Greening Supply Chain - Improving supply chain governance with sustainable supply chain model

• By: Ramesh Srinivasan, Manager MetricStream Inc
• Date: December 07, 2009

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• Conventional costs - Material, labor, other expenses, and revenues that are commonly allocated to a product or process.
• Potentially Hidden - Expenses incurred by and benefits to the firm that are not typically traced to the responsible products or processes, e.g., supervisor salaries and safety training courses.
• Contingent - Potential liability or benefit that depends on the occurrence of a future event, e.g. potential occupational health and clean-up costs related to a spill of a hazardous substance.
• Image/Relationship - Costs/benefits related to the subjective perceptions of a firm’s stakeholders, e.g., a community group’s resistance to a plant expansion or an insurer’s concern about the lack of a formal environmental management system.
• External - Costs/benefits of a company’s impacts upon the environment and society that do not directly accrue to the business, e.g., the benefits of reduced traffic congestion from a company’s telecommuting program.

By taking into account the above costs, a company cannot only save potentially hidden expenses but also save the image of their product. For instance:

• Purchasing and Inbound: GM reduced its disposal costs by $12 million by establishing a reusable container program with its suppliers.
• Production: Commonwealth Edison, a major electric utility company, realized $25 million in financial benefits through more effective resource utilization.
• Outbound and Distribution: Andersen Corporation implemented several programs that reduced waste at its source and had internal rates of return (IRR) exceeding 50%.

• Reverse Logistics: Public Service Electric and Gas Company saved more than $2 million in 1997 by streamlining its inventory process to avoid product obsolescence and disposal

Decision-Making Framework

While the potential benefits are significant, relatively few companies are pursuing the opportunity to improve their financial and environmental performance by explicitly addressing environmental costs. A clear, simple framework can help companies adopt Green Supply Management System.

By following the four-step framework companies can pinpoint and understand the costs and environmental impacts that result from materials management decisions.

Identify Costs: A systematic review of the facility or process is conducted to determine if and where significant environmental costs occur.

Determine Opportunities: The identified functional areas and processes are evaluated to determine which changes will likely yield significant cost savings and reduce environmental impacts. Potential changes are evaluated with criteria that can include the magnitude of potential cost improvement, the types of environmental burdens, and the barriers to change. This step yields a possible set of alternatives with significant potential for improving costs savings and reducing environmental impacts.

Calculate Benefits: Quantitative, and qualitative, analyses of the costs and benefits of a selected group of projects are conducted. Some of the analytical tools and methods used during this step are activity based costing approaches, net present value (NPV) calculations, and risk evaluations. The result is a
summary of the merits of the current process and any proposed alternatives.

Decide, Implement, and Monitor: First, a decision is made to continue with the status quo or to pursue a new approach. Financial benefits and/or environmental improvements then occur as changes are put into action. The new practices are institutionalized as information collection processes are integrated into the company’s materials resource planning (MRP II), enterprise resource planning (ERP) systems, and other information systems. After implementation, a periodic review and continuous improvement effort allows decision makers to evaluate their progress and pursue additional opportunities.