United States

Environmental

Protection Agency

Office of Pollution

Prevention and Toxics

(MC-7409)

Washington, D.C. 20460

EPA 742-R-00-001

January 2000

The Lean and Green

Supply Chain:

A Practical Guide for

Materials Managers and

Supply Chain Managers to Reduce Costs

and Improve Environmental

Performance

INTRODUCTION FRAMEWORK SUCCESSES CONCLUSION GLOSSARY REFERENCES INDEX COSTS & BENEFITS
Steve Anderson, Kerr, Greiner,

Anderson & April, Inc.

Rick Boike, Endura Software Corporation

John Claussen, Chemical Strategies

Partnership

Louis DelGeorge, Commonwealth

Edison Company

David Eagleson, LFR Technologies

Patrick Ferguson, 3M

Robert Handfield, Michigan State

University

Sean Harrison, Kaiser Permanente

Ed Huller, Dow Chemical

Dave Kling, U.S. Environmental

Protection Agency

Jeff Lime, Delta Consolidated Industries

Clare Lindsay, U.S. Environmental

Protection Agency

Ed Marien, University of Wisconsin

Peter Moor, LFR Technologies

DISCLAIMER

This report refers to environmental accounting activities at several companies in

North America. These examples by no means exhaust the many laudable efforts

under way at firms in multiple industries. Moreover, EPA and the report’s reviewers

do not necessarily endorse the example approaches, the terminology, or the

products mentioned in the document.

ACKNOWLEDGMENTS

This document was prepared for the U.S. Environmental Protection Agency’s Office of

Prevention, Pesticides, and Toxic Substances by Battelle Memorial Institute under Contract

Numbers 68-D5-0008 and 68-W-99-033. The primary author was Jeff S. McDaniel of

Battelle. Joseph Fiksel, Battelle’s Project Manager, also wrote portions of the report.

Susan McLaughlin was EPA’s Work Assignment Manager and contributed to the

writing of the report.

EPA and Battelle sincerely appreciate the reviews of drafts and other assistance

provided by the following individuals:

Katherine O’Dea, Business for Social

Responsibility

Dale Olson, Andersen Corporation

David Peterson, Lynchburg College

Kristin Pierre, U.S. Environmental

Protection Agency

Robert Pojasek, Pojasek &

Associates

Mike Pregent, Ashland Chemical

Company

Ken Sandler, U.S. Environmental

Protection Agency

Karen Shapiro, Tellus Institute

Tom Tramm, Commonwealth Edison

Company

Leanne Viera, IBM Supply Chain

Optimization Practice

David Vogel, The Gauntlett Group

Tom Votta, Tellus Institute

Steve Walton, Emory University
THE LEAN AND GREEN SUPPLY CHAIN iii

OVERVIEW

Companies are changing how they

manage their supply chains.a Rigid,

arms-length, customer-supplier

relationships are giving way to alliances

with upstream and downstream trading

partners. For example, many companies have suppliers automatically

replenish their inventory. Other

companies outsource product design

and development to key suppliers.

Direct interaction with supply

chain partners can enable a

company to reduce total inventory

levels, decrease product obsolescence, lower transaction costs,

react more quickly to changes in

the market, and respond more

promptly to customer requests.

Essential to supply chain performance

is improving the effectiveness of

materials management—the set of

business processes that support the

complete cycle of material flows from

purchasing and internal control of

production materials, through planning

and controlling work in process, to

warehousing, shipping, and distributing

finished products.1 Managers can

improve their materials management

performance by first understanding

how their decisions affect the purchasing, storage, handling, and asset

recovery activities throughout their

organization. Another key component of

supply chain management is logistics—

the activities to obtain incoming materials

and distribute finished products to the

proper place, at the desired time, and in

the optimal quantities. Companies can

greatly improve business performance by

working with suppliers, shippers,

distributors, and customers to better

coordinate logistics activities.

Companies of all sizes are further

enhancing these fundamental supply

chain changes by considering the

environmental impact — and

related bottom-line effects — of

their decisions and actions. They

have increased their competitiveness by

engaging in such environmental performance-enhancing activities as

■ Reducing the obsolescence and waste

of maintenance, repair and operating

(MRO) materials through enhanced

sourcing and inventory management

practices

■ Substantially decreasing the costs

associated with scrap and material

losses

■ Lowering the training, material

handling, and other extra expenses

associated with hazardous materials

■ Increasing revenues by converting

wastes to by-products

■ Reducing the use of hazardous

materials through more timely and

accurate materials tracking and

reporting systems

a

Several key terms are defined in the Glossary.

The first usage of each term is italicized.
iv THE LEAN AND GREEN SUPPLY CHAIN

■ Decreasing the use and waste of

solvents, paints, and other chemicals

through chemical service partnerships

■ Recovering valuable materials and

assets through efficient product take

back programs.

Yet, despite the potential for

significant financial gains, most

supply chain managers currently

do not focus on environmental

concerns. One reason for this is

that cost accounting systems

typically hide the frequency and

magnitude of the “environmental

costs” that companies incur. While

raw material and labor costs are

directly allocated to the appropriate

product or process, other costs are

accumulated into overhead accounts,

which are allocated proportionally

(e.g., based on the number of units

manufactured) to all products,

processes, or facilities. This allocation

method might be appropriate for many

overhead costs, such as rent and upper

management salaries. However, this

approach can lead to inaccurate

costing and ineffective decisions when

significant costs—waste disposal,

training expenses, environmental

permitting fees, and other environmental costs—are not allocated to the

responsible products and processes.

For these reasons, supply chain

managers often cannot achieve their

overall objectives unless they tackle

important environmental concerns.

Many companies have tackled

this issue by using environmental

accounting techniques to substantially reduce supply chain costs.

With these costing methods, companies

can systematically identify environmental

costs throughout the supply chain, e.g.,

costs associated with management of

hazardous materials, which typically are

not captured through conventional

accounting methods. Once the costs

(or potential benefits) have been

identified, companies can analyze the

cost drivers and evaluate alternative cost

reduction opportunities.

A number of companies have successfully applied environmental accounting

methods to supply chain management

decisions. Some examples from wellknown companies include:

■ GM reduced its disposal costs by

$12 million by establishing a

reusable container program with its

suppliers.

■ Commonwealth Edison, a major

electric utility company, realized

$25 million in financial benefits

through more effective resource

utilization.

■ Andersen Corporation implemented

several programs that reduced waste

at its source and had internal rates

of return (IRR) exceeding 50%.
THE LEAN AND GREEN SUPPLY CHAIN v

■ Public Service Electric and Gas

Company saved more than

$2 million in 1997 by streamlining

its inventory process to avoid

product obsolescence and disposal.

On a similar note, many companies are

also benefitting from chemical service

programs through which they

outsource such responsibilities as

chemical

inventory

management,

distribution,

training, and

waste management. Companies in industries as varied as

the semiconductor, automotive, and

aerospace industries have achieved

enormous materials management cost

reductions, reduced production

downtime, and significantly decreased

solid waste and air emissions.2

Significant savings are possible because

the costs to manage chemicals often

range from 100% to 1000% (and

sometimes up to 1500%!) of the costs

to buy these materials.3 With the help

of the chemical service provider’s

expertise, environmental gains are

coupled with substantial operating cost

savings to achieve win-win improvements.

The key to achieving these improvements is changing the company

decision-making processes to incorporate environmental information. This

guidebook provides a four-step

framework for identifying and

using environmental information

to improve financial performance.

Supply chain efficiency and cost

reduction programs will not fully

succeed

unless

managers

consider

critical

environmental, health,

and safety

activities.

These steps

include leveraging existing processes

and systems, such as materials

resource planning (MRP II) systems.

Some helpful models and checklist

questions are also provided. For

example, to improve inventory management, supply chain managers can apply

an improved inventory management

model, the Revised Economic Order

Quantity (pages 26-27). By applying

the four-step framework and supporting

tools, managers can enhance efforts to

improve operational efficiency and

increase stakeholder satisfaction.

This guidebook synthesizes the best

practices of leading U.S. companies

who have saved millions of dollars

while reducing or eliminating significant environmental impacts.
vi THE LEAN AND GREEN SUPPLY CHAIN

The purpose of this guidebook is

to demonstrate the opportunities

for improving both financial and

environmental performance and

to briefly review specific tools and

methods. To achieve this goal, the

guidebook is organized into eight

sections:

■ The Introduction presents some of

the most significant opportunities for

simultaneously improving environmental and financial performance.

■ In Environmental Costs &

Benefits, problems of traditional

accounting systems are described

and environmental costs and

benefits are delineated.

■ The Decision-Making Framework defines the four-step process

to improve environmental accounting efforts.

■ The Materials Management

Success Story illustrates some of

the benefits achieved and specific

actions taken by one leading

company.

■ The Conclusion summarizes the

four-step approach to improving

financial and environmental

performance.

■ The Glossary, Bibliography, and

References explain important terms

and provide additional sources of

information.
THE LEAN AND GREEN SUPPLY CHAIN vii

TABLE OF CONTENTS

1

6

12

12

13

14

17

20

24

29

30

31

32

32

33

35

39

46

Introduction

Environmental Costs & Benefits

Decision-Making Framework

The Four Steps: An Overview

A Good Start

Step 1: Identify Costs

Step 2: Determine Opportunities

Step 3: Calculate Benefits

Step 4: Decide, Implement, and Monitor

Materials Management Success Story

Materials Tracking

Team Approach

Life Cycle Cost Analyses

Results!

Conclusion

Glossary of Key Terms

Bibliography and References

Index
viii THE LEAN AND GREEN SUPPLY CHAIN

Table 1 : Supply Chain Improvements

Figure 1 : Misallocation of Environmental Costs

Figure 2 : Improved Allocation

Table 2 : Cost Hierarchy

Table 3 : Examples of Environmental Costs and Benefits

Figure 3 : Decision-Making Framework

Figure 4 : Pareto Diagram

Table 4 : Andersen’s Financial Analysis

TABLES AND FIGURES

4

7

7

8

10

12

20

25
THE LEAN AND GREEN SUPPLY CHAIN 1

INTRODUCTION

INTRODUCTION

The materials management activities

within most companies are undergoing

fundamental changes. Companies are,

among other

things, reducing

their supplier

base, forming

partnerships with

key suppliers, and

implementing lean

manufacturing

methods.

The purpose of these supply chain

initiatives is to reduce both costs and

wastes. Conventional decision-making

approaches commonly overlook or

inadequately represent the costs and

benefits that may occur in departments

outside the decision-maker’s area. For

example, a purchasing agent can often

reduce material procurement costs by

switching to a new, lower-price

supplier. In some cases, this change

increases overall production costs,

even though the engineering group may

approve the switch. For example, if the

new supplier uses excess packaging,

the increased disposal costs could

exceed the procurement savings. In

contrast, proactive purchasing

managers are reducing costs by

conducting value analyses of

materials to minimize the firm’s

overall costs, forming costreducing supplier partnerships,

demanding less or reusable

packaging and influencing the

material specification processes.

