite considerable progress in resource conservation and

process efficiency measures, this paradigm is still pervasive. The secure supply of critical feed-stocks will

remain a supply chain challenge into the future.

An examination of the global supply and demand for fish illustrates this point well. The World Resource

Institute reports that consumption of fish and fishing products has doubled in the past thirty years and has

increased five-fold since 1950.37 “Fish supply has become one of the major natural resource concerns,

as seventy-five percent of commercially important marine and most inland water fish stocks are either

currently being over-fished, or are being fished at their biological limit.”38 This situation bodes poorly for

those in the fish business, including global corporations such as Unilever that sells fish and uses fish

products as raw materials. Unilever is one of the world's leading suppliers of food, home care, and

personal care consumer goods. In the mid-1990s, Unilever launched a comprehensive effort to secure a

sustainable supply of fish. First, they provided seed money to the World Wildlife Foundation to research

the situation and establish the Marine Stewardship Council as an independent organization to certify

sustainable fish supplies. Then, they initiated discussion with competitors and national regulatory bodies

in support of the Council’s standards. Finally, Unilever publicly endorsed the work of the Stewardship

Council and committed to purchasing only certified fish.39

The availability of energy and water resources for manufacturing also presents a challenge to supply

chain management. Water shortages are increasing world-wide as demand for drinking and irrigation

grows. The United Nations Environmental Program reports that one third of the world’s population lives in

countries where consumption exceeds 10% of total supply and more than 2.7 billion people will face

severe water shortages by the year 2025.40 Supply chain managers must consider resource constraints

14

when locating facilities and planning operations, since energy and water shortages may dramatically

affect business. For example, both Pepsi and Coca-Cola lost their license to use local groundwater at

bottling plants in Kerala, India following a local drought.41

While it may be easy to take for granted the availability of natural resources to support industrial activities,

resource constraints represent a systemic environmental pressure. The most successful companies will

recognize natural limitations, in time to plan for conservation, substitution, or production of their own feed-

stocks. Such a response will require a broader perspective on the role of companies in providing goods,

services, as well as stewardship of the resources that enable economic success.

D. Summary

Altogether, supply chains must respond to environmental pressures from four sources. Resource

availability and regulatory pressures place physical, legal, and economic constraints on supply chain

management, while consumer demands and the ethical responsibilities of corporations define desirable

behavior in the market and within those constraints. As supply chains mature and environmental

pressures become more diverse and demanding, technical and organizational innovation is needed in

supply chain design and operation.

15

III. The supply chain response involves a distinct operating model, objective, and processes

In order to characterize how industry may best respond to environmental pressures through their supply

chains, it is important to understand the role supply chain management plays in supporting business

strategy. Given that “ample evidence exists to support the premise that supply chain management

processes have a significant impact on the operational and financial performance of companies,” it is

appropriate to ask what constitutes a supply chain that successfully brings value to a company.42 In a

working paper that forms the basis for the Supply Chain 2020 research initiative at Massachusetts

Institute of Technology, a four statement hypothesis defining an “excellent supply chain” is proposed. “An

excellent supply chain:

▪ enhances and is an integral part of a corporation’s business strategy;

▪ leverages a distinctive operating model to gain competitive advantage;

▪ executes well against a balanced set of operational objectives or metrics; and

▪ focuses on a small number of best business processes that are aligned with objectives.”

This hypothesis may be further examined with respect to environmental excellence.

A. Integral part of strategy First, if an excellent supply chain is considered an integral part of a corporation’s business strategy, then

it should also be integral to a corporation’s environmental strategy. Supply chains operationalize the

existing linear cycles of industrial production, and represent the cumulative environmental impacts of a

product from extraction to final delivery. It is reasonable to believe that if a company has an

environmental strategy, then that strategy would be implemented through activities at the supply chain

level. Many companies have exhibited a commitment to the natural environment through corporate

responsibility statements in marketing publications and on the internet. One may evaluate whether or not

these companies’ supply chains are enhancing or undermining their stated environmental positions.

B. Distinct operating model Second, an excellent supply chain should leverage a distinctive operating model to gain competitive

advantage. An operating model defines an organization’s overall strategy for business, and may be

reduced commonly to simple statements like “to offer the lowest priced products” or “to provide the largest

selection of products.” Supply chains either support the designated operating model, effectively

16

coordinating supply channels and production activities, or they do not.

A supply chain may also leverage a distinctive operating model with respect to environmental pressures.

Although environmental activities are typically regarded as ancillary to business operations, under ideal

circumstances, these activities are aligned with and augment the core operating model. Regardless of

whether or not this alignment exists, as environmental pressures increase and require action at the

supply chain level, a company must choose 1) to operate beyond environmental pressures, 2) to operate

at environmental pressures, or 3) to resist environmental pressures.

Figure 2. A response to environmental pressures requires an environmental operating model.

Operate at pressure Operate beyond pressureResist pressure

environmental pressure

current level

Operate at pressure Operate beyond pressureResist pressure

environmental pressure

current level

This categorization of environmental operating models is not a new concept. Several researchers have

described various corporate environmental orientations in a similar way. R. Kopicki presents three

approaches in environmental management: the reactive, proactive, or value-seeking.43,44 Steve Walton

offers a comparable model in characterizing the purpose of environmental activity as either “comply with

the letter of the law,” “clean up,” or “be proactive.”45 Robert Klassen describes the continuum of behavior

from reactive to proactive orientations in several publications.46 Ad de Ron designates environmental

strategy as following, market-oriented, or sustainability-oriented.47 Finally, Paul Murphy introduced a

survey tool that classifies companies across industries as environmental progressives, moderates, or

conservatives.48 It is important to note, however, that these categorizations of corporate environmental

orientation focus primarily on behavior within the facility, as opposed to articulating a product-focused

supply chain response. Also, they do not explicitly identify the different sources of environmental

pressure - regulations, consumers, and resources – in recognition of the fact that it may be advantageous

to operate beyond pressure for one and at pressure for others. Despite this more limited view and slight

difference in descriptive terms, it is generally agreed that environmental and core business activities are

best when mutually supportive. Accordingly, an excellent supply chain should leverage a distinct

operating model that is informed by environmental pressures to gain competitive advantage.

