Mutual gains
Environmental strategies for manufacturing operations explode the cost/compliance dichotomy
By Pamela J. Gordon, CMC -- Manufacturing Business Technology, 2/1/2006 7:00:00 AM
Meeting environmental requirements set by regulators and customers can seem a thankless task. Yet minimizing resources consumed by facilities and products—the ultimate purpose of many environmental regulations—leads manufacturers to meet other needs: e.g., running lean operations, pleasing investors, and enlarging market share.
Successful companies around the globe—including U.S.-based Texas Instruments (TI); U.K.-based BAE Systems; The Netherlands-based Philips; and Japan-based NEC—have proven that gains for business and the environment are mutual.
An investigation of business benefits achieved by 20 organizations through minimizing environmental impact suggests four common strategies (see table, p. 39).
For example, to take step one—question wasteful practices—TI practiced its "zero wasted resources" philosophy by requiring employees to focus on eliminating anything that did not add value to the chip-making process. These activities fit well with TI's business culture and long-term quality philosophy. Says Shaunna Sowell, VP and corporate staff manager of worldwide facilities, "Our focus on relating environmental, safety, and health to the cost of producing a chip resulted in real profit for TI."
Next, as described in step two, it is wise policy to use business language to characterize environmental improvements. At BAE Systems, each of the plant's business managers nominates a champion to tackle environmental issues. These "environmental coordinators" rarely have backgrounds in the environmental field, so they take a course on teaching categories of manufacturing waste—e.g., general, metals, liquids, dry hazardous materials, chemicals, and recycled.
BAE management also knows the effects of manufacturing waste on the costs of goods sold. According to Danny Martland, environmental advisor for BAE, "The training addresses how our children and our children's children will be affected by the environmental choices we make today."
Involving executives and teams when implementing improvements speeds attainment of business and environmental goals—which is step 3. Philips' EcoVision award makes it clear to all employees that top management encourages environmental focus. An international jury judges employee nominations. Then Philips' president, or a senior VP, subsequently presents two monetary awards: one for the most ecologically friendly product, and the other for the best ambassador of ecological practice.
Step four lends validity to the "lean and green" equation and propagates further environmental success. NEC Semiconductor Group worked with Japan's Ministry of International Trade and Industry (MITI) to introduce "environmental accounting" to its business. The new accounting procedures track resources used to protect the environment and resulting money saved or earned. In developing environmental accounting, NEC and MITI addressed these questions:
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Should potential lost revenue be incorporated into the accounting system? For example, if a company is not green enough, its customers may purchase products and services from competitors. But by being green, a company can prevent lost revenue.
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How best should an organization calculate cost savings from recycling materials in one year when, for example, it recycled 50 percent of its waste two years ago and an additional 25 percent last year? Should the savings for this year be calculated as just 25 percent?
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How should an organization measure environmental impact uniformly throughout its locations and divisions, and track project-specific cost savings to promote accountability?
Based on performance
In the four strategy examples noted—and in hundreds more—companies taking environmentally beneficial steps are increasing profits by reducing operating and product costs as well as designing more efficient products. Savvy investors know they will profit from evaluating what success their portfolio companies can have in reducing waste and designing competitively superior products—all leading to greater ROI.
In fact, many mutual funds that screen companies according to environmental and social criteria perform better than non-screened funds. Stock analysts have been writing favorable reports on the lean manufacturing prowess of electronics companies—believing that reducing wasted manufacturing space, processes, and materials contributes to a healthier bottom line. What most stock analysts may not realize is that steps toward "lean" nearly always yield a "green" company as well.
Even stock analysts who never ranked environmental programs high in their company evaluation criteria are now taking notice. Those analysts tracking companies selling electrical and electronic products are more aware that regulators and corporate customers require these products be devoid of hazardous substances and recycled after use.
