Environmental Supply-Chain Management versus Green Procurement in the Scope of a Business and Leadership Perspective

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1 Environmental Supply-Chain Management versus Green Procurement in the Scope of a Business and Leadership Perspective M.H. Nagel* Delft University of Technology Faculty of Industrial Design Engineering, Department of Engineering Design Jaffalaan BX Delft, The Netherlands Phone: , Fax: mnagel@lucent.com *Mr. Nagel conducts his research at Lucent Technologies Abstract This paper presents two different approaches, related to the integration of environment quality in the supply chain of an Original Equipment Manufacturer (OEM). The approach of Green Procurement (GP) and Environmental Supply- Chain Management (ESCM) will be outlined and discussed from a business and leadership perspective. This means attention for such aspects as strategy, costs, short and long-term, awareness, products, processes and innovations from an environmental perspective. Furthermore, both approaches will be compared and discussed in the scope of realization of a sustainable supply chain. I. Introduction Current procurement processes between equipment manufacturers of electronic consumer and telecommunication products and its suppliers involve elements as price, delivery performance, service, access to technology, quality and reliability. In addition to these elements, attention is focusing increasingly on the environment. This attention is generally driven by the environmental concern in relation to the earth. Environmental concern is triggered by environmental effects such as acid rain and acidification, the greenhouse effect, heavy metals, dehydration problems, and so on. All these effects have influence, one more than the other, on the earth and the health of its population. Opinions differ about the degree of influence, and these opinions are based on different environmental research results, measurements and calculations. This triggers global debate and defines the different forms of environmental policies that governments pursue. The different policies influence the electronics industry /00/$ IEEE 219 and hence the supply-base of an OEM and the OEM itself. Based on this regulatory pressure and questions from the customer, the global original equipment manufacturers are gradually switching from a defensive to a proactive role. This means that they develop their own strategies, tactics, goals, and ethics from a business scope. Such a change in attitude also means that issues relating to the environment fall more within the scope of an opportunity rather than constituting a threat. Regarding the direct supply-base of an OEM, the most diverse components and materials are procured and included in its products. The manufacture of telecommunication products requires semiconductors, cables, printed boards, plastics, cabinets, transformers, capacitors, and so on. These components are produced in different types of processes. They are the sum of base or raw materials. The raw materials are mostly delivered through a supplier of the supplier. The following supply chain can be outlined for copper lead frames in integrated circuits, for example from cradle to produced component : copper extraction, pure copper production, lead frame production for semiconductor devices and preparation before chip assembly. Several customer-supplier relationships exist in this chain. Each process step in the chain produces waste, emissions and subcomponents, while each process step requires energy, auxiliary compounds, water, raw materials andor sub-components. Beside the processes in the chain, products from the chain can be analyzed related to mass, environmentally hazardous substances, re-use, recyclability, energy use and a recycled material content. The entire chain, from cradle to grave, of telecommunication products can be described as a sum of supply chains related to different component industry branches plus product manufacturing, use and waste-handling options.

2 Different environmental approaches can be applied with respect to the OEM s supply-base or supply chain outlined above. This paper outlines two approaches in the scope of a business and leadership perspective. Approach A, Green Procurement and Approach B, Environmental Supply-Chain Management are described, discussed and positioned at a level of sustainability as both approaches are driven from the concept of sustainable development [ Approach A: Green Procurement Currently the concept of Green Procurement is often used in the electronics industry, but no clear definition or description is available. Green Procurement is a concept that can be positioned in each customer-supplier relationship, but the content will differ depending on the position in the chain. In most cases, Green Procurement is linked to a large variety of key words related to the procurement of products or components. These key words are: eco-labels, the avoidance of environmentally hazardous substances, energy use, the use of recycled materials, the mass, the re-usability of some parts, the recyclability and the disassembly time. All these words together give content to the term Green Procurement. In practice it means that one or more questions have been defined per key word. Some questions are open, but others enable the supplier to respond with a yes or a no. With respect to the material content of telecommunication products, different procurement standards are circulating. These standards differ per company, per country or per region. Procurement standards related to environmentally hazardous substances are the most frequently used. Beside key words related to products and components, Green Procurement can also be linked to, production process related key words, as use of environmental