C. Balanced operational objectives

Third, an excellent supply chain executes well against a balanced set of operational objectives or metrics.

Classic supply chain objectives are described by the Supply Chain Council to include reliability,

17

responsiveness, flexibility, cost, and asset utilization.49 A “balanced set” may include only one or two of

these operational objectives depending on the designated operating model. For instance, a corporation

may focus on supply chain efficiency and may employ metrics such as line-items-picked-per-hour or

cash-to-cash-cycle-time to indicate performance. With regard to the environment, operational objectives

may be developed for each environmental operating model in response to each type of environmental

pressure as follows:

Table 1. Environmental operational objectives

Exit Ignore

Breach Relocate

-Resist pressure

MeetSatisfy

ComplyConserveSecure

Operate at pressure

DriveCreate

Obviate the need forExceed

SubstituteExpand

Operate beyond pressure

MarketsRegulationsResources

Exit Ignore

Breach Relocate

-Resist pressure

MeetSatisfy

ComplyConserveSecure

Operate at pressure

DriveCreate

Obviate the need forExceed

SubstituteExpand

Operate beyond pressure

MarketsRegulationsResources

environmental pressures

envi

ronm

enta

l op

erat

ing

mod

els

Suppose a corporation elects to operate at regulatory pressure. This corporation’s operating objective,

therefore, is to comply with all regulatory directives that affect its activities with the least disruption to

other business processes. Metrics such as number-of-non-compliance-incidents, or fines-for-non-

compliance may be selected to indicate direct environmental performance. Metrics such as cost-to-

compliance and time-to-compliance may be used to indicate efficiency and environmental performance. A

large body of research discusses the application of metrics to indicate direct environmental performance,

such as energy use or total waste generated.50 An interesting extension of this research involves the

development of metrics to indicate environmental performance of an entire supply chain.51

Table 1 presents a useful framework for examining industry environmental activity at large. Proponents of

corporate environmental initiatives may argue that a proactive orientation “operating beyond

environmental pressures” is the best way to protect the natural environment and sustain long-term value

and profitability. However this framework suggests that environmentally-aware supply chain excellence

may be achieved within each operating model. In this sense, excellence may perhaps rely on three

conditions: 1) environmental pressure is effectively signaled to the company, 2) there is sufficient time to

respond to the pressure, and 3) the company has adequate management and technological capability to

implement a response at the supply chain level. A company that is reactive, flexible, and efficient in

execution may operate extremely well at environmental pressure, while a company that is proactive,

18

innovative, and differentiated from competition may best place themselves beyond pressure. The

operating model decision may be further determined by market conditions and product attributes.

D. Best business processes Fourth, an excellent supply chain focuses on a small number of best business processes that are aligned

with operational objectives. While comprehensive supply chain management may require hundreds of

processes to be performed in a structured manner, the greatest operational and financial benefits result

from concentrated efforts on a relatively small number of unique business processes. The same may be

said about environmental benefits: an excellent supply chain with respect to environmental performance

focuses on a small number of processes that are aligned with environmental operating objectives.

During the past decade, best business processes have typically included cross-functional processes,

extended or inter-enterprise processes, the use of formal optimized decision-making, the use of

stochastic decision-making, and the use of risk management.52 Interestingly, the vast body of

environmental management literature echoes these themes, encouraging many of the same approaches

in developing processes to improve environmental performance. Accordingly, concepts proposed by

environmental management literature may be understood and effectively applied to the context of supply

chain management.

Consider environmental processes arranged by the most basic functions of supply chain management as

defined by the SCOR model:

Figure 3. Basic supply chain management functions as defined by the Supply Chain Council

plan source make deliver return

Company A

Basic supply chain management functions of Company A

plan source make deliver returnplan source make deliver return

Company A

Basic supply chain management functions of Company A

Plan

The chief variables that influence the environmental performance of a product or system are determined

19

during the planning phase. A number of processes may be used to aid environmental decision-making

while planning the supply chain.

▪ Environmental cost accounting53 is a technique to identify and assign discrete costs to

environmentally harmful activities within a broader system. The term “cost” as used implies two

meanings. The first is the monetary cost that an individual company might incur from a specific

activity, such as the fees associated with hazardous waste disposal. The second is the cost of

damage to human health or the natural environment that may be directly attributed to a corporate

activity. Companies motivated to reduce operating costs or to demonstrate an environmental

commitment use environmentally accounting techniques to capture environmental costs not typically

captured through conventional accounting methods. The US EPA commissioned a comprehensive

study of the use of environmental accounting in hospital purchasing and waste management in the

year 2000, which serves as an excellent reference about accounting techniques.54

▪ Environmental life cycle analysis is a method used to identify and evaluate the environmental impacts

associated with a product or service throughout its entire life from material extraction to eventual

disposal and assimilation into the environment. As opposed to environmental cost accounting, life

cycle analysis implies non-monetary environmental assessment and is used as a product or system

design tool. A number of life cycle analysis methodology books and software programs are

available,55 although not specifically geared to supply chain managers.

▪ Design for environment is an approach to reduce the environmental impacts of a product by

introducing specific design criteria during the product development phase, such as “design for

recyclability” or “design for energy efficiency.” Once the environmental impacts of a particular product

characteristic or life-cycle phase are identified through a formal or informal analysis, design for

environment may be used as an organizing design principle to ameliorate those impacts. Many

industries have successfully implemented a design for environment approach in product

development. For instance, appliances that have been awarded Energy Star rating by the US EPA

are designed to meet specific energy efficiency criteria,56 and Kodak “Fun Saver” one-use-cameras

are designed to be disassembled and remanufactured into new cameras.57

Source

Sourcing professionals may consider the environmental attributes of materials, components, and

products, as well as the environmental performance of the suppliers’ direct activities using the following

processes.