These expenses are critical, because

the costs to purchase,

handle, store, and

dispose of materials

represent some of the

largest operating

expenses for most

manufacturing

companies. Companies can increase

their competitiveness by developing more efficient, responsive

supply chain processes. This is

evident from the massive efforts that

automotive, chemical, and other

companies are expending to implement

enterprise resource planning (ERP)

systems and to change their relationships with both suppliers and customers.

Many companies are striving to

improve their logistics and materials

management processes, but important

environmental burdens usually are

not addressed. While these considerations may seem to be a more appropriate focus for the Environmental,

Health, and Safety (EH&S) group than

for materials managers, a number of

companies have saved millions of

dollars by addressing difficult-to-spot

materials management expenses such

as inefficient material handling steps

that unnecessarily lose excessive

materials to air and water. In fact, the

Within most companies,

significant opportunities

exist to improve the

overall use and flows of

materials.
2 THE LEAN AND GREEN SUPPLY CHAIN

INTRODUCTION

bulk of the activities that are considered the responsibility of EH&S are

actually due to the operational activities

under the purview of supply chain

managers. Those managers who

overlook the EH&S elements of

their activities are probably

overlooking opportunities to

increase the responsiveness and

efficiency of the supply chain. As

highlighted in Table 1 (page 4), Intel,

Andersen Corporation, 3M, Commonwealth Edison (ComEd), and other

leading companies have improved their

purchasing, material handling, storage,

material recovery, disposition, and

product take back processes through

environmental accounting initiatives.

While these success stories are drawn

from several industries, the common

thread is a

proactive,

rigorous

effort to

incorporate

environmental considerations into

decisionmaking

processes.

Substantial

improvements

are feasible because environmental

management problems are, to a large

degree, material-driven. For example,

the types and costs of wastes, the

significance of regulatory constraints,

and the risks of improper handling are

all dependent upon which materials are

purchased and used within a facility.

This guidebook is intended to help

companies adopt these emerging

practices in order to improve both

economic and environmental performance. A four-step decisionmaking framework is presented

that can guide a company’s effort

to address the costs and benefits

occurring not only in a specific

facility or functional area, but also

throughout the supply chain.

These practices can be integrated with

other high-priority initiatives, including

programs to form supplier partnerships, improve overall quality levels,

and reduce inventory carrying costs.

For example, a

number of companies

have worked with

suppliers to eliminate

unnecessary packaging and reduce

hazardous materials

quantities. In fact,

some companies are

significantly improving both their

environmental profile

and profit margins by

taking a strategic approach to purchasing. They are asking suppliers (and

their suppliers’ suppliers) to evaluate

and lower environmental costs. These

approaches show that environmental

Andersen Corporation, Intel,

Commonwealth Edison, GM,

and 3M have improved their

operating efficiency by

integrating environmental

considerations into key

materials management

decisions.
THE LEAN AND GREEN SUPPLY CHAIN 3

INTRODUCTION

insights can improve core business

processes. Table 1 illustrates how

strategic innovations in several core

business practices have improved both

the financial and environmental

performance of their supply chain.

In each of the Table 1 illustrations, the

roles of purchasing, inventory, or other

supply chain managers were pivotal.

For example, at Public Service Electric

and Gas (PSE&G), the Materials

Management Team led the effort to

reduce disposal and other costs.4 The

team determined that the utility

company was overpurchasing numerous products and inefficiently storing

them in several locations within each

facility. The net result was unused,

excess materials that wasted storage

space and eventually required disposal.

The PSE&G Materials Management

Team first analyzed its inventory supply

chain, particularly for its chemical

commodities and paints. The inventory

analysis revealed that each facility

purchased materials separately from

many suppliers. Since most suppliers

encouraged purchasing in bulk, the

facilities often had excess product.

Leftover inventory was eventually sent to

PSE&G’s central resource recovery

facility where materials were sorted,

sent to disposal facilities, or, if possible,

sold. The company realized that it

could avoid the costs of sorting,

disposing, and finding buyers for excess

inventory by simply improving its

purchasing practices.

The Materials Management Team

narrowed PSE&G’s list of suppliers from

over 270 to only nine. As part of the

long-term agreements that the company

established with these select suppliers,

the suppliers agreed to track the

inventory that each PSE&G facility

purchased. Thus, whenever purchasing

agents from one plant called to order

products, the vendor would check to

see if another PSE&G facility already

had the material in stock. The suppliers also committed to take back any

extra, obsolete, or discontinued

products. (Usually they are able to sell

these materials to other customers.) By

placing the responsibility on its

suppliers, PSE&G eliminated the

disposal of unused, excess products

and, in doing so, reduced operating

costs and environmental burdens.
4 THE LEAN AND GREEN SUPPLY CHAIN

INTRODUCTION

bWhile this guidebook focuses on environmental improvements, the framework and tools are equally

applicable to health and safety issues, e.g., injuries and subsequent workers’ compensation claims that

result from materials handling.

Table 1: Supply Chain Improvementsb

INNOVATION RESULTS

By providing incentives for suppliers to

reduce material quantities and by

leveraging the suppliers’ expertise,

these companies have achieved

substantial savings and reduced wastes.

Chemical management providers are

no longer compensated based on the

volume of chemicals they sell to their

customers, but on value-added services

instead. With appropriate incentives,

providers are rewarded for reducing

chemical usage (and costs), increasing

productivity, or decreasing waste.

By working closely with suppliers, GM

successfully switched to reusable

packaging systems and reduced its

disposal costs by $12 million between

1987 and 1992. Additionally, reusable

containers can reduce solid waste,

decrease product damage during

shipping, and eliminate ergonomic and

safety problems (e.g., cuts while

slicing open boxes).

Public Service Electric and Gas

Company streamlined its purchasing

and storage processes and saved more

than $2 million in 1997. The changes

significantly decreased the disposal of

obsolete paint and other materials,

reduced storage space requirements,

and lowered carrying costs. Previously,

these costs had been hidden in

overhead accounts.

Purchasing

Several electronics companies,

including Nortel and Intel, have moved

away from purchasing materials

toward receiving chemical services via

chemical management programs.

These services can include procurement, inventory management, data

tracking, and waste management.

Materials Handling

A number of companies are switching

to reusable packaging systems. 3M

recently launched an Eco-Efficient

packaging business, and GM has a wellestablished reusable pallets and

containers program.

Storage

Several companies have changed their

inventory storage procedures for

maintenance, repair, and operating

(MRO) materials by consolidating

storage areas and requiring suppliers

to adhere to stringent material return

policies.
THE LEAN AND GREEN SUPPLY CHAIN 5

INTRODUCTION

Materials Recovery

By focusing on their high volume material

flows and striving to eliminate wastes,

several companies have justified material

recovery projects by applying environmental accounting methods.

Disposition

Many companies are saving money by

ensuring that major waste disposal costs

are made explicit and attributed directly

to the responsible product or business

unit. Companies use this cost information to identify more financially attractive

alternatives to disposal.

Product Take Back

A variety of companies have developed

cost-effective ways to recover products

from their distributors and customers.

By working with product designers and

other functions, supply chain managers

can establish systems that enable them to

recover these assets and reduce

manufacturing costs.

INNOVATION RESULTS

Andersen Corporation (manufacturer of

Andersen Windows and Patio Doors)

developed a composite material from

wood wastes generated during its

manufacturing processes. This innovation

is expected to yield a 50% return on

investment and has already enabled

Andersen to decrease solid lumber

purchases by 750,000 board-feet.

Environmental accounting techniques

enabled Commonwealth Edison, a

Midwestern electric utility company, to

greatly reduce its landfill disposal volume.

A life cycle accounting approach

highlighted the indirect costs created by a

variety of activities, including disposal.

Once these costs were made explicit, the

company began developing a cost-effective

method for grinding tree limbs. ComEd

netted $2 million annually by making and

selling tree mulch instead of sending the

tree limbs to landfills.

Kodak’s logistics system currently

recovers 70% of the cameras sold to

consumers. Since its inception, over 200

million FunSaver cameras have been

returned to Kodak facilities. Kodak

reduces operating costs by recycling or

reusing 77 to 86% of each camera’s

materials. One of its significant

accomplishments has been developing a

system that overcomes the financial and

nonfinancial barriers that initially limited

product returns from photo processors.
6 THE LEAN AND GREEN SUPPLY CHAIN

COSTS & BENEFITS

ENVIRONMENTAL COSTS &

BENEFITS

Materials management decisions affect

many dimensions of company performance, including operating costs,

investment requirements, product

quality, and meeting delivery schedules.

While materials managers typically

address these business objectives

during the decision-making process,

environmental concerns are commonly

overlooked. Unfortunately, failure to

incorporate these “hidden costs” not

only hinders a company’s efforts to

reduce a variety of environmental

burdens, but also hinders efforts to

improve financial performance.

Materials managers typically do

not address environmental concerns due to the structure of

traditional cost accounting systems. While raw material and labor

costs are directly allocated to the

appropriate product or process, other

costs are accumulated into overhead

accounts. These overhead costs are in

turn allocated proportionally to all

business units, product lines, or

facilities, typically based on gross sales

or output. When significant costs are

not allocated to the responsible

products and processes, this approach

may lead to inaccurate costing data and

ineffective decision making.

Environmental costs often are

misallocated in this manner. For

example, take the case of a company’s

wastewater treatment facility. The costs

of operating the facility are predominately caused by a few of the company’s

products whose production generates

significant quantities of wastewater. If,

as shown in Figure 1, the costs of

operating the treatment facility are

accumulated into an overhead account

and allocated equally to all of the

company’s products, the wastewater

costs are obscured and product

cost information is misleading. In

this case, product B appears to be less

expensive to produce than it actually is.

Figure 2 demonstrates a correction to

the allocation problem and depicts the

primary goal of many environmental

accounting efforts: to track environmental costs directly to the responsible

product, process, or facility.

When environmental costs are hidden in

overhead accounts, business decisions

are made without sufficient consideration of the potentially costly environmental impacts downstream of the

decision. For example, product design

decisions that specify the use of

hazardous materials inherently increase

the risk of employee exposure or other

incident. Lack of awareness can be

financially detrimental to a company.
THE LEAN AND GREEN SUPPLY CHAIN 7

COSTS & BENEFITS

Figure 1: Misallocation of Environmental Costs4

Figure 2: Improved Allocation

Table 2 presents a hierarchy that

classifies costs based on how easy they

are to measure in financial terms. This

hierarchy is a useful framework for

ensuring that a complete range of costs

(including environmental costs) is

considered.

While Table 2 shows clear delineations among the categories, considerable overlap exists, especially between

the first two categories. Whether or

not a cost is “conventional” or

“hidden” depends upon the facility’s

accounting practices. For example,

the costs to landfill waste materials are

generally accumulated into an overhead account and would therefore be

“hidden” and not incorporated into

product pricing or other decisions.

However, several firms have applied

activity-based costing methods to make

these costs “conventional” and are

allocating the landfill fees directly to the

products or processes that generate

them.

