White paper ERP for Green Supply Chain Management In Manufacturing
Content ERP for Green Supply Chain Management In Manufacturing... 1 Why Green Your Supply Chain?... 2 Investor demand for sustainability data is increasing... 2 Regulation is advancing... 3 You may need to provide documentation for the green supply chain of your customers... 4 Important considerations... 5 The Role of ERP... 7 Conclusion... 8
ERP for Green Supply Chain Management In Manufacturing By Bill Leedale Senior Advisor IFS North America Manufacturers are under increasing pressure to document their impact on the environment. This pressure is coming, for North American manufacturers, primarily from the private sector. Major manufacturers are asking their upstream supply chain partners to document their environmental impact as part of green supply chain initiatives. Green supply chain programs may be initiated in order to help manufacturers position themselves to their own customers or investors, or to facilitate environmental compliance. This focus on green extends well beyond the simple carbon footprint, which in and of itself can be a challenge to track given that almost any business activity, from turning on the lights to running a metal press, results in consumption of at least some fossil fuels. In coming to grips with an environmental footprint, a number of other impacts including discharges to waterways, landfills and other gas emissions must be monitored. The lifecycle impact of a product ranging from shipability, energy consumption, offgassing, service requirements and end-of-life disposal or recycling, must be taken into consideration. Government regulation is also a factor in the increased attention to green supply chains, in part because of European initiatives including the Reduction of Hazardous Substances (RoHS) and similar rules promulgated to varying degrees in individual states including California. These regulations place new demands on manufacturers to track the impact their operations and products have on the environment, specifically at the end of the product s lifecycle. In this whitepaper, we will address the various drivers for the green supply chain trend, share important considerations for satisfying a green supply chain initiative of a customer or initiating your own green supply chain initiative, and discuss the role of enterprise software like enterprise resources planning (ERP) in keeping pace with this industry trend. 1
Why Green Your Supply Chain? Certainly, today it is very appealing for marketing purposes to talk about how green, sustainable, environmentally and socially responsible you are. It is difficult to measure the value of perceptions of this nature in the market, so following are more quantifiable reasons to get into a position to document your manufacturing operation s impact on the environment including your suppliers who of course impact the total environmental footprint of your company and individual products you produce or sell. Investor demand for sustainability data is increasing This should be a serious consideration for public companies and their suppliers. In November of 2009, a group of institutional investors and chief executives of public companies from around the world met at UN Headquarters in New York to plan for responsible, sustainable investing. Towards the top of the agenda was the enhancement of sustainability reporting requirements and the establishment of ESG (environmental, social and corporate governance) indices. The concern for sustainability of public companies is not driven by altruism, but rather by a need to increase the degree of transparency and visibility of potential risks and liabilities that could harm long-term returns. While manufacturers can expect more rather than less in the way of environmental reporting requirements, substantial rules are already in force, including several statements of position (SOP) from the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (CPA)s. Because public companies must be audited by CPA firms, the following pieces of AIC positions ought to be of concern to manufacturers: Guidance on Accounting for Contingencies requires that liabilities be recognized in the financial statements if a loss is probable and the amount is estimable. This of course would include losses that would result from changing regulations that would require refit of existing manufacturing processes or product designs, refit of product in the field or reclamation of product at end of life. At the very least, even if the loss is not estimable, the likely loss must be accounted for in footnotes to financial reporting. These position statements also require that environmental contamination costs be expensed as incurred unless these costs extend the life or increase capacity of the property or mitigate or prevent future environmental contamination that could occur otherwise or if these costs are realized while preparing the asset for sale. 2
An SOP on Environmental Remediation Liabilities covers auditing and accounting topics dealing with environmental issues. It details the responsibilities of corporations involved in mandated environmental cleanup, and responsibilities of corporations to avoid environmental destruction. Moreover, 3,700 of the world s largest companies globally receive a survey from the Carbon Disclosure Project, and most voluntarily submit their information to this nonprofit, which shares data with institution investors and the public. Due to these market pressures largely from the investor sector, public companies will be under increasing pressure to green their own operations as well as their supply chain. Private companies that comprise the supply chain need to prepare accordingly. Regulation is advancing While myriad regulations impact North American manufacturers, touching on discharge to the air, waters and landfills, perhaps the area of environmental regulation that is advancing most quickly is in the area of Reduction of Hazardous Substances (RoHS). In the European Union, RoHS already governs the allowability of certain hazardous substances in a variety of products. RoHS generally restricts the use of hazardous substances in electrical and electronic