20

▪ Environmental auditing is a procedure to verify the environmental performance of a material,

component, product, or facility. Auditing may be conducted by a third-party organization or the buyer

in accordance with previously established environmental guidelines. Many multi-national companies,

including Limited Brands, Inc., Texas Instruments, and General Motors have designated standards

and routinely audit suppliers for environmental performance.58 Internal auditing is also widely

promoted as part of the ISO 1400059 environmental management standards.

▪ Environmental certification is a guarantee that a product or facility meets environmental standards

defined by a third party. Certification typically involves product labeling for consumer marketing in

response to regulatory pressures or consumer demands for products with improved environmental

attributes. Examples of prevalent certification programs include Green Seal60, Germany’s Blue

Angel61, Certified Organic,62 and the building industry’s Leadership in Energy and Environmental

Design certification63. Companies may undergo environmental certification for their own products or

seek to purchase certified products.

Make

As discussed earlier, the manufacturing response to facility-focused regulatory directives has evolved

from end-of-pipe pollution control to the implementation of environmental management systems. It may

be expected that this evolution will continue domestically and extend to facilities in regions with weaker

regulatory regimes, involving the following processes:

▪ Pollution prevention is an approach to preemptively identify and alter activities that create waste.

Prevention techniques including substitution, product modification, improved maintenance, and

recycling have been successfully applied at several facilities following the Pollution Prevention Act of

1990 and several state-level regulatory directives. The Journal for Cleaner Production64 and the

Pollution Prevention Resource Exchange65 serve as excellent references on this topic.

▪ Environmental management systems are sets of processes that enable an organization to identify,

monitor, and address the environmental impacts of its activities. Systems typically include guidance

for employees in environmental health and safety procedures and facilitation tools for continual

improvement of environmental performance. While developing an environmental management

system does not guarantee better environmental performance, it generally helps companies comply

with regulations and manage risk more consistently and effectively. While ISO 14000 serves as the

international standard for environmental management, the US EPA also provides several good

references to develop a system independently.66

21

Deliver

The environmental implications from transportation are growing, as materials, components, and finished

products travel longer distances through production and distribution cycles. The total impact of delivery

functions correlates to two variables that logistics professionals manage directly: transportation distance

and mode.

“Green” logistics is an approach that considers the environmental impacts of procurement, transport,

inventory control, and distribution activities along with other considerations in order to minimize

environmental costs. For example, in addition to considering monetary cost, time, and reliability of freight

service, one may also consider the volume carbon dioxide emissions. There are several interesting

studies that compare the environmental impacts of various product distribution systems, including online

retail models.67

Return

Return processes are gaining in strategic importance as companies compete further to maintain

customers, recover assets, minimize liability, and meet extended producer responsibility regulatory

requirements.

▪ Reverse logistics is a set of activities to collect, transport, and manage products and materials after

sale and delivery to the customer. Reverse logistics has been typically used to facilitate unsold

product and warrantee returns, and it is being further developed to address “take back” regulatory

obligations and to pioneer concepts of closed-loop supply chains. This subject represents an

important area of emerging research within supply chain management.68

▪ Remanufacturing is a process to clean, repair, and restore used durable products to good condition

for resale. Remanufacturing is typically integrated with reverse logistics processes because valuable

products and components must be appropriately transferred from the consumer to the manufacturer.

In addition to logistical challenges, remanufacturing involves serious technical, planning, and

inventory management challenges, areas which are increasingly explored in practice and research

literature.69

▪ Recycling is a procedure to reuse materials, which may otherwise be considered waste, in a form

other than primary use. Recycling is facilitated by return processes in part because existence of a

secondary market depends on the quality of recycled materials. Whether recycling recovered

materials or using purchased recycled content in production, processes require additional planning

22

due to fluctuations in material timing and availability.

This list is by no means exhaustive or prescriptive. Rather, it provides an overview of the many business

processes that could yield significant environmental improvements while being conscious of the impact on

corporate strategy. Although some may argue that true environmental excellence is a product of the

holistic integration of many processes, concentrated efforts on even one may yield significant

environmental benefits that ripple through the supply chain and create economic value. As said

previously, an excellent supply chain focuses on a small number of best business processes, which

prompts the question: when it comes to the supply chain response to environmental pressures, what is

best?

23

IV. Conclusion

Environmental pressures add a new element of complexity to supply chain management, requiring a

comprehensive response involving environmental operating models, operational objectives, and new

supply chain processes. As environmental pressures grow more diverse and demanding, the quality of

an individual company’s supply chain response may confer significant competitive advantage. This

discussion paper presented an overview of the types of environmental pressures that impact supply

chains today, as well as a framework for characterizing what may be an excellent response to these

pressures. From here, we may explore the different models and processes that companies within one

industry are implementing in response to a single pressure. This future research may establish a

relationship between the quality of a supply chain response and the extent of competitive advantage, offer

a prescriptive, evaluative framework for addressing environmental pressures, and present a path towards

the proactive development of supply chains that enable increased profitability and environmental

sustainability.