In addition, interrelationships exist

between the cost categories. For

example, if a new production process

Water Treatment (B) Rent Utility

Costs

Product A

Supervisor

Salaries

Materials and

Labor (A) Overhead Materials and

Labor (B)

Product B

Water Treatment (B) Rent Utility

Costs

Product A

Supervisor

Salaries

Materials and

Labor (A) Overhead Materials and

Labor (B)

Product B
8 THE LEAN AND GREEN SUPPLY CHAIN

COSTS & BENEFITS

required the use of hazardous materials,

the expenses that a company might incur

to clean up hazardous material spills

would be classified as “contingent’

costs. However, any future spills might

also trigger “image/relationship” costs,

such as concern among the company’s

employees or neighbors, and “external”

costs, such as damage to a nearby

aquatic ecosystem. The purpose of the

cost framework is to help to identify

and address the full set of consequences that might result from materials management decisions.

This cost framework is not limited

to analyzing environmental costs

and benefits but rather is univerConventional

(least difficult to quantify)

Potentially Hidden

Contingent

Image/Relationship

External

(most difficult to quantify)

Table 2: Cost Hierarchy5

Material, labor, other expenses, and revenues

that are commonly allocated to a product or

process.

Expenses incurred by and benefits to the firm

that are not typically traced to the responsible

products or processes, e.g., supervisor salaries

and safety training courses.

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.

Costs/benefits related to the subjective

perceptions of a firm’s stakeholders, e.g., a

community group’s resistance to a plant

expansion or an insurer’s concern about the

lack of a formal environmental management

system.

Costs/benefits of a company’s impacts upon the

environment and society that do not directly

accrue to the business, e.g., the benefits of

reduced traffic congestion from a company’s

telecommuting program.

COST CATEGORY DEFINITION
THE LEAN AND GREEN SUPPLY CHAIN 9

COSTS & BENEFITS

sally applicable to any type of

financial impact. For example, a

purchasing agent might be able to

lower the company’s conventional costs

by switching to another approved

supplier that provides a lower-priced

material. However, this switch could

lead to increased waste disposal costs,

a potentially hidden expense, if the new

supplier shipped materials in containers with excess packaging. Similarly,

delivery missteps by the new supplier

could inadvertently cause a variety of

contingent costs if these breakdowns

resulted in significant production

delays.

It is easy for

materials

managers to

overlook

environmental

costs and

benefits during

decision

making

because they

tend to occur

upstream or downstream of the

immediate decision, e.g., a purchasing

action can have materials handling,

storage, and disposition repercussions.

This focus on a single functional area is

not limited to environmental considerations, and the resulting problems are a

primary motivation for supply chain

integration efforts. However, an

increasing number of companies have

discovered ways to reduce operating

costs or otherwise improve performance by implementing practices that

optimize supply chain, rather than

functional area, performance.6

While this guidebook highlights

financial benefits, improved

materials management practices

can also improve environmental,

health, and safety performance. For

example, converting to reusable

containers can reduce the solid waste

burdens associated with primary and

secondary packaging materials, and can

minimize the number of injuries caused

by using razor knives to

open packages. Similarly,

chemical management

service providers closely

track material consumption and can quickly spot

production floor inefficiencies that lead to material

losses and resulting waste

disposal.

Table 3 lists a number of

financial and nonfinancial environmental

considerations associated with supply

chain activities. As shown, purchasing,

material handling, and several other core

materials management functions can

substantially affect environmental

performance. The table demonstrates how

better materials management decisions

can result from a more complete

understanding of the costs that a company

incurs throughout the life cycle of its

products, processes, and facilities.

Decision makers are at

least intuitively aware of

the different cost and

benefit categories, but a

formal structure helps

ensure that the full range

of financial considerations

is addressed.
10 THE LEAN AND GREEN SUPPLY CHAIN

COSTS & BENEFITS

 Table 3: Examples of Environmental Costs and Benefits

Conventional

Volume of production

materials purchased

Potentially Hidden

Activities to certify suppliers

Contingent

Reduced risk of environmental incidents by working with

suppliers that have product

stewardship programs

Image/Relationship

Positive media coverage

because of partnerships with

“green” suppliers

External

Improved ecosystems through

eliminating the use of

hazardous materials

Purchase price of packaging

materials

Efficiency gains from

automated handling of

reusable containers

Ergonomic and safety issues,

including cuts from razor

knives

Positive public image from

using reusable containers

Accidental emissions to air

and water due to spills

Specialized storage space for

hazardous materials

Costs of cleaning up spills

Employee exposure to

hazardous materials and

subsequent workers’

compensation claims

Improved employee

satisfaction from reduced

exposure to hazardous

materials

Decreased releases to

ecosystems because of fewer

and less severe spills

PURCHASING MATERIAL HANDLING STORAGE
THE LEAN AND GREEN SUPPLY CHAIN 11

COSTS & BENEFITS

Revenues from recovered

materials

Eco-efficiency gains, e.g.,

reduction of materials “lost to

scrap”

Decreased remediation

liability due to lower volume

of waste sent to landfills

Ability to attract investors and

insurers because of savings

from material efficiencies

Reduced exposure-related

medical expenses for local

residents

Labor and fees associated with

manifesting, hauling, and

dumping solid waste

Decreased environmental

insurance premiums by

decreasing the quantity and

hazard of disposed materials

Potential liabilities for cleaning

up hazardous wastes that leak

out of landfills

Positive public image by

avoiding the community

backlash related to leaks from

inadequate disposal sites

Decreased landfill burden

Reduced material costs

because of components

recovered from returned

products

Increased shipping costs due

to product returns

Increased customer concern

about the quality of products

Decreased mining or

harvesting of raw materials

due to lowered overall

material requirements

MATERIAL RECOVERY DISPOSITION PRODUCT TAKE BACK
12 THE LEAN AND GREEN SUPPLY CHAIN

COSTS & BENEFITS FRAMEWORK

DECISION-MAKING

FRAMEWORK

While the potential benefits are

significant, relatively few companies are

pursuing the opportunity to improve

their financial and environmental

performance by explicitly addressing

environmental costs. A clear, simple

framework can help companies begin

to explore this opportunity.

The following four-step framework

allows companies to pinpoint and

understand the costs and environmental

impacts that result from materials

management decisions. This decision-making framework is based

upon the best practices of several

companies that have successfully

initiated and implemented environmental accounting practices.

Ideally, companies will customize this

approach to best suit their own

organizational needs and culture.

The Four Steps: An Overview

The four steps of the framework are

discussed in detail in the following

pages. To give readers a general

understanding of the process, the four

steps are briefly described here.

In Step 1, Identify Costs, a systematic

review of the facility or process is

conducted to determine if and where

significant environmental costs occur.

This analysis enables the team to

later focus where the probability

for significant improvement is

greatest.

During Step 2, Determine 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.

Step 2 yields a set of possible

alternatives with significant

potential for improving costs

savings and reducing environmental impacts.

These initial screening steps lead to Step 3,

Calculate Benefits, where quantitative,

and sometimes qualitative, analyses of

the costs and benefits of a selected

Figure 3: Decision-Making Framework

1. Identify

 Costs

4. Decide,

Implement,

and Monitor

3. Calculate

 Benefits

2. Determine

Opportunities
THE LEAN AND GREEN SUPPLY CHAIN 13

FRAMEWORK

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.

In Step 4, Decide, Implement, and Monitor, the

team shifts from evaluation

to implementation. First, a

decision is made to

continue with the status quo

or to pursue a new approach. Financial

benefits and/or environmental 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. The

best practices and implementation

guidelines of Step 4 can enable

companies to integrate key concepts into their routine materials

management practices.

A Good Start

As a company begins to apply the

decision-making framework, organizational challenges will often arise.

Several business practices commonly

used in change

management can

be helpful in

addressing these

challenges and

assuring

successful

implementation.

These practices

are as follows:

■ Use cross-functional teams that

include members from different

divisions such as operations, purchasing, EH&S, accounting, and

engineering. Due to the broad scope

of these projects, insights and support

from all of the groups affected by the

changes are necessary.

■ Obtain management support to the

extent possible. As with any change

effort, there is likely to be passive

resistance that senior management

support can help overcome. A timely

and enthusiastic response by those

who are affected by the changes is

necessary to the success of the effort.

This simple four-step

framework can be the

foundation of a company’s

materials management

improvement effort.
14 THE LEAN AND GREEN SUPPLY CHAIN

COSTS & BENEFITS FRAMEWORK

■ Benchmark the best practices of

other facilities in your own company

and other companies to minimize the

risk of failure and the cost of

implementation.

■ Employ total quality management

(TQM) tools (e.g., Pareto analyses,

cause and effect diagrams, etc.) to

identify and evaluate improvement

opportunities. Since the goals and

principles behind environmental

accounting dovetail with those of

TQM, these efforts can be integrated

into and increase the effectiveness of

existing TQM initiatives.

These TQM and related business

practices will position the company

for initial and sustainable success

as it pursues changes to reduce

resource use, lower other costs,

and improve environmental

performance.

Step 1: Identify Costs

Regardless of the industry, companies

are being pressured by competitors,

customers, and financial stakeholders to

become more efficient. The first step in

achieving efficiency improvements is to

review materials management practices

to identify areas and activities that incur

significant environmental costs. These

initial evaluations will shape the course

of future steps and help ensure that

company resources are invested wisely.

Step 1 can range from the evaluation of

a specific product or process to an

entire corporation. A common application is at an individual production

facility. Key questions include

■ Are significant material losses caused

by spills or other material handling

problems?

■ Do ergonomic or other EH&S impacts

result from poor or nonreusable

packaging designs?

■ Are substantial quantities of materials

discarded because of quality,

obsolescence, or inventory problems?

■ Can material specification or other

easy-to-implement changes reduce

suppliers’ costs (and subsequently

our costs)?

■ Are there valuable materials in waste

streams that could be salvaged

through internal recycling or sold as

by-products?

There are two stages to this step: First,

the organization studies its waste

streams and identifies the activities that

lead to environmental costs. Second,

the organization attaches costs to those

wastes and activities. Two common

approaches to identifying sources

of environmental costs are materials tracking and EH&S performance

reviews.

Materials tracking is an assessment of

what, where, why, and how much

material is used, incorporated into

products and coproducts, and channeled into waste streams.
THE LEAN AND GREEN SUPPLY CHAIN 15

FRAMEWORK

The initial analyses are often limited to

the largest or most regulated material

streams because these are most likely to

generate the highest costs. Regardless of

the scale of analysis, the result is a

better understanding of material flows

through the facility.

Materials tracking depends on the

preparation of process maps. Process

mapping is typically a team exercise

where all of the production steps

associated with or required by a specific

materials management

process are visually

diagramed. As an example, a team might

analyze the steps necessary

to receive, store, handle,

and dispose a high-volume,

regulated material.

Material losses incurred

during each step should be

depicted on process

maps.7,8 Mass balances,

MRPs, dispensing records,

and other sources can

provide information on

materials usage and point

to the activities that

generate waste.

Materials tracking

activities commonly

highlight larger than

anticipated material

losses and uncover unexpected

waste streams. For example, a recent

study at a semiconductor manufacturing

facility revealed that roughly 12% of

chemical inputs were wasted during

machine setups and other nonproduction uses.9

Another approach to uncovering

sources of environmental costs is to

routinely conduct EH&S performance

reviews of facilities’ processes to

determine levels of waste and pollution,

health and safety risks, and effectiveness

PSE&G observed that the cost to

dispose of obsolete paint and

other waste MRO materials was

substantial. To address this

problem, PSE&G

■Consolidated its purchasing

process for MRO materials,

■Decreased the number of

suppliers, and

■ Implemented a material return

policy.

