Linking Supply Chain Management to Environmental Management: A Country-Level Analysis

Honor Thesis Proposal

Candidate: Zhimin MaoAdvisor: Stephan Vachon

March 7, 2006

***Do not quote or post without permission from the Zhimin Mao and Stephan Vachon

Linking Supply Chain Management to Environmental Management: A Country Level Analysis

1. Introduction

With the planet population expected to grow to 8 billion in 2020, consumption will inherently increase, creating pressure on all industries to supply more goods and services and, therefore, creating strain on the natural environment. Over the last decade, increasing awareness regarding climate changes and natural resource depletion has been evident across several industries and in the population. For example, international agencies and national governments have met regularly to establish goals regarding ozone depletion, gas emissions, and waste reduction (e.g., Kyoto meeting of 1997). One consequence of this general awareness regarding the natural environment is a greater scrutiny of manufacturing organizations’ operations and supply chain practices by different stakeholders groups. The impact of manufacturing organizations on the natural environment should not be studied from an isolated perspective but rather by explicitly recognizing the critical role of upstream and downstream organizations in the supply chain [1, 2].

Several studies linking supply chain management to the natural environment has been published in recent years [3-8]. Most of these studies have considered the manufacturing plant or the firm as the unit of analysis and rarely have they made an assessment of the entire supply chain particularly when survey methodology was adopted. This thesis departs from the usual supply chain studies by considering aggregate data at the country level. It contributes to the existing literature in two ways. First, it develops the concept of a country’s supply chain strength. Supply chain strength is defined as the availability and quality of local organizations that are composing/part of the supply chain. Second, it empirically tests the relationship between a country’s supply chain strength and different national environmental management indicators.

There are three additional sections to this thesis proposal. Next, the literature leading to the conceptual development of supply chain strength and its linkage to environmental management is reviewed. The methodology, which includes the presentation of the data employed and the construction of the variables needed for the analysis, is found in Section 3. Also, in Section 3, preliminary results from the analysis are presented and briefly discussed. A timeline for the completion of the thesis is proposed in the last section.

2. Literature Review

The relationship between supply chain management and the natural environment has been researched under different terminologies such as green purchasing [9], reverse logistics and reverse supply chain [10, 11], product stewardship [12], and green supply chain [5, 13]. Despite this increasing interest, the literature mainly focused on manufacturing organizations and their immediate links in the supply chain (i.e., suppliers and customers). Accumulated knowledge from that body of literature supports the fact

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that inter-organizational activities, whether upstream with the suppliers or downstream with the customers, are associated with sound environmental management and better environmental performance. Despite the fact that a country’s (or region) industrial profile is always central to corporate decisions and is fundamental to economic development and/or growth [14], very little research has investigated the linkage between a country’s industrial supply chain and its environmental performance or practices. The failure in the literature to conduct that kind of investigation can be explained by the lack of a clear definition or concept regarding ‘supply chain’ for such a unit of analysis. This section proposes the concept of supply chain strength to define the state of supply chains in a country. A second objective of this section is to present the argument and theoretical development leading to the relationship between supply chain strength and environmental management indicators.

2.1. Toward a Conceptualization of a Country’s Supply Chain Strength

Networks of corporations existing in a nation are not stranger to the concept of economic clusters [15, 16]. In fact, clusters are defined as a critical mass of organizations (private and publics) and the presence of synergy within a particular industry. Such synergy, speared by intense competition and quality suppliers, creates a rich operating context providing a competitive advantage to firms operating in that cluster. Well known American clusters include the electronic/IT industry in the Silicon Valley, the automotive industry in Michigan, and the cinematographic industry in Southern California. In this thesis, the notion of clusters is focused on two important stakeholder groups; the suppliers and the customers. In other words, the focus is on the supply chain.

Hence, building on the principles of economic clusters the concept of supply chain strength is defined as the richness of a nation’s industrial and commercial networks. Two major dimensions compose the value or richness of networks: (i) the availability of the suppliers and of the presence of sizeable markets, and (ii) the quality of the organizations composing the network, that is the production/operations capabilities of the suppliers and the sophistication of the customers. In network theory terms these two dimensions correspond to the number of ties (direct and indirect) and the value of these ties [17]. Therefore, supply chain strength aims to characterize the local (or domestics) organizations in the supply base as well as in the distribution channel.

2.2. Linking Supply Chain Strength to Environmental Management One of the main objectives of this thesis is to evaluate the impact of supply chain strength on the natural environment. Hypotheses linking supply chain strength to environmental management are theoretically developed making references to the existing literature in supply chain management and strategic management. These hypotheses are made along three dimensions of environmental management: (i) the degree of adoption of environmental systems by a country’s corporations, (ii) the level of environmental innovation in a country, and (iii) a country’s environmental performance.