24

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20 Boyer, Marcel and Porrini, Donatella, “The Choice of Instruments for Environmental Policy: Liability or Regulation?” An Introduction to the Law and Economics of Environmental Policy: Issues in Institutional Design, Research in Law and Economics, 20 (2002): 1-41. 21 Roberts, J.A., “Green consumers in the 1990s: profile and implications for advertising,” Journal of Business Research, 36/1, (1996): 217-231. 22 Mohr, Lois A., Eroglu, Dogan, Ellen, Pam E., “The development and testing of a measure of skepticism toward environmental claims in marketers communications,” The Journal of Consumer Affairs, 32/1, (1998): 30-56, referenced in Hoffman, Andrew, “Business Decisions and the Environment: Significance, Challenges, and Momentum of an Emerging Research Field,” in G. Brewer and P. Stern (eds.) National Research Council, Decision Making for the Environment: Social and Behavioral Science Research Priorities, 2005. 23 Hansen, Nannette, “Organic food sales see health growth,” MSNBC News Online, December, 3, 2004, msnbc.msn.com/id/6638417/, accessed May 20, 2005. 24 US Environmental Protection Agency, Energy Star Program, 2005, www.energystar.gov/, accessed June 1, 2005. 25 Daley, Beth, “Eco-products in demand, but labels can be murky,” Boston Globe, February 9, 2005. 26 Atkinson, William, “Demand for green solvents will boom,” Purchasing Magazine Online, October 10, 2002, www.purchasing.com/article/CA250861.html, accessed May 20, 2005. 27 Roberts, Sarah, “Supply chain specific? Understanding the patchy success of ethical sourcing initiatives,” Journal of Business Ethics, 44/2, (2003): 159-170 referencing the Environics International, CSR Monitor Survey, Millennium Poll, 1999. 28 Roberts, 2003. 29 Connor, Tim, “Still Waiting for Nike to Do It,” A Global Exchange Report, 2001, www.globalexchange.org/campaigns/sweatshops/nike/stillwaiting.html, accessed June 5, 2005. 30 Puckett, Jim, et al, “Exporting Harm: The High Tech Trashing of Asia,” A Silicon Valley Toxics Coalition Report, February 2002, www.svtc.org/cleancc/pubs/technotrash.pdf, accessed June 5, 2005. 31 US Environmental Protection Agency, "The Lean and Green Supply Chain: A Practical Guide for Materials Managers and Supply Chain Managers to Reduce Costs and Improve Environmental Performance," EPA 742-R-00-001, 2001. 32 Porter, M., van der Linde, C., “Green and Competitive: Ending the Stalemate,” Harvard Business Review, 73/5, (1995): 120-134. 33 The Toxics Use Reduction Institute offers numerous case studies that demonstrate environmental and financial savings through pollution prevention activities. www.turi.org/content/content/view/full/1879/, accessed May 31, 2005. 34 US EPA, “Lean and Green….,” 2001. 35 Todd Wilkerson’s presentation may found on the website of the Supply Chain Council, www.supply-chain.org/site/files/Wilkerson_LMI_SCWNA03.pdf, accessed April 2, 2005.

26

36 Geyer, R., Jackson, T., “Supply Loops and Their Constraints: The Industrial Ecology of Recycling and Reuse,” California Management Review, 46/2, (2004): 55-73. 37 Kura, Y., Revenga, C., Hoshino, E., Mock, G., “Fishing for answers: making sense of the global fish crisis,” World Resource Institute Report, 2004, pubs.wri.org/pubs_description.cfm?PubID=3866, accessed May 30, 2005. 38 Kura, et al, 2004. 39 Unilever’s annual report describing efforts to build and sustain reliable fish supplies is available at www.unilever.com/ourvalues/environmentandsociety/default.asp, accessed May 5, 2005. 40 United Nations Environmental Program, “Vital Graphics: An overview of the State of the World’s Fresh and Marine Waters,” 2002, www.unep.org/vitalwater/, accessed May 30, 2005. 41 Morrison, J., Gleick, P., “Freshwater Resources: Managing the Risks Facing the Private Sector,” A Research Paper of the Pacific Institute, 2004, www.pacinst.org/reports/business_risks_of_water/, accessed May 30, 2005 42 Lapide, L., “Supply Chain 2020 Project – Phase 1 Excellent Supply Chains: Working Hypothesis and Research Plan,” Center for Transportation and Logistics, Massachusetts Institute of Technology, July 2004, available at www.supplychain202.net, accessed June 7, 2005. 43 Hoek, Remko I. van, “From reversed logistics to green supply chains,” Supply Chain Management, 4/3, (1999): 129-136. 44 Kopicki R.J., M.J. Berg, L. Legg, V. Dasappa and C. Maggioni, “Reuse and Recycling: Reverse Logistics Opportunities,” Council of Logistics Management, 1993, referenced in Hoek, 1999. 45 Walton, S.V., Handfield, R.B. and Melnyk, S.A., "The green supply chain: integrating suppliers into environmental management processes", International Journal of Purchasing & Materials Management, 34/2, (1999): 2-11, referenced in Hoek, 1999. 46 Klassen, R.D., Johnson, P.F., “The Green Supply Chain,” in Westbrook, R., New, S., (eds.), Understanding Supply Chains: Concepts, Critique and Futures, Oxford University Press, 2004. 47 Ron, Ad J. de, “The ultimate result of continuous improvement,” International Journal of Production Economics, 56-57, (1998): 99-110 48 Murphy, Paul R., Poist, Richard, F., Braunschweig, Charles D., “Green Logistics: Comparative Views of Environmental Progressives, Moderates, and Conservatives,” Journal of Business Logistics, 17/1, (1996): 191-211. 49 Supply Chain Council, Supply-Chain Operations Reference Model, SCOR Version 7.0, available at www.supply-chain.org, accessed May 28, 2005. 50 Gregory J., Atlee J., Isaacs J., Kirchain, R., “Sustainability metrics for materials use at the system and operational level,” Materials Systems Laboratory discussion paper, 2004. 51 See Clift, R., “Metrics for Supply Chain Sustainability,” Clean Technologies and Environmental Policy, 5/3-4, (2003): 240-256, and McIntyre, K., et al, “Environmental Performance Indicators for Integrated Supply Chains: the Case of Xerox Ltd.,” Supply Chain Management, 3/3, (1998): 149-160. 52 Lapide, 2004.