These process changes yielded a

$2 million costs savings in 1997.

Additionally, the company

greatly reduced its hazardous

waste disposal volumes.
16 THE LEAN AND GREEN SUPPLY CHAIN

COSTS & BENEFITS FRAMEWORK

of EH&S management systems. These

reviews consist of interviews with

appropriate personnel, observations of day-to-day operational

practices, and reviews of accounting and manufacturing records.

The abbreviated questionnaire on the

pages 18 and 19 contains some key

questions drawn from existing review

checklists.

In comparison to materials tracking, the

drawback of performance reviews is that

they usually evaluate the extent to which

the facility is in conformance with preestablished criteria. If the criteria are

developed prior to

a thorough study of

the facility, it is

possible that some

problems may be

overlooked

because not all of

the necessary or

revealing questions

are asked.

Consequently,

reviews may be

less thorough and

informative than

materials tracking

efforts. Nevertheless, if review

checklists are

designed well, they can be very useful in

determining opportunities for improving

materials management and environmental performance.

Whether materials tracking, EH&S

performance reviews, or other

proven methods are used to

identify the sources of costs, the

next stage is to conduct an activitybased costing analysis to attribute

costs to the appropriate activities

or problems.

For each of the activities or wastes

identified in the first step , create a list

of the associated

environmental

costs. Refer to

Table 3 (page 10)

for examples of

the types of costs

to consider.

Consider also the

variety of environmental requirements that follow

from the identified

activities. Then

estimate the dollar

value of wastes

and related

activities. This

An extensive study of the

electroplating industry

focuses attention on storage costs. Because electroplating companies’ waste

treatment areas typically

are large (25% of the size

of production areas) and

contain numerous storage

facilities, storage costs

present a significant opportunity for improvement.10
THE LEAN AND GREEN SUPPLY CHAIN 17

FRAMEWORK

effort often reveals a variety of expensive

(non-value-added) overhead costs,

ranging from training and paperwork

activities to hazardous waste treatment

and disposal, that have not been

attributed to the responsible products

or processes.

Information Gathering

It will probably be necessary to consult

a wide variety of information sources to

collect the necessary cost and operational data. Commonly used sources

include11

■ Production records for material

usage rates

■ Invoice records for disposal rates

and quantities

■ Observations of activities and

discussions with operators

■ Training records for personnel

training hours

■ Maintenance logs for both labor

costs and the frequency and length of

production shutdowns

■ Utility bills for the costs and usage of

water and energy

■ Facility blueprints for warehouse

space requirements

■ Procurement records for the costs of

specialized handling equipment.

 Step 2: Determine Opportunities

Once a company has completed the

initial identification step, the next step is

to determine which areas offer the

greatest opportunities for improvement

and then develop specific solutions

that reduce costs and negative

impacts. Many companies have

found that the Pareto, or 80/20,

principle applies, i.e., that a few

supply chain improvements

provide most of the achievable

gains. At this point only preliminary

evaluations have been completed, so

the challenge is discerning the highvalue opportunities with the limited

information that has been collected.

Two procedures that can be used to

sort and analyze the activity and cost

information obtained in Step 1 are to

■ Use Pareto diagrams and other bar

charts to display environmental

costs by supply chain activity and

to rank opportunity areas by value.

(See Figure 4). 12

■ Identify root causes of wastes by

constructing cause-and-effect

diagrams or by continually asking

why certain problems or procedures exist.

Once these procedures are followed,

the solutions to the problems may

become obvious. Other methods for

identifying specific solutions are to

■ Interview production personnel to

understand potential opportunities

for (and barriers to) change.

■ Approach suppliers of the key

materials and request their

support to lower costs and reduce

impacts. Some suppliers have

developed this expertise internally

and can provide this service.
18 THE LEAN AND GREEN SUPPLY CHAIN

COSTS & BENEFITS FRAMEWORK

EHS Performance Review—Sample Questionsc

c

The questions and tables in this list are taken largely from a series of Guides to Pollution Prevention

published by the U.S. Environmental Protection Agency. The Guides span a wide array of industrial

sectors and each includes waste minimization assessment worksheets. (Various publication numbers,

all with the format EPA 625/7-9X/0XX). See www.epa.gov/ttbnrmrl/Guides.htm.

Purchasing

Have suppliers supported the company’s efforts to reduce the facility’s

quantities and costs of waste?

Are environmental, health, and safety performance criteria (e.g., flammability,

biodegradability, toxicity, recyclability, and other environmental or

regulatory requirements) clearly articulated in new product specifications

to suppliers?13

Does the plant accept samples from chemical suppliers?

Are suppliers required to take back unused samples they provide?

Input Materials Summary

Description

Attribute Stream # __ Stream # __ Stream #__

Material Name/ID

Source/Supplier

Hazardous Component

Annual Consumption Rate

Purchase Price, $ per ___

Overall Annual Cost

Material Flow Diagram

 available (Y/N)

Delivery mode

Shipping Container Size & Type

Storage Mode

Transfer Mode

Control Mode

Empty Container

 Disposal/Management

Shelf Life

Supplier would

 accept expired material (Y/N)

 accept shipping containers (Y/N)

Acceptable Substitute(s), if any

Alternate Supplier(s)

Handling

Are all raw materials tested for quality before being accepted from suppliers?

Are plant material balances routinely performed?

Does the company’s personnel training program include information on the

safe handling of raw materials, spill prevention, proper storage techniques,

and waste handling procedures?
THE LEAN AND GREEN SUPPLY CHAIN 19

FRAMEWORK

What is the injury frequency and severity rate among material handlers?______________________________________________

Storage

Are specialized containers or storage facilities required to prevent environmental

damage?

Is inventory used in first-in first-out order?

Is there a computerized inventory system to track inventory and material waste (e.g.,

barcoding, MRPII, etc.)?

What information do(es) the system(s) track? __________________

______________________________________________________

Are all storage tanks routinely monitored for leaks?

If yes, describe the procedure and monitoring frequency for above-ground/vaulted

 and underground tanks:

______________________________________________________

______________________________________________________

Disposition and Material Recovery

Is your solvent waste segregated from rinse-water streams and other wastes?

Does the plant generate waste streams that contain valuable process chemicals or

metals?

Are all empty bags, packages, and containers that contained hazardous materials

segregated from those that contained nonhazardous wastes? Are containers

properly cleaned prior to disposal?

Waste Sources

 Significance at Plant

 High Medium Low

Hazardous obsolete raw materials

Nonhazardous obsolete raw materials

Spills & leaks (liquids)

Empty container cleaning

Container disposal

Evaporative losses

Off-spec materials

Pipeline/tank drainage

Laboratory wastes

Contaminated wipes and gloves

Other
20 THE LEAN AND GREEN SUPPLY CHAIN

COSTS & BENEFITS FRAMEWORK

12345678 12345678

12345678

12345678

12345678

12345678

12345678

12345678

Figure 4: Pareto Diagram

■ Review the successes of other

companies in the same industry.

■ Apply the best practices available

from trade associations and public

institutions.

Since the next step, Calculate Benefits,

can be time-consuming, selecting the

most viable options for improvement is

important. By using proven, simple

ranking methods, a company can

quickly focuses on its most significant

opportunities.

Step 3: Calculate Benefits

Once a set of high-priority alternatives

has been developed, the analytical

exercise of calculating the costs and

benefits of the various options begins.

One approach to the calculation

process is to conduct quantitative

evaluations, which rely on empirical data. Two specific quantitative

approaches are Internal Rate of Return

(IRR) (Table 4 on page 25) and

Economic Order Quantity calculations

(pages 26-27).
THE LEAN AND GREEN SUPPLY CHAIN 21

FRAMEWORK

A second approach is to conduct

qualitative evaluations, which are

based on observation and judgment. These evaluations provide

valuable insights when credible data are

not available or quantification would be

too resource-intensive.

Often, both approaches are taken.

Environmental costs and impacts are

quantified when possible within the

project budget and schedule and

qualitatively evaluated otherwise. For

example, a project team could probably

find the data to answer the following

questions:

■ How much of a particular material

was landfilled last year and what were

the disposal costs?

■ How many pounds of hazardous

materials are purchased for a specific

process, e.g., painting? What portion

of the company’s cleaning and other

MRO materials must be treated as

hazardous waste? What were the

medical expenses attributable to

injuries caused by poor ergonomic

design?

■ How many times will a reusable

container be used?

In addition to these environmental

costs, a team will also determine the

operational benefits. Increased

production line efficiency and other

performance improvements can greatly

increase the total cost savings.

In contrast, precise quantification of

the following costs and benefits may be

less straightforward:

■ What were the total costs due to

overtime, lowered efficiency, quality

defects, and other issues related to

ergonomics?

■ How much labor is necessary to

meet tracking, record keeping, and

other regulatory mandated

requirements?

■ How much will employee satisfaction

be improved by switching from a

hazardous material to non-regulated

compound?

■ How does the use of specialized

containers and other EH&S-driven

activities affect the overall productivity of manufacturing operations?

Many times, the activity-based analysis

methods suggested in Step 1 answer

the above questions. However,

producing definitive answers is

sometimes not achievable within time

and resource constraints. Simply

estimating a range of costs and

benefits, or qualitatively describing

them, often is sufficient to justify an

eco-efficiency improvement investment.

Example Analyses from

Andersen Corporation14

Andersen Corporation, the manufacturer of Andersen Windows and Patio

Doors, applied several quantitative

methods when evaluating an automated

paint blending system. As the regulatory
22 THE LEAN AND GREEN SUPPLY CHAIN

COSTS & BENEFITS FRAMEWORK

pressures and costs associated with its

painting lines became more significant,

Andersen began searching for ways to

reduce emissions and material costs.

After reviewing several alternatives,

managers conducted an in-depth

analysis of the most promising

approach: a point-of-use paint mixing

system. This “meter mix” system

replaced the existing batch system.

They evaluated several cost and

material usage areas, including:

■ Paint materials: purchasing and

shipping costs

■ Waste: treatment, transport, and

disposal costs

■ VOC emissions: associated fees

■ Solvent materials: purchasing and

shipping costs

■ Solvent

emissions:

material losses

and associated

fees.

In addition, the

managers

factored in the

labor and

expenses

associated with

the following:

■ Raw material handling and storage

■ Waste handling, storage, and

disposal, as well as related training

activities to ensure that waste

materials were properly handled

and disposed

■ Analysis, reporting, and record keeping

associated with the paint line

■ Material obsolescence.

In each of the above four cases, the

team determined material usage rates

or described the financial impacts.

However, the team did not calculate

actual dollar figures for these costs, but

rather simply recognized that the total

financial impacts were significant. This

qualitative information provided

important insights that supplemented

the more precise calculations.

As shown below, installation of the

meter mix system was attractive

because the quantified costs yielded

an 18-month payback and 58%

internal rate of

return. The

qualitatively

evaluated

activities further

strengthened

this decision to

proceed.

The payback

calculations are

relatively straightforward, as shown below.