management systems and use of ozone depleting chemicals. Furthermore, Green Procurement has been linked also to design processes by key words as Eco-Design or Design for Environment (DE) or Life Cycle Assessment (LCA). An example of a question in such a procurement survey is: have you executed life-cycle assessments on your developed product? Another example is: do you have a design for environment program in place? In practice, the supplier will answer these questions positively, to create a positive image for himself. Based on the positive answers, the supplier will be assigned a high ranking, which is important from a business perspective. From a customer standpoint, Green Procurement is mostly an action-driven activity. It means that the supplier should fulfill a set product or componentrelated environmental requirements. Such an actiondriven attitude often comes from a direct regulatory driver. For example, the Waste Directive (Waste on Electrical and Electronic Equipment, WEEE). This directive was issued on the initiative of the European Union. The directive states that the Member States shall ensure that the use of environmentally hazardous substances like lead, mercury, cadmium, hexavalent chromium and some flame-retardants is to be phased out by January 1, When such a directive becomes a law and a mobile phone, for example, contains some quantities of these substances, what does it infer about the policy of the equipment manufacturer? The simplest answer is that the manufacturer has not implemented the effects of these regulations into its product requirements and has not influenced its supply chain. When in this case the competitors are perceived to be more green, a loss of competitive advantage and fewer additional sales may ensue, while the company s brand image may also diminish. All these aspects are related to costs and can be avoided by the manufacturer paying greater attention. An estimation of these costs is difficult: but can become largely dependent on circumstances. The elimination of environmentally hazardous substances is triggered from a direct driver, the legislation and therefore the product requirements. The direct driver influences the supply chain, the supplier selection, qualification, contracting and performance measurements. The direct driver brings about cost avoidance. A supply-chain approach from the direct driver is a re-active one and not based on the vision, innovation and leadership of the company. In summary, the Green Procurement approach, the next set of behavior elements can be established, as: An action-driven program from customer to supplier containing environmental requirements, criteria or a survey for the determination of the supplier s performance. An extemal direct driver e.g. legislation, customers or competitors, forms the cause of the action-driven program. It is not primarily focussed on environmentally technological innovations, but it can trigger innovations. It is cost avoiding. It is not driven from an environmental vision, procurement strategy and leadership on the long term. 220

3 It creates awareness in the customer-supplier relationships, which can form a platform for sustainability in the business from the bottom up. It is mostly related to the material content of products and components. general, Green Procurement can be described as several short-term actions driven from the customer to the direct supplier, which have the above-mentioned behavior elements and are activated by external direct drivers. Figure 1 shows an image of Green Procurement in practice between an OEM and its suppliers SI, Sz and Sf. :... i Fig. 1. Green procurement in practice 111. Approach B: Environmental Supply- Chain Management Supply-chain management is a widely accepted concept in global operating companies independent of the kind of branch. Each company, whch produces services or products, has its own set of suppliers. The total supply-base of an OEM of telecommunication products can be divided into several commodities such as components and materials, products for resale, equipment and operations, office equipment, advertising, transportation and facilities. The product realization process of telecommunication products primarily needs components, materials and products for resale, while other supplied services are of a more supportive nature. For the management of the supply-base many concepts are circulating, like supplier management, supplier classification, supplier qualification, supplier rating, supplier selection and supplier monitoring [2]. In the scope of this paper, the supply-chain management approach can fit to the whole supply-base. In general, the supply-chain management approach with the key element: supply and technology strategy, can be derived from the following elements: 1. desired relationships between an equipment manufacturer and its suppliers, 2. decisions related to make or buy, 3. product standardization, 4. business strategy, 5. product requirements, 6. existing supply environment. These six elements are inputs for the development of the supply and technology strategy. Figure 2 shows a process flow of supply-chain management, which contains the supplier and technology strategy development, supplier selection, supplier qualification, contracting, operational interaction and monitoring and improvement of supplier performance. From a theoretical viewpoint, these six process steps realize a cyclical process. Each company needs a business strategy that defines the business, what it wants to achieve, and how it plans to compete. In addition, the business strategy needs to identify the customers of the final product or service: the end customer. The end customers needs drive the product or service requirements. Finally, the business strategy needs to drive the supply-chain management