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53 The US Environmental Protection Agency maintains a website with a number of resources about the environmental and financial benefits of environmental cost accounting, available at www.epa.gov/opptintr/acctg/resources.htm, accessed June 2, 2005. 54 Shapiro, K., Stoughton, M., Graff, R., Feng, L., “Health Hospitals: Environmental Improvements through Environmental Accounting,” A Report from Tellus Institute, July 2000, available at www.epa.gov/opptintr/acctg/pubs/hospitalreport.pdf, accessed June 1, 2005. 55 Among the most recent books published about life cycle analysis is The Hitch Hiker’s Guide to LCA by Henrikke Baumann and Anne-Marie Tillman published in 2004. 56 Energy Star designates product specifications and eligibility criteria for several categories of products, summarized at www.energystar.gov/index.cfm?c=products.pr_es_home_office, accessed June 1, 2005. 57 Kodak’s One-use Camera Recycling Program, www.kodak.com/eknec/PageQuerier.jhtml?pq-path=2/3/9/1026/1032&pq-locale=en_US, accessed June 1, 2005. 58 Data is based on conversations with individual companies and online information. 59 International Organization for Standardization, www.iso.org/iso/en/iso9000-14000/index.html, accessed June 2, 2005. 60 Green Seal Product Certification, www.greenseal.org, accessed June 1, 2005. 61 Germany’s Blue Angel Certification, www.blauer-engel.de/englisch/navigation/body_blauer_engel.htm, accessed June 1, 2005. 62 Certified Organic Food Standards, www.ams.usda.gov/nop, accessed June 1, 2005. 63 Leadership in Energy and Environmental Design is a national rating system to certify green buildings, administered by the US Green Building Council, www.usgbc.org/LEED/, accessed June 1, 2005. 64 The contents of the Journal for Cleaner Production is available at www.elsevier.com/wps/find/journaldescription.cws_home/30440/description#description, accessed at June 1, 2005. 65 Pollution Prevention Resource Exchange, www.p2rx.org, accessed June 2, 2005. 66 The US Environmental Protection Agency maintains a website with a number of resources and case studies about environmental management systems, available at www.epa.gov/ems/resources/index.htm, accessed June 2, 2005. 67 Matthews, H. Scott, Hendrickson, Chris T., “Economic and Environmental Implications of Online Retailing in the United States,” Joint OECD/ECMT Seminar on the Impact of E-commerce on Transport, Paris, June 6, 2001.

68 Among the most cited books about reverse logistics is Going Backwards: Reverse Logistics Trends and Practices by Dale S. Rogers and Robald S. Tibben-Lembke published by the Reverse Logistics Executive Council in 1999. Full text of this work is available online at http://www.rlec.org/reverse.pdf, accessed June 3, 2005.

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69 Guide Jr., V.D.R., and Van Wassenhove, L.N., “Business Aspects of Closed-Loop Supply Chains,” in Guide Jr., V.D.R., and Van Wassenhove, L.N., eds., Business Aspects of Closed-Loop Supply Chains, Carnegie Mellon University Press, (2003): 17-42.

29

1

GREEN SUPPLY CHAIN PARAMETERS FOR COMPANIES IN THE LUMBER INDUSTRY

Salem Y. Lakhal, Ph.D.1* and Souad H’Mida, Ph.D.2 1Faculty of Business Administration, Phone: +(506) 858 4601, Fax: +(506) 858 4093. University of

Moncton, Moncton, NB, E1A 3E9, Canada, E-mail: lakhals@umoncton.ca

2 Faculty of Business Administration, Phone: +(506) 863 2035, Fax: +(506) 858 4093 University of Moncton, Moncton, NB, E1A 3E9, Canada, E-mail: hmidas@umoncton.ca

Abstract

This research studies the environmental dimensions, policies, operations, and technologies

of companies in the lumber industry. It proposes an analysis of the supply chain from

suppliers to clients and focuses on specific actions related to the following: (i) reduction of

contaminants; (ii) analysis of the operations process; and (iii) development of parameters

and characteristics, which can evolve into a benchmarking system for measuring greenness

efforts of lumber industry companies. This analysis aims at defining the basic features of

an “Olympic” green supply chain, characterized by zero emissions, zero waste of resources,

zero waste in activities, zero use of toxics, zero waste in product life-cycle, and zero waste

( the five zeros analogous to the five circles in the Olympic flag), and green input and

output.

Keywords: Green supply chain, Wood industry, Environment, Kyoto Convention

1. Introduction

In the present days of globalization, leading corporations increasingly are coming to

appreciate the value of the supply chain as a competitive advantage, which has the

potential to enhance customer retention, revenue generation, cost reduction, and asset

utilization (GEMI, 2004). However, concern is growing about the impact that, through the

supply chain, business activities have on the environment, and efforts are underway to

develop appropriate policies, which would reduce adverse environmental repercussions.

The number of companies publishing environmental reports has been increasing rapidly

(Kokubu and Nashioka, 2001). Environmental reporting within the forest and paper

industries is around 56% according to Sinclair and Walton (2003) Furthermore, leading

companies are beginning to realize the importance of proactive environment management * Corresponding author

2

strategies, and to factor in environmental costs when making management decisions. These

measures, however, are still in early stages of development (Lee, 2001). For example, 35

leading American companies, members of the Global Environmental Management

Initiative, have acknowledged the competitive edge acquired by considering environmental

aspects in supply chain management (GEMI, 2004). This statement has been corroborated

by Hitchens et al. (2003), substantiating that improved environmental performance does

not translate into bad economic management. Similarly, strong environmental policies do

not weaken the competitive advantage of a company. Rather, any company that has a

long-term vision is likely to excel both in the short-term and the long-term. Corporate

environmental initiatives are on the rise in North America, while Japanese firms remain

leaders in this field (Imai, 2001).