P=I/M

Where

P = Payback period (months)

I = Investment ($)

M = Monthly savings ($/month)

Andersen Corporation is one

company that has saved

several hundred thousand

dollars by incorporating environmental considerations,

qualitatively as well as quantitatively, into its materials

management decision-making.
THE LEAN AND GREEN SUPPLY CHAIN 23

FRAMEWORK

Based on the forecasts in Table 4, the

initial investment (I) was $130,100 and

the monthly savings (M) during the first

two years averaged $7,146. With these

values, the payback period was 18

months.

The IRR calculations are more complex,

but fortunately a variety of software

packages, including standard spreadsheet packages can compute these

values. The internal rate of return is the

interest rate at which the net present

value (NPV) of the investment is zero. It

takes into consideration the amount and

timing of the costs, savings, and

revenues of the investment.d

The higher the IRR, the better the

project. A money-saving project will

have a high IRR because it will have a

positive value even if the future cost

savings are discounted heavily. The IRR

calculations are shown below.

For the meter mix system,

NPV =0=-$130,100 + $85,655/(1 + IRR)

+ $85,863/(1 + IRR)2 + $82,579/

(1 + IRR)3 + $80,921/(1 + IRR)4

+ $80,419/(1 + IRR)5

Solving this equation by trial and error

shows that the IRR is 58%. The trial and

error approach is somewhat tedious,

but again, many software packages can

quickly compute IRR values.

These and other analyses demonstrated

the operating and environmental

benefits of making this investment.

Andersen Corporation has since applied

this approach to numerous decisions

and thereby improved its operating

efficiency and reduced environmental

burdens. Environmental accounting

approaches helped the company achieve

its goal of reducing high-priority

emissions by 90%.

Most cost-estimation efforts focus on

conventional and potentially hidden

costs, since quantifying contingent and

image/relationship costs is considerably

more challenging. For example,

eliminating an ergonomic problem will

probably improve employee satisfaction,

but what is the economic value of that

increased satisfaction? The recommended approach is to quantify costs

when feasible, and then to identify and

qualitatively value those other costs that

will better inform the decision-making

process.

dSimilarly, companies can directly calculate the

investment’s NPV. The NPV is based on the

company’s cost of capital and considers the

amount and timing of the investment’s capital

outlays, savings, and revenues. An NPV greater

than zero indicates a profitable investment,

and, as with IRRs, the higher the NPV, the

better.

     ( )

== +   ∑ 
24 THE LEAN AND GREEN SUPPLY CHAIN

COSTS & BENEFITS FRAMEWORK

As the Andersen case demonstrates, by

gathering and evaluating production and

cost data through the use of activitybased costing, internal rate of return,

net present value, and other financial

analysis techniques, companies can

demonstrate the economic benefits of

more eco-efficient practices.

The payback and IRR methods that

Andersen applied are commonly used in

industry. For their purposes, the

company was able to use a wellestablished calculation method. In

other cases, managers might need to

slightly modify a method to address

environmental costs. For example, as

shown on pages 26-27, the standard

inventory management model can be

easily adapted to include the costs

associated with material obsolescence

and subsequent disposal costs.

Step 4: Decide, Implement, and

Monitor

Once the financial and environmental

improvements have been estimated, the

fourth and final step is to make a

decision, implement the changes, and

monitor progress.

Decide

Approaches to decision-making vary

significantly among companies. The

objective is to select the option that

improves both dimensions of performance. Some companies have

adopted team decision processes

that involve individuals from

several different functions. Other

firms have more conventional,

unilateral decision processes in

which the responsible manager

chooses the alternative that he or

she believes will be most advantageous. A formal weighting methodology can help decision makers trade off

the strengths and weaknesses of one

alternative against another.

Regardless of the methodology, the

preceding steps provide the financial

and nonfinancial information that

improves the effectiveness of this effort.

The environmental and financial

information is considered with a variety

of other strategic concerns to enable

decision makers to select the best

solution for their company.

Implement

Once a decision has been made, the

final challenge is implementing the

change. Many good ideas are

implemented poorly or not at all.

In either case, the potential

savings and environmental benefits

are not realized.

The beginning organizational steps

(page 13), including use of a crossfunctional team, also support the

implementation effort. Some additional

recommendations to ensure a successful implementation include:
THE LEAN AND GREEN SUPPLY CHAIN 25

FRAMEWORK

Notes and assumptions

■ “Operating costs” are additional costs

required to operate point-of-use system

■ 3 % annual increase in material and

labor costs

■ 5 % annual increase in all other costs,

e.g., waste management

Table 4: Andersen’s Financial Analysis

Investment

Equipment ($115,541) ($115,541)

Installation and other expenses ($14,559 ($14,559)

 Total Investment ($130,100) ($130,100)

Costs

Operating costs ($109,355) ($115,302) ($623,197)

Total Costs ($109,355) ($115,302) ($623,197)

Savings

Paint Use and Waste Reductions

Paint purchase and shipping $110,374 $113,685 $585,991

Waste treatment, transport, disposal $14,387 $15,106 $79,497

VOC emissions and associated fees $162 $170 $895

Dilute Solvent Use & Waste Reductions

Solvent purchase and shipping $58,710 $60,471 $311,699

Solvent emission losses and fees $560 $588 $3,094

Flush Solvent Use & Waste Reductions

Solvent purchase and shipping $10,687 $11,008 $56,739

Solvent emission losses and fees $130 $137 $718

 Total Savings $195,010 $201,165 $1,038,633

Net Benefit ($130,100) $85,655 $85,863 $415,436

Year 0

(Installation) Year 1 Year 2

Total

(Years 0-5)
26 THE LEAN AND GREEN SUPPLY CHAIN

COSTS & BENEFITS FRAMEWORK

A Revised Economic Order Quantity:

Improving the Inventory Management Model

As companies establish just-in-time and other lean inventory systems, they

reevaluate the lot sizes of purchase orders and production runs. This

hypothetical example demonstrates how a company could increase

its overall efficiency by changing a common inventory practice—

determining the economic order quantity.

Commonly hidden in inventory management decision making are the costs to

dispose of obsolete, hazardous materials. Several factors, especially ordering

costs and inventory carrying costs, are typically considered when companies

determine what quantity of specific materials to order. In contrast, companies

rarely incorporate the risk of obsolete materials.

This example illustrates how two environmental considerations, material

losses and waste disposal, can be included in this common inventory management model. This example does not address other hidden and contingent

costs, such as those related to spills and worker exposure. The basic equation

for determining the order quantity that minimizes total costs is

 Where

Q = Optimal order quantity (units)

D = Annual demand for material (units)

S = Procurement and setup costs per order ($)

H = Inventory holding cost rate, often 10 - 35%

C = Cost of inventory item ($/unit)

Holding costs are the costs to maintain inventory and include cost of capital

(that could be invested elsewhere), warehousing costs, insurance, and other

expenses. For hazardous materials, the costs of disposing obsolete materials

should be considered because disposal costs, on a per unit basis, can be

comparable to the initial purchase costs.

   =  THE LEAN AND GREEN SUPPLY CHAIN 27

FRAMEWORK

eSeveral options, including recycling and energy recovery, can reduce these costs. In this

case, assume that disposal is required.

f

Losses include the purchase cost of the lost material (5% x material price) and the

disposal cost due to obsolescence (5% x disposal cost).

g

The disposal ratio (5%) could be determined empirically and would depend upon the

types of materials, purchase quantities, and consumption rates. Periodic reevaluation of

this ratio would be warranted.

hFor a conventional case, assume that material price = $3/lb and that holding costs =

(10% x material price).

i

For a revised case, assume that disposal cost =$1/lb and that revised holding costs

=[(10% + 5%) x material cost] + [5% x disposal cost].

For example, many industrial paints cost approximately $3/lb, while

disposal costs for these materials can exceed $1/lb.e If a company

analyzed its hazardous waste disposals and observed that ~5% of its paint

was eventually disposed of instead of used, then the company should

increase its holding costs considerably.f,g

Conventional Revised

Annual demand (D) 4,000 lb 4,000 lb

Setup costs (S) $50 $50

Holding cost rates (H)h,i 10% 15% (+ 5% for

disposal)

Item cost (C) $3/lb $3/lb (+ $1/lb

 for disposal)

Order quantity (Q) 1,155 lb 895 lb

For this hypothetical case, the economic order quantity decreases by 23%

when material obsolescence and the accompanying costs of lost materials

and waste disposal are considered. With this approach, a company could

reduce the environmental burdens and decrease the overall costs associated with paint disposal.
28 THE LEAN AND GREEN SUPPLY CHAIN

COSTS & BENEFITS FRAMEWORK

■ Review previous organizational change efforts within

the company to gain valuable

insights on the reasons behind

those efforts’ successes and

failures.

■ Establish a group that is

solely committed to conducting the cost analyses, implementing the changes, and then

ensuring and reporting the

successes. This group may

only be necessary for an

interim period.

■ Conduct one or more pilot

studies to demonstrate the

benefit of this initiative and

gain support for broader

implementation. Pilots also

enable the team to adapt to

unexpected problems.

■ Provide appropriate training

for employees so that they begin

developing the necessary skills.

These implementation guidelines are

particularly helpful and important during

the initial changes. Since most companies

concurrently pursue a variety of improvement initiatives, early, substantive results

may be necessary to compete against the

other initiatives and increase the probability of long-term acceptance and success.

Monitor

As these new materials management

practices become established, they

should be periodically monitored to

ensure continued progress. The

monitoring effort is often part of the

company’s broader quality program

and ensures that any performance

problems are promptly addressed.

Additionally, the rapid pace of

technological and environmental

change necessitates an effort to

continuously identify opportunities to further reduce costs and

lower potential impacts.

The team should also periodically

review overall progress toward

An aerospace electronics company saved $1.1 million by

successfully implementing a

chemical management program.

Moreover, the company tracked

its performance in a number of

areas and realized other impressive results. For example,

■ Procurement cycle time

dropped from fifteen days to

one

■ Hazardous waste costs fell

75%.

These results demonstrate how

monitoring can reveal environmental and operating gains.15
THE LEAN AND GREEN SUPPLY CHAIN 29

SUCCESSES

reducing the wastes and costs identified

in the first step. As part of this review,

and to improve the accuracy of data,

gaps in information and information

systems should be analyzed and

communicated to those responsible for

the development and maintenance of

the information systems. For example,

because ERP and MRP II systems

already closely track the flow of

materials and other information

throughout a company, they present

opportunities for improving and

institutionalizing the collection of

material loss and environmental cost

information.16 Material managers,

through their understanding of

and influence over materials

information systems, have access

to information on wastes and costs

that others throughout the

organization (e.g., engineers) may

need for their own quality and

efficiency-building efforts. ERPs,

MRPs, and even traditional accounting systems can be designed

or modified to pull material,

handling, disposal, and other

environmental costs out of overhead accounts and charge them

directly back to the responsible

departments. This will facilitate

reporting this information and will

make the information quickly accessible to a wide variety of decision

makers.

A rigorous review process supports

another crucial activity—communicating results. Success begets more

success. Demonstrating accomplishments to senior management will help

secure continued resources for the

supply chain effort and may help

improve other core business decisions.