strategy. The supply and technology strategy development is also influenced by the business and technical conditions in the supply-base that affect supply and technology strategies. The business strategy, product and service requirements, and supply environment set the fundamental direction for the supply-chain strategy. In this cyclical process of Figure2 the tangibles of price, delivery or flexibility, service, access to technology, quality and reliability operate continuously. Beside these five tangibles, a new element can be added: environmental quality. In the scope of strategy development, environmental quality can be linked to the business strategy, the existing supply-base, product requirements, supplier selection, qualification, sustainability, etc. When the concept of environmental quality is included in the business strategy and the product requirements, an environmental supply-chain management strategy can be derived or vice versa. An environmental supplychain strategy sets the direction for supplier selection and qualification, contracting, operational interactions as well as monitoring and improving supplier performance. The development of such a strategy should include the concept of environmental quality 221

4 ~ and this should then be merged with the existing supply-chain strategy. This means that an existing concept such as supplier qualification should be evaluated from an environmental perspective as well as the monitoring and improvement of- supplier performance. Such a strategy development is a timeconsuming activity, which needs supply-chain and environmental knowledge. The development of such a strategy can be conducted independently for external direct drivers, see Figure 1, but based on an indirect driver as vision and leadership. Inputs Supplier and Technology Y Strategy Development I I Supplierselection t I I F I I 1 Supplier Qualification * Contracting I I compounds as NO, and SO2. A minimization of energy minimizes CO2 emission and hence minimizes the greenhouse effect. The costs for the energy use for heat and power by eight selected sectors in the electronics industry in the United States are shown in Table 1 [3]. The original-equipment sector in Table 1 contains computers, computer storage equipment, terminals, peripheral equipment, etc. Other electronic components, is a sector, which includes crystals, filters, switches, etc. Table 1 shows the energy costs of the supply chain of the equipment manufacturers. Sectors 1, 2 and 8 have the highest energy costs. These energy costs influence the selling prices of the components and products. A second example of an indirect driver is the materials use in the supply chain. An efficient use of material resources is coupled to the cost price and the selling price of a component or material. Table 2 gives insight into the material costs of the electronics industry in the United States. Beside the original equipment and other electronic components sectors, the printed boards, semiconductors and connector sectors are highly material consuming. When the material costs per produced component in the supply chain can be reduced, environment is linked to the Total Cost of Ownership concept Monitoring and Improving Supplier Performance Fig. 2, Supply-chain management approach Within the scope of supply-chain management, an indirect driver is defined as a driver that is not triggered by external sources like legislation, customers or competitors, but by the principle of sustainability. Studying the existing supply chain from this principle, a new economic perspective can also be seen. The supply chain can be broken up into semiconductors, capacitors, etc. The production of these components needs energy, materials and water and produces waste. In most cases, energy is procured from a utility company. The production of electrical energy results in the emission of CO2 and acid ~ 4 I Resistors,I I Coils and transformers I I 6 Connectors 46.8 Other electronic components Original equipment 338 Table I, Energy costs electronics industry in the USA during 1991 Total Supply Chain of Original Equipment Manufacturers Printedboards Costs (M$) 2678 Semiconductors Capacitors Resistors Coils and transformers Connectors I Other electronic components I I Original equipment I Table 2, Material costs electronics industry in the USA during

5 A third indirect driver is the water use per produced component. No detailed information per branch of industry is available about water use as outlined in Tables 1 and 2. A fourth indirect driver is the use of auxiliary compounds. Many chemical compounds are used in all eight branches of industry mentioned. These compounds are used, but not included in the end product. For example, processing 1 kg wafer (bare chips) requires 116 kg chemical compounds, with an average number of mask steps of 8.5. With respect to paclng materials, the minimization of the mass can be identified as a fifth indirect driver. These five indirect drivers are linked to the suppliers cost structure, which contains material costs, costs for energy, water, auxiliary compounds and packing materials, possible taxes for waste, labor costs, factory overhead and sales and administrative costs. A decrease in material costs, as well as costs for energy, water, etc., results in an improvement of the environmental performance of a facility, when suppliers are triggered to invest in environmentally technological innovations. Such a trigger can be realized when they are measured and benchmarked on their environmental behavior. A supply-chain management approach from the indirect drivers is a pro-active approach. Summarizing the Environmental Supply-Chain Management approach, the next set of behavior elements can be established, as: A strategy-driven program from the customer to the supplier, which contains a