However, while environmental awareness has increased, the corporate response towards

environmental sustainability is marred by the absence of an agreed upon set of operational

environment assessment tools. In this paper, we seek to fill this gap by suggesting a supply

mechanism that embraces the environment-friendly dimensions of a “green supply chain.”

The existing knowledge of the "green" aspect of the supply chain is still in its embryonic

stage and much remains to be done (Bjorndalen et al., 2005; Khan et al., 2005b; Lakhal

and H'Mida, 2003; Robert, 1999; Sarkis, 2003) to develop its evaluation tools (Bolli and

Emtairah, 2001; Cox, 1999; Lakhal and H'Mida, 2003). While research on environmental

benchmarking remains relatively sparse, it is evident that companies are interested in

learning about methodologies, which ensure the integration of environmental

considerations in all supply chain activities. (See for example Auramo et al., 2002; Cox,

1999; Kleijnen and Smith, 2003; Robert, 1999).

The design, construction, and maintenance of buildings have a tremendous impact on our

environment and our natural resources. Based on the information available on the website

of Smart Community Network (http://www.sustainable.doe.gov/buildings/gbintro.shtml),

buildings use one-third of all the energy consumed in the US, and two-thirds of all

electricity. Therefore, wood product companies must work to be sustainable, especially if

they are to survive today's world of rapid changes in technology, increasing complexity in

products, and strong competition. These factors require companies, among other things, to

integrate environmental protection dimensions into their supply chain operations. The

development of customer awareness about ecological problems of forest product industries

puts the lumber industry companies into the center of interest of the home building

3

industry. ‘‘The natural building movement is where organic food was 20 years ago,” says

Joe Kennedy, co-editor of the book The Art of Natural Building. However, the movement

is growing quickly: in 2002 alone, an additional 13,000 green houses were constructed. By

the year 2010, 38 million buildings are expected to be constructed. The challenge will be to

build them “smart,” so that they use a minimum of non-renewable energy, produce a

minimum of pollution, and cost a minimum of energy dollars, while increasing the

comfort, health, and safety of the people who live and work in them.

Basically, all companies need to know where they stand relative to where they could be,

and what they need to do to close the gap between the customer’s expectations and the

technology available to reach the green supply chain. They need to take advantage of

advanced technologies to achieve the best possible levels of performance. The green

supply chain concept (Lakhal and H'Mida, 2003) helps companies make the right decisions

in the greening process, given each company's unique resources, capabilities, opportunities,

and limitations.

This study proposes parameters to benchmark lumber industry companies in Canada, using

the greening framework developed by Lakhal and H’Mida (2003). It analyses the structure

of the supply chain from supplier to client (Figure 1), and considers the following specific

aspects: (i) the actual contaminants in the supply chain; and (ii) an analysis of operations,

process, materials design, and selection, according to environmental policy. The research

asserts that environmental practices will accrue competitive benefits to lumber companies

and enhance corporate performance.

Figure 1: The lumber supply chain

Forests

Sawmill

Inventory Management

BuildingConstruction

Harvesting

Building

4

This paper is organized as follows: Section 2 opens with a brief review of the available

literature on the green supply chain. Section 3 proposes a functional model of an

“Olympic” green supply chain for a lumber industry company. Section 4 offers concluding

comments and guidelines for future research.

2. Literature review

No research has been conducted on a green supply chain in the lumber industry. Therefore,

this review covers the small amount of literature that is available on green supply chain in

general. We have listed nearly ten papers that deal with the topic. The central concern of

this literature has been to investigate the relationship between environmental management

activity of suppliers and firms, and to study the structure of customer-supplier

manufacturing patterns. Simpson and Power (2005) developed a model for approaching

issues in the environmental performance of the supplier, and Zhu and Sarkis (2005) used

regression analysis to examine the relationship between green supply chain practices and

economic performance. Preuss (2001) studied purchasing patterns of Scottish

manufacturing companies. He introduces the notion of Green Multiplier Effect, suggesting

that purchasing could become an important agent of change towards environmental

initiatives in the supply chain. Three industries were studied in this corpus of research:

paper making, chemicals, and electronics. Evidently, some concepts need more elaboration

and clarification, as shown by Seuring (2004). He assimilates product life-cycle into the

supply chain and discusses environmental aspects of inter-organizational management:

life-cycle management, closed-loop supply chains, integrated chain management, and

green/environmental or sustainable supply chain management. However, Seuring is not

clear about how these concepts relate to each other, and if or how they are different. Rarely

do these researchers suggested models to assess green supply chains. Lakhal and H'Mida

(2004) suggested a framework for a green supply chain, using gap analysis to compare

structural patterns of different supply chains. In marketing research, Georgiadis and

Vlachos (2004) studied the effects of the ‘green image’ on customer demand. Rios et al.

(2003) worked on the disassembling process and developed a model that uses electronic

products to study scenarios in which a recycler identifies and separates high-value

engineering plastics and metals. Murphy and Poist (2003) conducted an empirical study of

the relationship between logistics and environment, confirming that greenness would

broaden the scope of logistics, and influence the way logistics’ managers do their jobs.

Finally, Rao (2002) used a survey questionnaire to determine the extent of greening taking

5

place in the supply chain in South East Asia: the Philippines, Indonesia, Malaysia,

Thailand, and Singapore.

It is obvious from this brief review that limited research has been done on the green supply

chain. More models are needed to assess greenness efforts and for research specific to the

most pollutant industries. This paper adds to the literature on green supply chain and the

methods for the assessment of greenness efforts. In addition, it prepares a protocol for

implementing truly sustainable technologies (Khan et al., 2005a).