In recent years, more responsibilities regarding supplier’s practices have been assigned to buying corporations. For instance, Nike was associated in the 1990s with the child labor practices of its contract manufacturers in East Asia putting the American

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sportswear company in a precarious situation and resulting in declining sales. Nowadays, corporations need to implement control and monitoring activities to assure that their suppliers act in socially responsible manner. This is usually part of a due diligence and risk minimization strategy. However, as the number of suppliers in a supply network increases, the degree of control and monitoring activities, particularly associated with environmental management increases [13]. It is not rare for a corporation to reduce that load of activities by requiring suppliers to adopt particular environmental management systems such as ISO 14001 [18] or to participate into a voluntary industry program such as the Responsible Care code of conduct in the chemical industry [19].

On the other hand, corporate environmental management that includes such activities as adopting an environmental management system (e.g., ISO 14001) or participating in an industry voluntary code of conduct can yield significant advantage such as better quality and improved productivity [20, 21]. Hence, in supply chain where quality suppliers compete and sophisticated customers dictate the market conditions, proactive environmental management become a way to differentiate or to be more cost competitive [22]. Hence, a link can be made between the characteristics of a supply chain and environmental management practices in a country.

H1: As supply chain strength increases in a country, proactive environmental management is increasingly adopted by the organizations of that country.

The number of network ties and the quality of these ties are two variables that were positively associated with technological innovation [17]. For instance, collaboration with suppliers and customers has been linked to the adoption of the pollution prevention and innovative environmental technologies [2, 23]. Geffen and Rothenberg [24] found a link between environmental innovation and supplier involvement in the buying organization processes. Such involvement is not possible without suppliers having strong production/operations capabilities.

H2: As supply chain strength increases in a country, environmental innovation in that country will be higher.

Supply chain strength also means that manufacturing performance is improved (e.g., costs, quality, delivery and flexibility) [23]. Such improvements are also acknowledged to benefit the natural environment [25]. This correlation between environmental and manufacturing performance was develop under the premises set by the Porter Hypothesis [20] and the theoretical development of the natural-resource-based view of the firm [26]. Furthermore, the positive relationship between environmental performance and financial indicators is now widely accepted [27-29]. For example, Vachon and Klassen [23] found evidences that green partnership in the supply chain, whether with customers or with suppliers, were positively associated with quality, delivery and flexibility performance in organizations in the package printing industry while improving environmental performance.

H3: As supply chain strength increases in a country, environmental performance is also improving in that country.

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3. Methodology and Analysis

The hypothesized relationships were tested using two international datasets: (i) The Global Competitiveness Report: 2004-2005 [30] and (ii) the 2005 Environmental Sustainability Index [31]. The Global Competitiveness Report 2004-2005 is an annual publication of The World Economic Forum (WEF) which provides the most up-to-date data source for 104 countries on their comparative strengths and weaknesses. Using a common survey instrument, this report examines factors affecting and economy’s business environment and its ability to sustain economic growth. Special attention was paid on the macroeconomic environment, the quality of public institutions which underpin the development process, and the level of technological readiness and innovation. The 2005 Environmental Sustainability Index is a composite data base which examines 21 elements of environmental sustainability covering natural resource endowments, past and present pollution levels, environmental management efforts, contributions to protection of the global commons, and a society's capacity to improve its environmental performance over time.

3.1. Dependent Variables: Environmental Management Indicators

A total of ten indicators assessed a country’s environmental management over the three dimensions: (i) the adoption of environmental systems, (ii) environmental innovation, and (iii) environmental performance.

3.1.1. Adoption of environmental systems

Three indicators were used to assess the degree of environmental management: (i) the number of ISO 14001 certified facilities in a country, (ii) the degree of participation in Responsible Care (chemical industry), and (iii) the prevalence of corporation environmental management.

The first indicator is measured by the number of ISO 14001 certified facilities normalized by the size of the economy (GDP adjusted for the purchasing power parity) in each country. The second indicator of environmental management system measure the level of participation in the Responsible Care Program as provided by the Chemical Manufacturer's Association and reported in the Environmental Sustainability Index [31].

These two ‘hard’ numbers indicators are supplemented by a perceptual variable using data from the Global Competitiveness Report [30]. This perceptual variable, termed corporate environmental management, was constructed from seven items that assess the prevalence of different environmental practices in corporation on a scale from one to seven (see Appendix A). The seven items were tested for internal reliability and have a Cronbach-α of .982, which is above the recommended threshold of .70 for new constructs [32]. An exploratory factor analysis (with varimax rotation) using all seven items suggests that the items were loading on one dimension with all factor loadings above .93 and variance extracted exceeding 90% (Table 1). The average of the items was computed to form the corporate environmental management variable and subsequently used for analysis.