Results should be shared with other

colleagues, especially design and

manufacturing engineers. The cost and

material information collected in Steps

1 and 2 could be key to other efficiency-improving efforts. For example, product designers might specify

less burdensome materials if they

understood the full costs associated

with handling and disposing harmful

materials. By monitoring implementation of the cost-reduction efforts,

sharing information, and communicating results, supply chain managers can

support further gains and justify future

improvements.

MATERIALS MANAGEMENT

SUCCESS STORY

One company that has markedly

improved its materials management

processes by applying environmental

accounting tools and techniques is

Commonwealth Edison (ComEd), a

major midwestern electric utility. The

company’s cost reduction activities

yielded over $25 million in cumulative

savings and afforded the company a

number of important environmental

benefits.17 This abridged case study

reveals how these results were
30 THE LEAN AND GREEN SUPPLY CHAIN

SUCCESSES

accomplished and demonstrates the

step-by-step decision-making

framework.

One of ComEd’s materials management

successes was its

Inventory Minimization Program,

which enabled the

company to reduce

the number of

hazardous

materials purchased, decrease

the quantity of

waste, and

concurrently lower

the costs of buying, storing, using, and

disposing solvents at its facilities. The

key steps are highlighted below.

Materials Tracking

In 1993, ComEd recognized that its total

cost of managing materials was greater

than its initial purchasing expenses. In

particular, a significant portion of the

company’s waste disposal costs were

caused by inefficient purchasing,

storage, and other materials management practices. Based upon this

realization, the company initiated a

materials tracking effort to identify and

characterize the waste and by-product

streams from its generating facilities.

At several facilities, engineering teams

used a waste accounting software

package to evaluate five high-priority

material categories: chemicals and oils,

coal by-products, PCBs, recyclables, and

solid waste. The teams did not conduct

extensive mass balances, but rather

addressed some key questions:

■ Which types of wastes

were being generated at

the various facilities?

■ What quantities of each

material were being

disposed?

■ What were the waste

disposal costs or

recycling revenues for

each material?

The goal of the first

step, Identify Costs, was to identify

the waste streams that were

significant enough to justify

additional evaluation. Thus, the

initial evaluation was limited to identifying the waste streams and completing

preliminary analyses at a few facilities.

The teams did not track emissions,

spills, or other types of environmental

burdens, nor did they estimate purchasing, storage, or other costs.

The approach pinpointed three highvolume and high-cost waste streams:

coal ash, contaminated soil, and solvent

waste. In particular, the ComEd

team discovered that the facilities

annually disposed of over 500,000

pounds of solvent-contaminated

materials. Since these waste solvents

were regulated and accordingly

disposed of as hazardous wastes, the

disposal costs were substantial.

ComEd saved over

$25 million and achieved

a number of important

environmental benefits

by improving its materials management

processes.
THE LEAN AND GREEN SUPPLY CHAIN 31

SUCCESSES

Team Approach

The waste stream evaluation revealed a

number of significant opportunities for

reducing waste at its source. ComEd

then focused on the company’s use of

solvents and alternative cleaning

materials, and broadened its scope of

analysis to include the complete set of

materials management activities. Action

committees were formed with members

from all of ComEd’s key materials

management processes: procurement

and contracting, receiving and testing,

warehousing and distribution, operations, and recovery and distribution.

The team began by evaluating

requirements that could constrain

its ability to replace a solvent with

a less costly, less burdensome

cleaning material. Three questions

were answered for each cleaner:

■ For which applications is the solvent

best suited?

■ Does the cleaner leave a residue?

■ Is the cleaner corrosive to metals,

vinyls, plastics, or insulations?

These questions helped the team

determine which cleaners could be

easily substituted and which ones could

not, e.g., obviously, a cleaner that

corroded metal could not be used on

steel or other metallic surfaces. After

determining which cleaning materials

were viable substitutes for each other,

the team then evaluated the product

performance of each cleaner. A crosssection of personnel who used or

managed the solvents rated the materials in five categories:

■ Operating

■ Purchasing and Supply

■ Environmental and Regulatory

■ Safety and Health

■ Analytical.

The survey participants rated each

cleaner on several criteria within each

category. For example, the Purchasing

and Supply criteria were

■ Cost

■ Vendor Performance

■ Shelf Life

■ Packaging Safety

■ Availability of Various Sized Packages

■ Storage Ease

■ Dispensing Ease.

The solvents were ranked from 1 to 10

(1 being the worst rating, and 10 the

best). Since some factors were considered significantly more important than

others, the team assigned a weighting

factor to each criteria. A final product rating was determined by

calculating a sum of the weighted

criteria scores.

The screening questions enabled the

identification of substitute cleaners, and

the product ratings revealed which

cleaning materials had superior

operating and environmental performance. Thus, during the second
32 THE LEAN AND GREEN SUPPLY CHAIN

SUCCESSES

step, Determine Opportunities, the

team uncovered numerous opportunities to replace solvents with

equivalent or superior performing

cleaners.

Life Cycle Cost Analyses

The third step of the Inventory Minimization Program, Calculate Benefits, was

a life cycle cost evaluation. The team

quantified three categories of cost:

■ Purchase Costs

■ Inventory Carrying Costs

■ Waste Disposal Costs.

Since the team had already determined

the last category of costs, the team

focused on the first two categories and

obtained data by reviewing purchasing

and warehouse records. The analyses

revealed that the cost reduction

opportunity was spread across several

of ComEd’s materials management

processes. In fact, disposal cost

savings were less than one-third of

the total cost savings obtainable.

The team was also concerned about

hidden and contingent costs. Since

these costs were more difficult to

estimate, the team qualitatively evaluated several additional cost categories,

including:

■ Solvent Specification Cost

■ Record Keeping Cost

■ Cost of OSHA and EPA Citations

■ Training Costs

■ Cost of Solvent Misuse.

These cost evaluations enabled the

team to address the full spectrum

of solvent performance, from

purchasing cost to environmental

considerations to operating

effectiveness.

The life cycle cost analyses confirmed

the opportunities to replace ComEd’s

current cleaning materials with lower

cost, better (or at least equivalent)

performing alternatives.

Results!

The Inventory Minimization Program

proved to be quite successful at the two

facilities that first implemented it. The

teams’ recommendations led to cost

savings and environmental gains. ComEd

changed its procurement decision

process and reduced the number of

solvents from fifteen to three.

Based upon this initial success, the

program was implemented and

transferred to other generating

facilities. The overall results were:

■ Replacement of over 100 solvent

products with nonhazardous

materials

■ Reduction of hazardous solvent

waste by 88% during a two-year

period

■ Five-year estimated cost savings

of over $1,000,000
THE LEAN AND GREEN SUPPLY CHAIN 33

CONCLUSION

■ Considerable reduction of

difficult-to-estimate costs,

including those for record

keeping and training.

This initial improvement effort has since

evolved into a continuous improvement

effort— the New Product Evaluation

Process. The purpose of this process is

to ensure that ComEd continues to

reduce the life cycle costs and the

environmental concerns of cleaning

activities. After some initial screening

steps (e.g., determining if the material

has special handling or storage requirements), new solvents are evaluated as

described in Steps 2 and 3 with a

performance evaluation and life cycle

cost evaluation. This effort has

enabled ComEd to continue reducing its hazardous material use,

accompanying waste, and overall

costs, while helping operating

personnel perform their jobs

quickly and effectively.

Since this initial success, ComEd has

monitored its progress and successfully

expanded its program to address several

other materials management activities.

CONCLUSION

Materials managers can simultaneously

improve both the financial and environmental performance of their supply

chain systems. This guidebook has

recommended a four-step approach to

implement environmental accounting

methods that can identify hidden costs

or benefits and reveal opportunities to

increase overall efficiency and productivity. This approach is part of a

broader paradigm that has

emerged among leading corporations around the world—the

realization that environmental

considerations should be integrated into each and every core

business process.

Over the past few decades, there has

been a gradual progression in the

environmental performance of industrial firms. The old view of pollution as

a “cost of doing business” has given way

to a more enlightened view—namely,

preventing pollution at its source makes

good financial sense. This trend has

culminated in the concept of “ecoefficiency,” which involves minimization of waste, conservation of

scarce resources, and avoidance of

persistent, toxic by-products. The

World Business Council on Sustainable

Development, an influential group of

corporations formed in 1990 by their

chief executives, has published a series of

reports demonstrating how eco-efficiency

can contribute to competitiveness.18

A number of U.S.-based multinational

companies have recognized the

importance of environmental excellence

to long-term success, and are positioning themselves to derive advantage from

the introduction of eco-efficient

products and technologies. In the
34 THE LEAN AND GREEN SUPPLY CHAIN

CONCLUSION

electronics industry, companies such as

Hewlett Packard, Xerox, and IBM have

embarked upon pioneering initiatives to

design environmentally conscious

products and to communicate these

benefits to their customers. In the

chemical industry, companies such as

Monsanto, Dow, DuPont, and Rohm &

Haas have sought new market opportunities through the introduction of

environmentally preferable processes

and the exploration of biotechnologybased products. Another notable

example is Interface Corporation, a

manufacturer of industrial carpets,

whose CEO, Ray Anderson, has made a

personal commitment to transform the

company into an eco-efficient, sustainable enterprise.19

A number of recent success stories

demonstrate that reducing pollution at

the source and designing products and

processes in ways that enhance environmental quality will generally result in

higher productivity and reduced

operating costs, and may also increase

market share.20 For example:

■ Proactive management of supplier

environmental performance, as

practiced by Hewlett Packard, can

lead to product and process simplification, more efficient resource

utilization, product quality improvement, liability avoidance, and an

enhanced leadership image.

■ Adoption of eco-efficient manufacturing methods, as practiced by 3M, can

lead to more flexible plant configuration, enhanced productivity, improved

community support, and a stronger

influence on the evolving regulatory

regime.

■ Attention to the environmental

services aspect of customer satisfaction, as practiced by Ashland Chemical, can lead to reduced cost of

ownership, more convenient product

handling and disposal, and a perception of supplier commitment.

■ Finally, attention to “end-of-life”

product disposition issues, as

practiced by Xerox in its photocopier

business, can lead to diminished

waste liability, reduced cost of

materials, improved asset utilization,

and a strengthened linkage with

customers.

By focusing on an appropriate set of

these sources of competitive advantage,

a company can use environmentally

beneficial strategies selectively to

become more competitive over the long

run. Obviously, implementation of these

strategies will require fundamental

changes in core business processes

such as product development, marketing and sales, manufacturing, supply

chain management, and customer

service. In each case, environmental accounting methods are useful

for systematically identifying and

assessing opportunities to increase

shareholder value.
THE LEAN AND GREEN SUPPLY CHAIN 35

GLOSSARY

j

Definitions adapted primarily from the

following sources:

■ APICS Dictionary, Ninth Edition, APICS,

1998.

■ Joseph Fiksel, Design for Environment:

Creating Eco-Efficient Products and

Processes, McGraw-Hill, 1996.

GLOSSARY OF KEY TERMSJ

Activity-Based Costing Accounting method that accumulates

costs based on activities performed and

then allocates these costs to products,

customers, or processes.

Business Process A set of logically related tasks or

activities performed to achieve a

defined business outcome.

Disposition Process of discarding waste materials

or obsolete products.