3. Attributes of “Olympic” lumber company green supply chain

This section defines the attributes of the green supply chain for a “green” lumber company,

using the framework to assess greenness efforts of a lumber company through its supply

chain developed by Lakhal and H'Mida (2003; 2004). The section proceeds to develop the

concept of the Olympic green supply chain.

The ideal green supply chain is an Olympic green supply chain

We term the ideal green supply an Olympic lumber green supply chain, which is

characterized by the following:

(i) Five zeros of waste or emissions (corresponding to the five circles in the Olympic flag):

1. Zero emissions (air, soil, water, solid waste, hazardous waste);

2. Zero waste of resources (energy, materials, human);

3. Zero waste in activities (administration, production);

4. Zero use of toxics (processes and products);

5. Zero waste in product life-cycle (transportation, use, end-of-life);

and

(ii) Green input and output.

The zero waste approach is defended by Zero-waste Organization (www.zerowaste.org)

using a visionary goal of zero waste to represent the endpoint of “closing-the-loop” so that

all materials are returned at the end of their life as industrial nutrients, thereby avoiding

any degradation to nature. A 100% use efficiency of all resources -- energy, material, and

human – is promoted by Zerowaste, working towards the goals of reducing costs, easing

demands on scarce resources, and providing greater availability for all. When applied to

products, Zerowaste’s principles reduce the negative impact on the environment during the

6

manufacture, transportation, use, and end of the product’s life cycle. For a lumber

company as a unit of analysis, the concept of the green supply chain is illustrated by Figure

2. Such an approach, which is always the norm in nature, is what we define in the case of a

lumber company.

Figure 2: The concept of the Olympic Green Supply chain adapted from the Zerowaste

approach

We now proceed with an analysis of the five zeros emissions, output,, and input to

elaborate on the parameters of the Olympic green supply chain.

Parameters of an Olympic lumber company

Zero emissions (air, soil, water, solid waste, hazardous waste)

We have compiled a list of the most important contaminants from the Tri-Explorer

database from the Environmental Protection Agency (EPA):

http://www.epa.gov/triexplorer/. Since 1998, the EPA has been collecting information for

the database from the commercial hazardous waste treatment sector. The data is based on

industry reports regulated under the Federal Resource Conservation and Recovery Act

(RCRA). Eighty-five contaminants have been reported by the industry. For our purposes,

we have retained a list of 26 contaminants considered important according to the quantity

more or less equal to 100,000 lb in 2003.

Air emissions: Acetaldehyde, Ammonia, Glycol Ethers, Creosote, Ethyl Benzene,

Ethylene Glycol, Formaldehyde, Hydrochloric Acid, Manganese and Manganese

compounds, Methanol, Methyl Ethyl Ketone, Methyl Isobutyl Ketone, N-Butyl Alcohol,

Phenol, Propional Dehyde, Styrene, Toluene, Xylene (mixed isomers), Dioxin, Co2.

Product

By-productsGreen

Product

By-productsGreen

Green

7

Soil emissions (landfills): Arsenic Compounds, Chromium Compounds, Copper

Compounds, Creosote, Manganese and Manganese compounds, Methyl Ethyl Ketone,

Pentachlorophenol, Zinc Compounds, Mercury.

In Canada, for example significantly, only four contaminants were tracked: Chromium

(and its compounds), Copper (and its compounds), Dioxins and Furans, and

Hexachlorobenzene (Environment-Canada, 2005a). Furthermore, based on the American

lumber industry’s declaration,. the industry emission of the Hexachlorobenzene seems to

be insignificant (15 lbs in the U.S. was declared in 2003).

The occupational standard of respirable particle concentrations at the sawmill are 5mg/m3.

In evaluating workers at a pine and spruce processing sawmill in west central Alberta,

Hessel et al. (1995) found that the airway dysfunction causing a degree of airway

obstruction occurred at respirable dust levels below the occupational standard of 5mg/m3. .

According to authors, histories of acute bronchitis and asthma were reported in a

significant number of workers with more than three years of employment in the sawmill.

Primary Hazardous/solid wastes:

In the lumber industry, sawmill workers and woodworkers are considered high risk for

contracting occupational asthma (Probable Occupational Asthma) (JOHNSON et al., 2000).

The association between exposure to wood dust and respiratory symptoms was examined

in mill workers by (Liou et al., 1996). The authors concluded that high levels of wood dust

exposure in the wood mill industries may cause pulmonary damage; engineering controls

and industrial hygiene were recommended. Total dust concentrations from grinding and

screening in the high exposure work areas ranged from 4.4 to 22.4mg/m3, and the

respirable proportions were between 2.4% and 50.2%. The dust level in sawing work was

2.9 mg/m3. These results are corroborated by Malo et al. (1994), who found that asthmatic

symptoms appeared to be of occupational origin in 59 % of workers after 30 months of

work.

Risks of nasal cancer and nonmalignant nasal pathology among woodworkers in North

America was reviewed in detail and contrasted with experiences in Europe and elsewhere

by Blot et al. (1997). Considering the totality of evidence on the risk of cancer in exposed

workers, it appears that wood-dust-related nasal adenocarcinoma essentially can be

8

eliminated in Europe and its occurrence prevented in the United States if wood-dust

exposures do not exceed an eight-hour, time-weighted average of 5 mg/m3 standard.

Zero waste of resources (energy, materials, and human),

In Canada, lumber drying accounts for a significant portion of the total energy used in

lumber production, and energy costs represent a large portion of production costs.

According to Natural Resources Canada (NRC) (2005), dry kilns consume an estimated

121 petajoules (PJ) of energy annually, 57% of which is fossil-fuel energy, and emit

roughly 3.5 MT/year of CO2. It is important to have kilns energy efficient. Evidently, this

not the case in Canada where a large percentage of the kilns used in the industry are aging

and not very energy efficient. A reduction in kiln energy consumption would allow the

sector to increase its competitiveness and to have a greener supply chain by decreasing

greenhouse gas (GHG) emissions. In fact, a reduction in energy consumption by 25% and

considering a 15% penetration rate would result in a 3.5 MT reduction in CO2 emissions

over twenty years (NRC 2005).