equipment, while associated regulation, Waste Electrical and Electronic Equipment (WEEE) regulates the disposal of these products. RoHS and WEEE focus on certain heavy metals, specifically lead, mercury, cadmium and hexavalent chromium. In Europe, these regulations also cover the flame retardants polybrominated biphenyl (PBB) and polybrominated diphenyl ethers (PBDE), while states like California do not, as of yet deal with these substances in their RoHS regulations. California does, however, already have separate regulations that make it illegal to manufacture, process, or distribute products containing more than one-tenth of 1 percent of these substances by mass, which once again has green supply chain implications. California s RoHS regulation currently applies to a very narrow set of products, including computer monitors, televisions or other products that involve cathode ray or LCD screens, but bills have been advanced through the state legislature that would expand that state s RoHS initiative to mirror that of the European Union in scope. This means you will need to roll up in each of your assemblies the materials that are in each product with great detail. Some companies are also already manufacturing distinct product lines for Europe that, for instance, use mechanical electrical connectors instead of solder joints or welds. Manufacturers will need excellent functionality for tracking of the raw materials going into component parts sourced through a supply chain and for decision support in the area of product design. 3
You may need to provide documentation for the green supply chain of your customers This is actually a more daunting task than is reporting for regulatory compliance because a manufacturer can expect individual requirements from each of its customers with a green supply chain program. Each of these customers cares about certain things that they track for their supply chain and their green emphasis. This might not be the same things that another manufacturer tracks and requires documentation on. So, because most manufacturers have more than one customer, there is the need for a great deal of flexibility in an environmental footprint solution. Each customer with a green supply chain program is likely to have unique requirements for tracking different hazardous materials and environmental impacts depending on what it is that they are purchasing from you and what industry they are in. The six heavy metals included in RoHS, like lead and cadmium, may be typical and broadly of interest. But beyond that there will be other needs based on what customers want. So manufacturers need flexibility to track environmental impact by product, and also need the ability to customize the queries and reports so they can display what that customer cares about. Each customer can then, in turn, justify their product to the EU or to their customers as being in compliance with regulation or as being greener than a competitor s products. The takeaway here is that you will need the flexibility and the ability to track and report on a variety of rapidly changing metrics rather than one standardized set of environmental metrics. Obviously, given the nature of your product mix and the industries you operate in, there might be certain substances or metrics that will be most of interest to your customers. Most manufacturers will be able to determine the substances within their own processes and products that are potentially hazardous, in addition to carbon emissions, and determine what it is that they want to track and manage within their own operation and supply chain. But while each customer with a green supply chain mandate will be different, the real challenge will come not just from the data each requires but from determining the format for data interchange. Currently, there is no standard file format, no XML standard, for environmental data. There will likely be some standards developed in the years to come. But today, manufacturers need the flexibility to have all the data elements they and their customers care about stored in a way that is easy to get to. This means that a cookie cutter approach, or an integration to a third-party environmental product that can track, for instance, only carbon, will not be helpful in responding to green supply chain mandates. The way IFS Applications handles this is by rolling things up from bills of materials, routings and suppliers and into data on finished products. This means a customer is able to basically present all the information needed in a way that will work until standard export formats are established. As constituent parts change, as suppliers change and as the product design changes, you can re-roll the data and the 4
application will put that new data into your product structure, regardless of whether it is from your own internal manufacturing efforts or from a supplier. This simplifies the process of providing accurate environmental impact data for customers. IFS Eco Footprint Management tool allows inclusion of other environmental impacts not attributable directly to the product but to the company s operation as a whole, and amortizes it across the entire product line. So environmental costs that would normally be considered the equivalent of overhead can be included and managed, but that may actually extend well beyond what a trading partner would require, allowing you to manage your operation to become much more environmentally responsible than your competitors. Important considerations The single most important thing to keep in mind when planning to measure and manage your environmental footprint is that whether you are manufacturing something yourself, or purchasing it from a supplier, it has equal impact on the total environmental footprint of the product you sell. In some cases, your supplier may be liable for reclamation costs for components of subassemblies they sell you, but unless this is covered specifically in a contract, you should count on being solely responsible for what you sell when it comes to environmental impact. This means that you need excellent integration between your supply chain solution and your ERP system so that you can easily present comprehensive product