Environmental Burden A release or modification to the

environment, due to an industrial

process, that may have adverse effects.

Eco-Efficiency The ability to simultaneously meet cost,

quality, and performance goals; reduce

environmental impacts; and conserve

valuable resources.

Environmental Accounting Management accounting practices that

enable the incorporation of environmental cost and benefit information

into business decisions.

Ergonomics Approach to job design that focuses on

the interactions between employees

and their work environment, which

includes tools, equipment, heat, light,

sound, and possible pollutants.
36 THE LEAN AND GREEN SUPPLY CHAIN

GLOSSARY

kPlease note that this APICS definition is different

than the definition included in the Resource

Conservation and Recovery Act. The latter should

be used as the basis for hazardous waste

regulatory compliance activities.

Hazardous Waste A waste such as chemicals or nuclear

material that is hazardous to humans

or animals and requires special

handling.k Hazardous waste costs are

typically substantially higher than other

waste costs due the special handling,

training, and recording as well as

higher disposal fees that are required.

Life Cycle A sequence of stages spanning the

lifetime of a product, process, service,

facility, or enterprise from inception to

final use and disposition; in the case of

materials, includes extraction,

acquisition, manufacturing, and

ultimate reuse or disposal.

Life Cycle Costs Financial impacts associated with the

life cycle stages of a material, product,

process, service, facility, or enterprise.

Logistics Activities to move incoming materials

and distribute finished products to the

proper place, at the desired time, and

in the optimal quantities.

Mass Balance A quantitative or engineering

assessment of material flows and

transformations.

Materials Handling Process of developing and implement

ing manual, mechanized, and auto

mated systems to provide movement of

materials throughout a facility.
THE LEAN AND GREEN SUPPLY CHAIN 37

GLOSSARY

Materials Management The grouping of management functions

supporting the complete cycle of

material flow, from the purchase and

internal control of production materials

to the planning and control of work-inprocess to the warehousing, shipping,

and distribution of the finished product.

Materials Recovery Activities to prevent the release of

materials into air, water, or solid waste

streams and incorporate these materials

back into the manufacturing process.

Materials Tracking Assessment of what, where, why and

how much material is acquired,

incorporated into products and coproducts, and channeled into waste

streams throughout the materials life

cycle.

Net Present Value The discounted value of future earnings

(cash flows minus initial investment) for

a given number of time periods. The

discount rate reflects the company’s

time value of money and commonly

ranges from 10% to 15% per year.

Product Take Back Activities to obtain used products from

industrial customers or consumers, and

then recycle or reuse these products.

Purchasing Process of determining specifically

which materials, supplies and services

must be procured, and then obtaining

those resources from suppliers.
38 THE LEAN AND GREEN SUPPLY CHAIN

GLOSSARY

Recovery Process of obtaining a valuable

resource from a potential waste

material.

Sourcing Process of determining the types of

products and services required and

establishing purchasing relationships

with capable suppliers.

Supply Chain The functions inside and outside a

company that enable the value chain to

make products and provide services to

the customer.

Value Analysis A systematic approach that identifies a

required function of a product or

service, establishes a value for that

function, and finally provides that

function at the lowest overall cost.
THE LEAN AND GREEN SUPPLY CHAIN 39

INTRODUCTION REFERENCES

BIBLIOGRAPHY

The following references are suggested

for readers interested in obtaining more

in-depth information.

Environmental Accounting—General

Bartlett, K.L.; Lester, R.R.; and Pojasek,

R.B. “Prioritizing P2 Opportunities with

Activity-Based Costing,” Pollution

Prevention Review, pp. 17-26, Autumn

1995, www.pollutionprevention.com.

Cooper, Robin; and Kaplan, Robert.

“Activity-Based Systems: Measuring the

Costs of Resource Usage,” Accounting

Horizons, Vol. 6, pp. 1-13, September

1992.

Epstein, Marc. Measuring Corporate

Environmental Performance: Best

Practices for Costing and Managing

an Effective Environmental Strategy,

Irwin Professional Publishing and

Institute of Management Accountants,

1996.

Kennedy, Mitchell. “Critical Issues of

Total Cost Assessment: Gathering

Environmental Cost Data for P2,”

Pollution Prevention Review, Spring

1998.

Pojasek, Robert B. “Practical Pollution

Prevention: Using Cause and Effect

Diagrams in Your P2 Program,”

Pollution Prevention Review, Summer

1996, pp. 99-105,

www.pollutionprevention.com.

Description

Demonstrates how activity-based costing

enables companies to quickly identify

their largest environmental cost

generators.

Provides a broad overview of activitybased costing, one of the primary

methodologies for determining environmental costs.

Presents findings of a study of how

corporations are measuring, reporting,

and otherwise dealing with environmental impacts, costs, and benefits. Based

on reviews of documents from more

than 100 leading corporations and visits

to at least 30 of those corporations.

Gives tips on locating sources of data

within companies and on compensating

for missing data.

Describes methods for identifying the

root causes of such operational

problems as losses of raw materials or

hazardous constituents from a manufacturing process.
40 THE LEAN AND GREEN SUPPLY CHAIN

REFERENCES

Environmental Accounting—

General (Continued) Description

Pojasek, Robert B. “Practical Pollution

Prevention: Understanding a Process

with Process Mapping,” Pollution

Prevention Review, Summer 1997, pp.

91-101, www.pollutionprevention.com.

Tellus Institute. P2/FINANCE Version

3.0, Pollution Prevention Financial

Analysis Cost Evaluation Spreadsheet

Software Application, December 1996,

www.epa.gov/opptintr/acctg.

U.S. Environmental Protection Agency.

An Introduction to Environmental

Accounting as a Business Management Tool: Key Concepts and Terms,

EPA 742-R-95-001, June 1995,

www.epa.gov/opptintr/acctg.

Materials Management/Supply

Chain Management

Beveridge, T.S. “Materials Management

Means Dollars,” Coal, pp. 137+, April

1981.

Bierma, Thomas; and Waterstraat,

Frank. Innovative Chemical Supply

Contracts, A Source of Competitive

Advantage, TR-31, Illinois Waste

Management & Research Center,

Champaign, IL, September 1997,

www.wmrc.uiuc.edu/library/

hwrictr.htm.

Defines and describes benefits of

process mapping, including tracking

material flows, improving costing, and

identifying opportunities for improving

efficiency. Details a team approach to

conducting process mapping.

Provides spreadsheets for use with

Microsoft Excel for Windows and Lotus

1-2-3 for incorporating environmental

costs into financial evaluations for

capital investment and other decisionmaking.

Defines the key terms and explains

fundamental concepts of environmental

accounting.

Explains the benefits of materials

management approaches for the coal

industry.

Demonstrates that traditional chemical

supply relationships are inherently

wasteful and documents successful

chemical management programs in the

automotive industry.
THE LEAN AND GREEN SUPPLY CHAIN 41

INTRODUCTION REFERENCES

Materials Management/Supply

Chain Management (Continued) Description

Boike, Rick. “Material Planners Bear

Weight of Supply Chain,” APICS—The

Performance Advantage, February

1999.

Handfield, Robert; and Nichols, Ernest,

Jr. Introduction to Supply Chain

Management, Prentice Hall, New

Jersey, 1999.

Melnyk, Steven; and Denzler, David.

Operations Management; A ValueDriven Approach, Irwin, Chicago,

1996.

Thayer, Ann. “Supply-Chain Management,” Chemical & Engineering News,

pp. 12-16, January 5, 1998.

Use of Environmental Information

in Supply Chain Management

Callahan, Michael S.; and Sciarrotta,

Terry. “Pollution Prevention Using

Materials Management and Product

Substitution at a Power Facility,”

Pollution Prevention Review, Winter

1993-94.

Chemical Strategies Partnership. Tools

for Optimizing Chemical Management Manual: Strategies for Reducing

Chemical Use and Cost, San Francisco, Chemical Strategies Partnership,

1999, www.chemicalstrategies.org.

 Argues that minimizing total costs while

meeting production demands requires

tools, policy guidance, and organizational backing from a high level.

Synthesizes the successful approaches of

many companies into a perspective on

managing supply chains.

Provides educational overview of

warehousing, distribution, and other

materials management topics.

Discusses the growing trend toward

integration with suppliers and customers in the chemical industry.

This article describes two projects

conducted to reduce hazardous wastes.

One project used more effective

materials tracking methods, and the

other developed a framework for

identifying less hazardous substitutes.

Provides detailed guidance on how to

develop strategic partnerships with

chemical service providers who perform

some or all of the activities related to

managing chemicals in the company.
42 THE LEAN AND GREEN SUPPLY CHAIN

REFERENCES

Description

Use of Environmental Information

in Supply Chain Management

(Continued)

Freeman, Harry. Industrial Pollution

Prevention Handbook, Chapter 47,

pp. 777-789, McGraw-Hill: New

York, 1995.

Global Environmental Management

Initiative. Environment: Value to

Business, 1999, www.apics.org.

Handfield, Robert; Sroufe, Robert;

Walton, Steven; and Melnyk, Steven.

“Applying Environmental Criteria to

Commodity Strategy Decisions: Current

Practices and Future Tools,” publication

forthcoming, Dept. of Marketing and

Supply Chain Management, Michigan

State University, East Lansing, MI, 1998.

Marien, Edward. “Reverse Logistics as

Competitive Strategy,” Supply Chain

Management Review, pp. 44-52, Spring

1998.

U.S. Environmental Protection Agency.

Enhancing Materials Management and

Supply Chain Performance with

Environmental Cost Information:

Examples from Commonwealth

Edison, Andersen Corporation, and

Ashland Chemical, EPA742-R-00-XXX,

forthcoming in 2000, www.epa.gov/

opptintr/acctg.

Describes GM’s chemical service

program, which has reduced the

number and costs of chemicals used in

the company’s assembly plants.

Shows how companies can measure the

value of environmental initiatives.

Describes how a number of companies

have integrated environmental concerns

into their existing purchasing strategies

and presents a model for evaluating and

selecting suppliers.

Describes approaches for supply chain

professionals to address the direct and

indirect costs of rejects, recyclables,

returnables, and other “REs.”

Demonstrates the successful application

of environmental accounting to a variety

of supply chain management decisions

within three industries.
THE LEAN AND GREEN SUPPLY CHAIN 43

INTRODUCTION REFERENCES

Description

Use of Environmental Information

in Supply Chain Management

(Continued)

U.S. Environmental Protection Agency.

WasteWise Update: Extended Product

Responsibility, EPA530-N-98-007,

October 1998, www.epa.gov/wastewise.

Votta, Thomas; Broe, Robert; Kauffman

Johnson, Jill; and White, Allen. “Using

Environmental Accounting to Green

Chemical Supplier Contracts,” Pollution Prevention Review, Spring 1998.

Walton, Steve; Handfield, Robert; and

Melnyk, Steven. “The Green Supply

Chain: Integrating Suppliers into

Environmental Management Process,”

International Journal of Purchasing

and Materials Management, pp. 2-11,

April 1998.

Waste Reduction Institute for Training

and Applications Research (WRITAR).

Applying Environmental Accounting

to Electroplating Operations: An InDepth Analysis, EPA-742-R-97-003,

May 1997, www.epa.gov/opptintr/acctg.