To reduce loss, the effective use of materials throughout the stages of lumber goods

production is examined, as is the reduction of raw material use by cutting down the amount

of wood used in products and their wrapping and packing. The target is the reduction of the

amount of resource depletion through the use of recycled materials.

Like the manufacturing industry, labor costs constitute a high percentage of expenses. The

waste of human resources could be measured by ratios of accident (number of work

accidents / number of employers), and absenteeism due to illness (number of days lost for

illness / number of work days x number of employees). In an Olympic lumber company,

ratios of accident and absenteeism would be near zero.

Zero waste in administration activities

Zero waste in administration

Considerable cost savings could be achieved by using resource-efficient products and good

environmental practices. Good practices should target energy-efficiency, waste reduction,

water conservation, and other resource-efficient practices for the environment. By taking

advantage of these practices, lumber companies can avoid resource waste and save money.

An Olympic lumber process should have a list of good practices and should encourage

employers and employees to respect them. For example, one workstation (computer and

monitor) left running after business hours, causes power plants to emit nearly one ton of

9

CO2 per year. That emission could be cut by 80% if the workstation is switched off at night

and set to “sleep mode” during idle periods in the day. If every computer and monitor in

the US was turned off at night, the nation could shut down eight large power stations and

avoid emitting seven million tons of CO2 every year (Nichols et al., 2001).

Zero use of toxics (Processes and Products)

The most toxic product used to protect wood is arsenic. In the 1970s, the lumber industry

introduced pressure-treated boards – ordinary planks and posts – injected with a

preservative known as CCA, which can extend the life of wood fivefold, eliminating

repairs and saving millions of trees annually. What received less attention at the time is the

fact that CCA stands for chromated copper arsenate--a form of arsenic. This has turned out

to be a problem.

No one knows precisely what concentrations of environmental arsenic are toxic, and the

wood-treatment industry insists that wherever that line is, its products do not cross it.

Environmental groups, however, disagree, insisting that at any dosage level, children and

arsenic don't mix. The alarm bells being sounded by consumer groups have reached the

point where CCA-treated lumber sold in the US now carries warning labels. Many

playgrounds have been shut down, and some states have been ordered to switch to another

preservative. In the US, 98% of outdoor wood is treated with CCA, and represents a

market of more than $4 billion a year (Kluger, 2001). In Canada, this process is the most

used, and remains the most important soil contamination source by arsenic (Environment-

Canada, 2005b).

Arsenic was found in the soil in nearby playgrounds at levels far higher than hazardous-

waste experts consider safe. Prolonged exposure can lead to nerve damage, dizziness, and

numbness, as well as increased risk of bladder, lung, and skin cancer. Therefore, an

Olympic lumber company would ban the use of arsenic in wood treatment.

Zero waste in product life cycle (Transportation, Use, and End-of-Life)

Green Input

An Olympic lumber company should receive wood from

forests carefully harvested. A well-managed timberland

respects habitats, wildlife, air, land, and water, and the

general forest ecosystem. Harvesting often results in more

(and more species of) birds and animals living in woodland.

10

Sustainable forests generate income while improving the environment. It is rooted in the

present and the future.

Whatever CCA's ultimate fate, the existing problem probably will remain when disposing

of treated wood with CCA. Dumping it in an unlined landfill allows arsenic to seep

underground; mulching it scatters CCA on the surface; and burning it fills the air with

toxic smoke. Leaving the structures to disintegrate on their own could take long time.

An Olympic green lumber supply chain would only use biodegradable input to assure a

green output.

Green output

Green output is obtained if green input is used through the supply chain in the lumber

processing. A green output could be assured by certification becoming an important tool

to demonstrate that the lumber company is operating according to a set of principles and

criteria determined by a particular certification program. In the wood industry, one result

of a study conducted in U.S. (Vlosky and Gazo, 2003) indicates a lack of significant

awareness of certification. An average of a third of respondents declared that they had no

understanding of the certifier services and objective. A third of of the respondents had not

heard of the certifiers.

Greenness effort to be an Olympic Lumber company

A lumber company does not easily reach the Olympic stage, which is why stages in the process

should be considered. The efforts utilised to reach the Olympic stage could be designated as

“greenness efforts,” and the company would receive recognition at each stage. We define

greenness efforts as the difference between regulated contaminant levels and average real

contaminant levels. If no regulations exist, the industry average should be considered. This

difference should be positive or equal to zero. This way, the lumber company must comply

with any regulations in place. Clearly, each greenness effort would have to be specific to

its region. Even in one country, it could vary from one region to another. In Canada, for

example, the regulation could vary from one Province to another.

4. Concluding remarks

This research defines the main characteristics of the green supply chain of a lumber

company, applying the framework developed by Lakhal and H’mida (2003). It develops

the concept of the Olympic green supply chain, characterized by five zeros recalling the

five-circled flag of the Olympics: zero emissions, zero waste of resources, zero waste in

11

activities, zero use of toxics, zero waste in product life-cycle, in addition to green input and

green output. This research can serve as the cornerstone of a green supply chain

assessment mechanism, where practical solutions may be generated to improve greenness

levels in supply chain operations. This research aims at ensuring the sustainable

development of the Canadian lumber companies’ sector, and at maximizing its contribution

to the economic and social well-being of the Canadian nation.

Acknowledgements

This research was funded by the Social Sciences and Humanities Research Council of

Canada (SCHRC) 410-2004-1384, the New Brunswick Innovation Foundation (FINB), the

Society of Management Accountants of Canada (CMA), and Université de Moncton,

Canada.

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