For example, on July 1, 2006, the Restriction of Hazardous Substances directive will block all noncompliant products from entering Europe, and countries will be assessed fines for failure to recycle products sold there. Availability of noncompliant components and materials is coming to an end. To avoid product delays, engineers are redesigning products to consist solely of benign parts. To meet recycling targets profitably, products now will be faster and easier to assemble and disassemble for recycling. With billions of dollars of revenue, market share, product shipments, and corporate image at risk, it's no wonder stock analysts are starting to notice the environmental responsibility of companies they track.
Cooking up changes
A long-standing recipe for a successful business is as follows:
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Find a new or changing market need.
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Fill that need.
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Repeat the process.
Many businesses haven't followed this recipe, and as such, their market shares have diminished, or companies have failed. By 2016, which companies will have failed because management did not anticipate the needs of markets that no longer tolerate hazardous substances? Possibilities include:
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Chemical companies—and users of those chemicals—wherein management fails to redesign products before approximately 30,000 chemicals are banned by the European Union's (EU) Registration, Evaluation, Authorization of Chemicals directive.
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Electronic and electrical companies that miss recycling thresholds in regions where producers are responsible for keeping their products out of landfills and incinerators.
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Companies offering products that consume too much energy—given enactment of the EU's Equipment using Power directive—as customers scrutinize gas and electric bills as never before.
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Companies still relying on petroleum-based materials—and experiencing supply chain delays and higher costs—while competitors invent new uses for renewable resources (e.g., corn-based plastics) that are widely available, less expensive, and preferred by customers.
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Companies offering products or packaging considered unnecessarily large and more expensive to ship from manufacturing regions to customers.
Anticipate needs
Which companies will enlarge market share the most based on anticipating changing environmental needs, and filling those needs first and best? From today's perspective, it could be that Japanese companies will be the market winners, for these reasons:
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Numerous Japanese companies have invented ways to make electronic products as small and energy-efficient as possible. For example, Tokyo-based Sony has been switching from petroleum-plastic materials to renewable plastics and virgin or recycled metals that are in demand for aesthetic and environmental reasons.
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Sale of hybrid-electric cars grew 960 percent from 2000 to 2005; 95 percent of this niche is occupied by Japanese companies. At Detroit-based General Motors, General Manager Bob Lutz—who chose horsepower over efficiency—admits the company dropped the ball on hybrids. Though some American car makers now offer hybrids, these vehicles are much less efficient than their Japanese counterparts. In California, three models of hybrids—all Japanese—are now allowed in the high-occupancy-vehicle lanes.
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Today there are Japanese recycling facilities considered to be five to 10 years ahead of recycling technology elsewhere. Many of these companies have lucrative plans to export advanced technology to other regions. Japan's goal is to move forward with home appliance and other electronics recycling, anticipating that Japan will run out of landfill as early as 2008. To this end, Japan created aggressive recycling targets back in 2001. So far, recycling is about 30 percent above those targets. Among the world's leading environmental engineers is Tokyo-based conglomerate Ebara Corp., which is dedicated to building a zero-emission society. It has developed numerous in-house technologies for energy conservation, pollution control, advanced recycling, and closed-process engineering systems and services. Revenues for these environmental programs topped $2 billion in 2004. By penetrating the Chinese market, Ebara's revenues should soar.
Scramble, or insulate?
Given the escalating environmental requirements from both global regulators and the markets themselves, it is best for a business to swiftly convert its products and way of thinking to sustainability. This year presents a critical decision point: do you scramble to meet a succession of environmental requirements, or "insulate" your company and its products from regulations by being competitively superior? The latter choice will result not in "thankless tasks" but in "thank goodness our operations are running leaner, we are pleasing investors, and we have enlarged our market share."
Four steps to "Lean" and "Green"
| Step | Strategy |
| 1. | Question wasteful practices. |
| 2. | Gain endorsement for improvements by making sound business cases. |
| 3. | Involve executives and teams for the swiftest implementation. |
| 4. | Measure both financial and environmental progress, and keep improving. |
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