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INSERT TABLE 1 ABOUT HERE

3.1.2. Corporate and industrial innovation

Two indicators were used to assess the degree of environmental innovation. Both variables are excerpted from the Environmental Sustainability Index [31]. Knowledge creation measures the level of knowledge creation in environmental science, technology, and policy. It is an index developed from data compiled at the Yale Center for Environmental Law and Policy. The second indicator is from the World Economic Forum Survey and constituted the result of a principal component analysis on items of the survey conducted in 2004.

3.1.3. Environmental performance

Five indicators, namely waste recycling rate, generation of hazardous waste, water pollution, energy efficiency, and greenhouse gas emission, are measuring a country’s environmental performance. The generation of hazardous waste measures the level of hazardous waste. The water pollution measures the industrial organic water pollutant (BOD) per available freshwater. The greenhouse gas emission measures the carbon emissions per million US dollars GDP.

3.2. Supply Chain Strength

A total of six related items were used to measure a country’s supply chain strength (see Appendix A). These items measures the sophistication of the local buyer, the avialability and quality of the local supplier, as well as the state of local cluster development. This last item reflect the size and depth of economic clusters as judged by the respodents. All six items were tested for internal reliability (Cronbach-α = .964). An exploratory factor analysis (with varimax rotation) using all the items suggests that they were loading on one dimension with factor loading all exceeding .87 (Table 2). Subsequently, the average of the items was used as a metric for the supply chain strength.

INSERT TABLE 2 ABOUT HERE

3.3. Control Variables

Three variables were used to control for other factors which could influence the dependent variables. These variables are population, population density, and economic wealth.

First, the population is a good indication of a country size and as such should be included to control for size in the analysis. Using the size of the unit of analysis in environmental management is current and usually takes the form of the number of employees in a plant or in a company. Because countries population vary greatly (e.g., China vs. Canada), it was transformed using the natural logarithmic of the population for each country [33]. Second, the population density gives the direct measurement of a country’s population pressure on a country’s natural environment. For instance, it is a

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good proxy for the degree of urbanization and environmental stress coming from the population.

Finally, economic wealth is an important variable to be included as it reflects different competitive pressures and, therefore, different in environmental priorities. For instance, in advanced economies like the United States, strong governmental agencies are monitoring activities and legislating corporate impact on the natural environment: that is most likely not the case for emerging economies such as China.

3.5. Preliminary Results

Bivariate correlations for all the variables are reported in Table 31. It is noteworthy that seven out the ten dependent variables are significantly correlated with supply chain strength. However, two of those correlations are surprisingly negative suggesting that supply chain strength is detrimental. The correlation table also reveals the potential for collinearity in the regression as the supply chain strength variable is highly correlated with GDP per capita (.77, p < .05).

INSERT TABLE 3 ABOUT HERE

The hypotheses were tested using multiple ordinary-least-squares (OLS) regression analysis. To eliminate the influence from the strong positive association between GDP per Capita and Supply Chain Strength, two different regressions for each dependent variable were run. First, the regression was run using only the three control variables. Second, the supply chain strength variable was added to the model. Such hierarchical linear regression allows assessing explicitly the impact of supply chain strength on the environmental management. Preliminary results provide strong support for Hypothesis 1 with supply chain strength being significantly and positively linked to the participation to Responsible Care and Corporate Environmental Management. We also found similar support for Hypothesis 2. However, the linear regression analysis confirms the mixed results provided by the correlation in regards to environmental performance, hence, for Hypothesis 3.

At this point, we still believe that the high correlation between supply chain strength and the GDP per capita can be problematic. Therefore, more refine analyses are planned. For instance, we are investigating the possibility to use an approach similar to a two-stage-least-square (2SLS) estimator rather than a simple OLS. That approach, inspired by King and Lenox [29], would first compute the residuals from an OLS using supply chain strength as a dependent variable and GDP per capita as an explanatory variable. The residuals would then be used as a proxy for supply chain strength in the analysis of environmental management.

4. Timeline

1 Dependent variables were coded so that higher the value better it is for the natural environment. For example, the greenhouse emission variables, which was initially measured to reflect worst environmental performance as it increases was transformed to reflect better performance as the variable increases.

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The thesis should be completed by the end of the 2006 summer. Professor Vachon, while taking a position at HEC-Montreal in June 2006, will remain the thesis advisor through its completion. The content of the thesis will also be submitted for publication in an academic journal: an extended abstract is currently under review for Journal of Cleaner Production. The journal Editor’s assessment regarding the paper suitability for the journal is imminent. If accepted, a full paper will be required September 1, 2006. If not accepted, a paper will be submitted to one of the following journals in August 2006: Environmental Science and Policy, Journal of Environmental Management, Organization and Environment.

Spring 2006 Complete/refine data analyses. Complete/refine the literature review.