data when asked by a customer or by regulators and manage your own manufacturing operations and supply chain to minimize environmental impacts. When it comes to suppliers, you will want to document what your suppliers are consuming for the products you are buying from them. Let s say you are buying a printed circuit board from a supply chain partner. You will still want to know by weight how much lead that has in it before you can sell that product in the European Union. Plastic components will need to comply with regulations on the amount of PBDE, and so on. The degree of post consumer waste incorporated in materials, sub assemblies and products can also be something that must be documented and managed. Apart from constituent parts and materials and their impact, there is also the environmental impact of logistics and transportation to consider. There will be an increasing need to factor in the environmental impact of different transportation methods and the distance of supply chain partners from your own location, along with the ability to roll that data up into the environmental impact for each individual product. Because you are not just tracking the amount of potentially hazardous materials in your product but their mass and the impact of mass on getting products and component parts and sub-assemblies from one place to the next, there are real implications not only for external vendors and suppliers but for multi-site companies. For companies with multiple sites or business units located any distance apart, this 5
can be a major factor for your internal supply chain. Enterprise applications that combine environmental footprint management with multi-site capabilities will be essential for companies with more than one site as they quantify their impact on the environment. In IFS Applications, it is possible to take environmental impact information from both internal and external suppliers and roll them up by product. This allows a manufacturer to present to their customer a very supportable number for environmental impact for the products that are purchased as well as for the company as a whole. The environmental impact of transport logistics between your own sites and between your site and your customers and vendors also has implications for product design. In design of the final product and in designing elements of the supply chain, the question of how products could be made to fit better in a cube will become paramount. Can products, subassemblies or parts nest in shipping, or otherwise fit into a truck more effectively? Product design for sustainability will not be restricted to just what is in a product, but in packaging materials and shipability. In Europe, for instance, there are requirements for recyclable pallets. We have not addressed this in regulation in the Western hemisphere yet, but may be headed in that direction. Product design is only one area where environmental footprint management in ERP is important for decision support. But perhaps a more critical area for environmental decision support in ERP software is risk management. An enterprise application ought to be able to help you evaluate the risks from an environmental standpoint when it comes to getting involved with a particular supplier or even the risk of working with an internal supplier like a different location or subsidiary. What are the environmental risks this supplier relationship poses, and what is the cost to mitigate those risks? Many companies find that investing in this approach is less expensive in the long run because the fines, loss of public goodwill and litigation costs involved in environmental incidents and liabilities are so high. It is important to determine the likelihood of a risk event occurring, the ramifications of that risk, and what steps are necessary for mitigation. Some companies will claim to go through risk analysis and engage in risk management when it comes to environmental and green initiatives, but what they really have is a very informal process that does not adequately identify the ramifications and outcomes that would result if a risk is not dealt with appropriately. Risk tends to flow downstream in a supply chain, so the degree to which a vendor has formal and well-documented risk management practices should be a criterion for selecting vendors in a green supply chain. In implementing a green supply chain or participating in the green supply chain of a customer organization, it will also be important to document and track the history of your environmental impact program, so we have given our customers the ability to see that they are in fact moving in the right direction when it comes to sustainability. The ability to look back on where you were in the past will also allow you to respond intelligently to changing legislation and other mandates that impact 6
lifecycle and end of lifecycle product impacts. In the case or durable and complex assets like capital manufacturing equipment and aircraft, changing environmental rules could have implications for ongoing support, maintenance and sustainment, and for spare parts and lifecycle extensions of these assets. The Role of ERP It quickly becomes clear that the depth and breadth of information required to track an environmental footprint is substantial. To simply ensure compliance with RoHS and customer-driven reporting requirements, deep integration between supply chain management, contract management, bills of materials and routings, multi-site/intercompany transactions and other enterprise functionality are required. While manufacturers might look at third party products that purport to offer some degree of environmental management functionality, the broad number of integration points will make it very messy if not impractical to get these bolt on applications to integrate well with ERP. Moreover, these integrations are subject to the drawbacks of all integration products. The integration is not stable because the ERP product and the third party environmental package are not on the same release schedule. This adds increased cost each time either product is upgraded to a new version. Instead, it probably makes sense for a manufacturer to look at whether their central