Summarizes many successful efforts to

reduce waste by recovering materials

and products.

Reviews how environmental accounting

methodologies can help electronics

manufacturers develop chemical

services programs.

Compares the efforts of five companies

in the furniture industry to reduce their

environmental burdens via proactive

purchasing practices. Identifies five

primary areas to increase purchasing’s

impact on environmental results.

Reveals approaches to and potential

benefits of using environmental

accounting tools in the electroplating

industry.
44 THE LEAN AND GREEN SUPPLY CHAIN

REFERENCES

REFERENCES CITED IN TEXT

1. James Cox and John Blackstone, Jr.,

APICS Dictionary, Ninth Edition,

APICS, Falls Church, VA, 1998,

www.apics.org.

2. T.J. Bierma and F.L. Waterstraat,

Chemical Management: Reducing

Waste and Cost Through Innovative Chemical Supply Strategies,

John Wiley & Sons, Inc., New York,

forthcoming, in Chemical Strategies

Partnership, Tools for Optimizing

Chemical Management Manual.

(See next reference.)

 3. Chemical Strategies Partnership,

Tools for Optimizing Chemical

Management Manual: Strategies

for Chemical Use and Cost, San

Francisco, Chemical Strategies

Partnership, 1999,

www.chemicalstrategies.org.

 4. U.S. Environmental Protection

Agency, WasteWise Update:

Extended Product Responsibility,

EPA530-N-98-007, October 1998,

www.epa.gov/wastewise.

 5. U.S. Environmental Protection

Agency, An Introduction to

Environmental Accounting as a

Business Management Tool: Key

Concepts and Terms, EPA 742-R95-001, June 1995, www.epa.gov/

opptintr/acctg.

 6. Ann Thayer, "Supply-Chain

Management," Chemical &

Engineering News, pp. 12-16,

January 5, 1998.

 7. K.L., Bartlett., R.R. Lester, and R.B.

Pojasek, "Prioritizing P2 Opportunities with Activity-Based Costing,"

Pollution Prevention Review,

August 1995, pp. 17-26.

 8. Robert B. Pojasek, "Activity-Based

Costing for EHS Improvement,"

Pollution Prevention Review,

Winter 1998, pp. 111-120,

www.pollutionprevention.com.

9. Thomas Votta, Robert Broe, Jill

Kauffman Johnson, and Allen White,

“Using Environmental Accounting

to Green Chemical Supplier

Contracts,” Pollution Prevention

Review, Spring 1998, pp. 67-78.

10. Waste Reduction Institute for Training

and Applications Research

(WRITAR), Applying Environmental Accounting to Electroplating

Operations: An In-Depth Analysis,

May 1997, www.epa.gov/opptintr/acctg.

11. Mitchell Kennedy, “Critical Issues of

Total Cost Assessment: Gathering

Environmental Cost Data for P2,”

Pollution Prevention Review,

Spring 1998, pp. 87-96.
THE LEAN AND GREEN SUPPLY CHAIN 45

INTRODUCTION REFERENCES

12. Robert B. Pojasek, “Activity-Based

Costing for EHS Improvement,”

Pollution Prevention Review,

Winter 1998, pp. 111-120,

www.pollutionprevention.com.

13. Michael S. Callahan and Terry

Sciarrotta, “Pollution Prevention

Using Materials Management and

Product Substitution at a Power

Facility,” Pollution Prevention

Review, Winter 1993-94.

14. U.S. Environmental Protection

Agency, Enhancing Materials

Management and Supply Chain

Performance with Environmental Cost Information: Examples

from Commonwealth Edison,

Andersen Corporation, and

Ashland Chemical, EPA742-R-00-

XXX, forthcoming in 2000,

www.epa.gov/opptintr/acctg.

15. Chemical Strategies Partnership,

Tools for Optimizing Chemical

Management Manual: Strategies

for Chemical Use and Cost,

San Francisco, Chemical Strategies

Partnership, 1999,

www.chemicalstrategies.org.

16. Robert B. Pojasek, “Practical

Pollution Prevention: Understanding Process with Process Mapping,” Pollution Prevention

Review, Summer 1997, pp. 91-

101, www.pollutionprevention.com.

17. U.S. Environmental Protection

Agency, Enhancing Materials

Management and Supply Chain

Performance with Environmental

Cost Information: Examples from

Commonwealth Edison, Andersen

Corporation, and Ashland

Chemical, EPA742-R-00-XXX,

forthcoming in 2000, www.epa.gov/

opptintr/acctg.

18. World Business Council for

Sustainable Development, “Environmental Performance and Shareholder Value,” 1997. (Also see the

Eco-Efficiency Case Study Collection

on WBCSD’s web site at

www.wbcsd.ch.)

19. Eileen Gunn, “In the Future,

People Like Me Will Go to Jail,”

Fortune, pp. 190-200, May 24,

1999.

20. Joseph Fiksel, “Competitive

Advantage Through Environmental

Excellence,” Journal of Corporate

Environmental Strategy, Summer

1997.
46 THE LEAN AND GREEN SUPPLY CHAIN

INDEX

INDEX

A

accounting vi, 2, 6, 7, 13, 16, 29

See also environmental accounting, life cycle accounting

activity-based costing

7, 13, 16, 24, 35, 39, 44, 45.

Andersen Corporation ii, vi, 2, 5, 21, 22, 23,

42, 45

B

business processes iii, 3, 34

C

change management 13

chemical management providers 4

chemical service partnerships vi

ComEd. See Commonwealth Edison

Commonwealth Edison ii, vi, 2, 5, 29, 30,

31, 32, 42, 45

contingent costs

See costs: contingent

conventional costs

See costs: conventional

cost(s) 

and benefits 1, 2, 10, 12, 20-21

contingent 8, 9, 10, 23, 26, 32

conventional 7, 8, 9, 10, 23, 27

drivers vi

environmental. See environmental costs

permitting vi

external 8, 10

framework 8

image/relationship 8, 10, 23

life cycle 32, 33, 36

operating vii, 1, 3, 5, 6, 9, 25, 34

overhead vi, 4, 6, 17, 29

potentially hidden 8, 9, 10, 23

product 6, 8, 11, 36

reduction vi, vii, 29, 32, 33

training iii, vi, 8, 17, 32, 33

waste disposal 5, 9, 27, 30, 32

wastewater 6

cross-functional teams 13

D

disposal

 landfill. See landfill disposal

 waste. See waste disposal

disposition 2, 5, 9, 11, 19, 34, 35, 36

Dow ii, 34

DuPont 34

E

eco-efficiency 11, 21, 33, 35, 45

economic order quantity 20, 26, 27

enterprise resource planning 1, 13, 29

environmental

accounting vi, 2, 5, 6,12, 14, 23, 29,

33-34, 35, 39, 40, 42, 43, 44

benefits 23, 24, 29

burden(s) 1, 3, 12, 23, 30

burdens 6

cost(s)

2, 6, 8, 12, 14, 15, 16, 17, 21, 24, 29,

39

and benefits 6, 8, 9, 39

health and safety 4, 15

performance iii, 2, 3, 9, 12, 14-

15, 16, 31, 33-34, 39, 45

profile 2

ergonomic(s) 4, 10, 14, 21, 23

excess inventory 3

external costs. See cost(s): external

G

GM vi, 2, 4

H

hazardous

material(s) 8, 21, 33

waste 15, 17, 21, 27, 28, 36

Hewlett Packard 34
THE LEAN AND GREEN SUPPLY CHAIN 47

INTRODUCTION INDEX

I

IBM ii, 34

image/relationship costs 

See costs: image /relationship

Intel 2, 4

Interface Corporation 34

inventory iii, 2, 3, 4, 14,

19, 24, 26, 30, 32

excess. See excess inventory

management 4, 26, 32

minimization 30, 32

K

Kodak 5

L

landfill disposal 5

life cycle

cost analysis/evaluation 32, 33

cost(s) See cost(s): life cycle

life cycle accounting 5

logistics iii, 1, 5, 36, 42

M

mass balance(s) 15, 30, 36

material(s)

management iii, 1, 2, 3, 6, 8, 9,

12, 13, 14, 15, 16, 22, 28-

33, 37, 40, 41, 42, 43, 44, 45

obsolescence. See obsolescence

recovery 2, 5, 11, 19, 37

resource planning (MRP) 13, 15, 29

tracking 14, 15, 16, 30, 37, 41

Monsanto 34

MRPII 19. See also material(s): resource

planning

N

net present value 13, 23, 24, 37

Nortel 4

O

obsolescence iii, 14, 22, 24, 27

operating costs. See cost(s): operating

outsource iii

P

packaging

design 14

materials 9, 10

safety 31

systems 1

systems (reusable) 4

Pareto analysis 14, 17, 20

performance reviews 14, 15, 16

process maps 15

product design 5, 6, 29

product take back vi, 2, 5, 11, 37

profit margins 2

PSE&G 3, 4, 15

Public Service Electric and Gas. See PS&EG

purchasing 1, 2, 3, 4, 9, 10, 13,

15, 18, 22, 30, 31, 32, 38, 42, 43

Q

qualitative evaluations 21. See also

evaluations: qualitiative

quality 2, 6, 11, 14, 18, 21, 28-

29, 34-35

R

rate of return 20, 22, 23, 24

raw material vi, 6, 11, 18, 19, 22, 39

recovery iii, 19, 27, 31, 38

energy 27

resource 3

recycling 5, 14, 27, 30

reusable packaging systems. See packaging:

systems (reusable)

Rohm & Haas 34

S

sourcing 38

suppliers 1, 2, 3, 4, 10, 14, 15,

17, 18, 37, 38, 41, 42, 43

supply chain(s) iii, vi, 1, 2, 3, 4, 5,

9, 17, 29, 33-34, 38, 40

T

3M 2, 4, 34

total quality management 14
48 THE LEAN AND GREEN SUPPLY CHAIN

INDEX

V

value analysis 1, 38

W

waste accounting 30

waste disposal 9, 15, 26, 27

waste stream 14, 15, 19, 30, 31, 37

X

Xerox 34
This document is a product of EPA’s Environmental Accounting Project, a collaborative program with industry, trade associations, research institutions, and government agencies to increase the incorporation of environmental costs and benefits

into businesses’ decision-making. Environmental costs include material losses and

other costs of waste, equipment and facilities used to treat or monitor emissions,

and many costs typically associated with environmental management such as

reporting and disposal. Increased awareness of these costs leads to the identification of financially attractive opportunities to prevent pollution and eliminate wastes.

Companies can then make decisions that are both financially superior and environmentally beneficial.

The Environmental Accounting Project offers numerous educational resources that

demonstrate successful approaches to integrating environmental costs into

decision-making. Copies of this document and other Environmental Accounting

Project products can be obtained free of charge through the Project’s website

(www.epa.gov/opptintr/acctg) or through the US EPA’s Pollution Prevention

Information Clearinghouse (telephone 202-260-1023, fax 202-260-4659, or e-mail

ppic@epamial.epa.gov).

For additional examples of industrial waste reduction efforts, also visit EPA’s

WasteWise website at www.epa.gov/wastewise.

This document may be reproduced and distributed without permission from EPA.