Summer 2006 Draft of the thesis (to be completed by July 1) Working paper ready for journal submission (to be completed by August 1) Final draft of thesis (by September 1)

Fall 2006 Presentation (defense) of the thesis (by October 15) Corrections and extensions if needed (October-November) Final submission (by December 15)

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Appendix A

Corporate Environmental Management

10.08 In your country, environmental marketing, eco-labeling, and other efforts to respond to “green” consumer demand are (1 = unimportant, 7= widespread and profitable)

10.09 How many companies in your country adhere to environmental management systems such as ISO14000? (1 = almost no companies, 7 = most companies)

10.10 Corporate environmental reporting in your country is ( 1 = nonexistent, 7 = widespread)

10.11 Companies in your country consider cleaner production, material flow management, waste reduction and recycling, and life cycle management of products to be (1 = irrelevant, 7 = important)

10.12 In your country, energy efficiency and the transition to new and renewable sources of energy is (1 = a low priority, 7 = a high priority)

10.13 Business planning in your country now considers long-term factors such as global climate change and other environmental risks to be (1 = unimportant, 7 = important )

10.14 Socially and environmentally responsible investing in your country is ( 1 = absent, 7 = frequent)

Supply Chain Strength

7.04 Buyers in your country are (1 = slow to adopt new products and processes, 7 = actively seeking the latest products, technologies and processes)

8.01 Buyers in your country are (1 = unsophisticated and make choices based on the lowest price, 7 = knowledgeable and demanding and buy based on superior performance attributes)

8.02 Local suppliers in your country are (1 = largely nonexistent, 7 = numerous and include the most important materials, components, equipment, and services)

8.03 The quality of local suppliers in your country is (1 = poor, as they are inefficient and have little technological capability, 7 = very good, as they are internationally competitive and assist in new product and process development)

8.06 How common are clusters in your country? (1 = limited and shallow, 7 = common and deep)

8.07 Collaboration in your clusters with suppliers, service providers and partners in your country is (1= almost nonexistent, 7 = extensive and involves suppliers, local customers, and local research institutions)

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References

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[14] M. E. Porter, "The Adam Smith Address: Location, Clusters, and the 'new' Microeconomics of Competition," Business Economics, vol. 33, pp. 7-13, 1998.

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[29] A. King and M. Lenox, "Exploring the Locus of Profitable Pollution Reduction," Management Science, vol. 48, pp. 289-299, 2002.

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Table 1Rotated factor matrix on corporate environmental managementa

Items Corporate Environmental ManagementV10_08 0.959V10_09 0.934V10_10 0.951V10_11 0.971V10_12 0.963V10_13 0.930V10_14 0.956Cronbach α 0.982Variance Extracted 0.906

a Extraction method: principal component analysis. Rotation method: varimax with Kaiser Normalization.

Table 2Rotated factor matrix on supply chain strengthaItems Supply Chain StrengthV7_04 0.941V8_01 0.940V8_02 0.933V8_03 0.949V8_06 0.872V8_07 0.927Cronbach α 0.964Variance Extracted 0.860

a Extraction method: principal component analysis. Rotation method: varimax with Kaiser Normalization.

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Table 3Correlation

Variables 1 2 3 4 5 6 7 8 9 10 11 12 13

Environmental Management

1 ISO14001 Adoption -

2 Responsible Care .28* -

3 Environmental Managementa .16 .60* -

Corporate Innovation

4 Innovation Index -.06 .09 .09 -

5 Environmental Innovation .14 .47* .86* .10 -

Environmental Performance

6 Recycle Rate .13 .61* .77* .14 .63 * -

7 Hazard -.14 -.17 -.30* -.15 -.22 -.26 -

8 Water Pollution -.02 -.15 -.25* .06 -.27* -.06 -.01 -

9 Energy Efficiency -.02 -.13 -.02 -.13 .00 .20 .09 -.15 -

10 Green House Gas Emission .12 .31 * .28* .18 .35 * .34 * -.02 .07 -.57* -

Supply Chain Strength

11 Supply Chain Strength b .15 .64 * .90 * .03 .84* .74 * -.28 * -.33* .12 .23 * -

Control Variables

12 Population c -.05 .07 .08 -.10 .00 -.02 -.38 * .03 .07 -.18 .15 -

13 Density -.07 .08 .11 -.09 .12 .20 -.06 -.42 * -.07 .05 .22* -.03 -

14 GDP per Capita d .22 * .64 * .73* .01 .70 * .82* -.22 -.24* .14 .31* .77* -.11 .19

* p-value < 0.05 a Mean of 10.08, 10.09, 10.10, 10.11, 10.12, 10.13, 10.14 in section X of The Global Competitiveness Report (2004-2005)b Mean of section 7.04, 8.01,8.02, 8.03, 8.06, 8.07 of The 2005 Environmental Sustainability Indexc Natural logarithmic transformation of population for each countryd Natural logarithmic transformation of GDP per Capita for each country