ERP package carries enough information about each of the components that they buy or manufature to help them towards their initial environmental reporting or decision support goals. It is a simple matter of determining how your ERP package tracks what goes into each product and how it tracks what comes out of the product when it is disposed of, so you can ensure that it is disposed of in a manner appropriate for the environment. A next level of sophistication is an ERP product with environmental footprint tracking tool already embedded in the package. This delivers a level of futureproofing and simplicity that will become more and more in demand in the market as manufacturers continue to document their impact on the environment. In a recent survey commissioned by IFS, a sizable majority of respondents said they would like to see ERP vendors offer embedded environmental footprint management in their products, and would consider this in future software selection cycles. In these selection processes, manufacturers will have to determine first of all whether this embedded functionality even exists in the package they are looking at. Given the massive amount of data involved in this type of tracking and sustainability effort, ERP products with this type of capability built in will become more and more critical for manufacturing operations of all sizes because they will need to meet immediate needs and then know what their environmental exposure and liability is going forward. As regulations advance covering the products they have in the field, there may be liabilities with regard to reclamation of certain portions of those products, and in some cases immediate refits might be necessary. Regulations can 7
also have implications for spare parts, as some proposed legislation may require that replacement parts comply with new RoHS guidelines even when the initial asset those parts are for is not affected. ERP with built-in environmental footprint management functionality also will deliver data that is more accurate than data that might originate from several point solutions and then go through a series of manual processes in spreadsheets, as is the case in most companies today. Manual changes to data can of course result in more errors than an automated process. Moreover, a CPA firm, auditor or institutional investor may question to degree to which the books have been cooked during those manual processes. Within a modern ERP system, however, there is an indelible record of what data has been accessed and changed by who, and security and privacy rules can be set up to mitigate against the risk that environmental data may be tampered with. Conclusion Manufacturers are under increasing pressure to measure, manage and report on their environmental footprint, and this footprint by necessity extends beyond their four walls and into their supply chains. Whether manufacturers need to green their supply chain in order to document their own marketing claims of environmental sustainability, to satisfy customer mandates or to comply with government regulation, the vast amounts of data involved mean that enterprise software is the best way to meet the challenge. For practical reasons, and in order to arrive at data that is accurate and inspires the confidence of downstream trading partners, a centralized ERP solution is a better technology tool for these purposes than a collection of point solutions or, for that matter, manual record keeping. Bill Leedale is responsible for knowledge transfer in North America for the manufacturing product suite within IFS Applications. He has over 20 years of hands-on experience in the manufacturing arena from leading large-scale implementation projects to managing business process reengineering engagements for global companies. Leedale holds a B.A. in Business and Economics from Wittenberg University in Springfield, Ohio and an M.B.A. from Ohio State University, Columbus, Ohio. He is an author of the current APICS Operations Management Body of knowledge and a contributor to APICS current LEAN ENTERPRISE WORKSHOP. His certifications include Certified Fellow in Production and Inventory Management (CFPIM), and Certified in Integrated Resource Management (CIRM), And a Certified Supply Chain Professional (CSCP).
About IFS IFS is a public company (OMX STO: IFS) founded in 1983 that develops, supplies, and implements IFS Applications, a fullyintegrated, component-based extended ERP suite built on SOA technology. The company has more than 2,000 customers in more than 50 countries and focuses on seven main industries: aerospace & defense, utilities & telecom, manufacturing, process industries, automotive, retail & wholesale distribution, and construction contracting & service management. IFS has 2,700 employees and net revenue in 2008 was SKr 2.5 billion. More details can be found at www.ifsworld.com. For further information, e-mail to info@ifsworld.com Americas....+1 888 437 4968 Argentina, Brazil, Canada, Mexico, United States Asia Pacific...+61 2 8904 9222 Australia, Indonesia, Japan, Malaysia, new Zealand, Philippines, PR China, Singapore, Thailand Europe east and central asia...+48 22 577 45 00 BALKANS, Czech Republic, GEORGIA, Greece, Hungary, KAZAKHSTAN, Poland, RUSSIA, Slovakia, Turkey, UKRAINE Europe Central...+49 9131 77 340 AUSTRIA, Belgium, GERMANY, ITALY, netherlands, SWITZERLAND Europe West...+44 1494 428 900 France, Portugal, Spain, United Kingdom Middle East and africa................................................+9714 390 0888 India, South Africa, Sri Lanka, United Arab Emirates Nordic...+46 13 460 4000 Denmark, Norway, Sweden Finland and the Baltic area.... +358 102 17 9300 Estonia, Finland, Latvia, Lithuania www.ifsworld.com This document may contain statements of possible future functionality for IFS software products and technology. Such statements of future functionalit y are for information purp oses only and should not be interpreted as any commitment or representation. IFS and all IFS product names are tr ademarks of IFS. The names of actual c ompanies and products mentioned herein may be the trademarks of their respective owners. IFS AB 2010 En4705-2 Production: IFS Corporate Marketing, February 2010.