full integration of environmental quality in the supply chain in the scope of a business perspective. An internal set of direct drivers, based on vision and leadership forms the basis of the strategydriven program. It is primarily focussed at activating environmentally technological innovations in the supply chain. It is cost effective. It creates awareness in the customer-supplier relationships, which can form a platform for sustainability in the business from top down. It is related to the material content of products and components and the production processes. In general, Environmental Supply-Chain Management can be described as a long-term strategy-driven program from the customer to the direct supplier primarily, which has the above-mentioned behavior elements and is activated by internal direct drivers. Figure 3 shows an image of Environmental Supply- Chain Management in practice between an OEM and its suppliers SI, S2 and S3, and the influence of these suppliers on S4, S5 and S6 etc. Environmental Quality in the Supply Chain Fig. 3, Environmental supply-chain management in practice IV. Discussion of Approach A and B A discussion of approachesa andb above can extend from a comparison. In general, each approach exhibits a number of behavioral elements. A confrontation of the approaches can be realized from the elements and should be positioned in the scope of realization of sustainability levels in the supply chain. A comparison of both approaches based on the elements is shown in Table 3. Both approaches can be applied with respect to greening the supply chain, but the effect of ApproachA will be less than Approach B related to the feasibility of sustainability levels. In practice, Approach A is chosen most frequently because it is a direct simple applicable approach, which creates awareness in the operations between customers and suppliers. But when ApproachA is not followed by ApproachB, the supply chain will not be triggered to realize higher sustainability levels. Regarding the supply chain as a number of one or more suppliers, the next general sustainability levels can be defined: 1. A small product or component change, from an existing product or component, which can be realized by the direct supplier independent on suppliers deeper in the chain. 2. A product or component change, primarily from an existing product or component, which can be realized only by two or more suppliers in the chain. 223

6 A product or component innovation, which can be realized by one or more suppliers in the chain. A process innovation in the chain, which can be realized by applying the concept of environmental quality in each customer-supplier relationship, which can be realized by several different supply chains. Ac tion-driven External direct drivers Re-active Minimum vision and leadership Short-term I 5 1 approach ti 7 Minimum trigger of innovations. Cost avoidance Strategy-driven No external drivers Pro-active Based on vision and leadership Long-term approach Triggers innovations Cost effective I Create awareness I Create awareness I frombottomup Mostly related to from top down Related to products, components and processes Table 3, Comparison of Approaches A and B A product or component change and an innovation are measurable by the following tangibles: a recycled material content, minimum mass, minimum use of energy, minimum of environmentally hazardous substances, maximum re-use and maximum recyclability, when re-use is not feasible. The degree of feasibility of these tangibles differs with respect to changes or innovations. A process innovation is measurable by the following tangibles: when ar product or component is produced with a minimum of materials, auxiliary compounds, water, energy, airborne emissions and waste and is transported to the customer with a minimum of packing materials. The product and component changes and innovations as well as process innovations are time-dependent and can be activated from Approaches A andb. The feasible sustainability levels as function time, with parameters Approaches A and B, have been outlined in Figure 4. In general, sustainability levels 1 and 2 can be realized with Approach A, while application of Approach B is necessary for the realization of levels 3 and 4. Currently, Approach B is not chosen because it is not a direct simple applicable. Approach B cannot be executed without research into production facilities of strategic suppliers in a partnership. Research from an environmental, a quality and a business perspective in different branches of industry is the cornerstone for usable Environmental Performance Tools in the supply chain. Such Tools are composed of two parts: 1. A set of specific questions related to: use of materials, auxiliary compounds, water, energy and packing material and the airborne emissions and waste, the so-called data collection process. 2. A model, which generates one performance value between 0 and 1 (1 is the best). Sustainability levels I b time Fig. 4, The influence of Approaches A and B on the realization of sustainability in the supply chain V. Conclusion Currently, the approaches of Green Procurement and Environmental Supply-Chain Management are both applicable to the supply chain. But from a sustainable business and leadership perspective, the Environmental Supply-Chain Management approach will be leading on the long term for the realization of a sustainable supply chain. References [l] - Allenby B.R., Graedel T.E., Industrial Ecology, pp. 8,9,63-71, ISBN [2] - AT&T, Supplier Quality Management: Foundations, AT&T Customer Information Center Order Entry Department, P.O. Box 19901, Indianapolis, IN 46219, USA, 1994, ISBN [3] - Microelectronics and Computer Technology Corporation (MCC) (1996), Report MCC-ECESM , Environmental Roadmap, 1 Edition June 1996, phone , USA. 224