'Green' procurement goes into the black
Saving trees is good, but for purchasing pros saving money is even better. Here is how three companies have found a positive return-on-investment for environmentally friendly purchasing.
By Maria Varmazis -- Purchasing, 5/8/2008 2:00:00 AM
Not long ago when business people used the word “green” they were talking about money. Now Green—in and outside of business—refers to a consumer trend towards environmentally friendly practices. But many businesses are making the case that it doesn't have to be just one or the other—Green can conserve both the environment and your budget.
Just ask IBM, Herman Miller and GlaxoSmithKline. At IBM, sustainable sourcing and supply chain efficiency go hand in hand. Herman Miller uses Green concepts to optimize the lifecycle of their products. And at GlaxoSmithKline, purchasing works with the company's research and development staff to find ways to save energy, water and cut down on emissions. Though their definitions of Green and their approaches to environmentally friendly purchasing may differ, each company follows the three Rs—reduce, reuse, recycle—and each works to find the best way to promote Green throughout their respective supply chains.
Video: GE, IBM, Herman Miller lead green purchasing charge
Big Blue goes Green
The Armonk, N.Y.-based technology giant IBM takes a multitier approach to implementing environmentally friendly policy, says John Gabriel, procurement manager for supply chain social responsibility. Instead of keeping Green activities in a separate silo, cordoned off from the rest of the company and called upon when it's convenient, Gabriel says the company has integrated a Green ethos of global environmental stewardship into all aspects of what it does. “We don't have a task force or specialized Green procurement brigade,” he says. “We've integrated many variables into our sourcing approach, one of which is environmentalism, because we know in most cases we're going to get a cost reduction.”
Employees have projects and key performance indicators (KPIs) that measure their progress and compliance with Green policies. “We look at environmentalism as an opportunity to contribute to cost reduction,” says Gabriel. “Broadly defined, if you can reduce demand or select something that's more efficient, you can claim and generate cost savings on that.” To determine the Green impact on product production, he says, you need to know the cost for each part and service that goes into a product at the most granular level possible.
And Gabriel has the numbers to back him up. For example, between the years of 1990 and 2006, IBM reduced its electrical demand by 4.5 billion kilowatt-hours, saving money and cutting emissions by approximately three million metric tons of CO2.
IBM also increased the amount of recycled materials it uses in product manufacturing. In 2004, 3.77% of the company's direct materials were recycled components. By 2006, the number grew to 11.74%. Additionally, the company reports that 38.6% of its plastic resins by weight in 2006 contained recycled content, which smashed the corporate goal of 5% for that year.
Those recycled resins aren't consumer-grade, like most recycled plastics, but rather they're engineering-grade. That means they are of high-enough quality to be used in industrial applications. Before Gabriel and his team started to ask suppliers for recycled engineering-grade resins in the mid-1990s, the recycled plastics on the market were as expensive if not more expensive than virgin resins, and of lesser quality.
“We helped the supply chain locate sources of engineered resins, made sure they could get a feedstock for that, and worked with them to create an economically attractive resin that was either at or below cost of virgin resin,” Gabriel says. “As soon as you do that, things become self-sustaining.” By 1999 IBM released its first personal computer where most of the plastic parts were made from this recycled engineering-grade resin.
IBM also worked with suppliers to develop more environmentally friendly painting and coating systems. For a long time, most of the metal parts IBM used for computer casings were spray-painted with a liquid paint, which was petroleum-based and as Gabriel puts it, “rather messy environmentally.” When, in the late 1990s, Gabriel and his team found an alternative—powder paints—suppliers resisted.
IBM wanted to go with powder paints because they greatly reduced waste—any extra paint sprayed during an application can be gathered up and put back into the process. And because the paints are dry and not liquid, contamination risks to the environment are low. “Asia in the late 1990s was not into powder painting, everything was liquid and they could just throw labor at it,” says Gabriel. “But by showing suppliers where this was going technologically, as they invested in future plants, they started to invest in powder coat lines.”
When IBM began using powder paints in the mid-1990s, only about 10% of applications used these paints. Gabriel estimates by about 10 years later, in 2007, well over 95% of IBM's applications use this paint.
The logistics angle
But, the bulk of carbon emissions in almost any supply chain don't come from manufacturing processes. Instead, they come from logistics. David Simchi-Levi, professor of civil and environmental engineering and engineering systems at Massachusetts Institute of Technology, says some estimates attribute 70% of a company's total carbon output to freight alone. He says there are two major financial headaches for companies right now—cheaper labor and production costs in Asia on the one hand, skyrocketing oil and consequently freight costs on the other. “As oil prices go up to $150 a barrel, it puts a lot of pressure on companies to be more efficient in their supply chain,” says Simchi-Levi. “One way to understand this is that high carbon emissions are a sign of inefficiency in the supply chain.”
Some companies opt to shuffle their distribution centers to more centrally located nodes, cutting down time-to-delivery and overall logistics costs while also reducing carbon output, says Simchi-Levi. The strategy IBM and others have taken is to join the Environmental Protection Agency's SmartWay Transport Partnership, which partners companies with freight carriers that are actively working to reduce their carbon emissions by 2012. The EPA's goal for the SmartWay program is to cut 33-66 million metric tons of carbon dioxide by that date.
Since most companies outsource their freight down the supply chain, there's only so much a company can do to influence how their carriers operate. It then falls on the company to find ways to cut the amount of freight needed as a method to cut freight-related carbon emissions. Smaller, more compact products that take up less space and require less packaging is one solution. “It's a multiplier effect—if you can redesign packaging, take the dunnage out or find a way to get more in a given volume, you're going to impact transportation,” says Gabriel at IBM. “Anything you can do to affect packaging has a positive benefit.”
Bulk packaging, says IBM's Jan Dillon, operations director for client satisfaction and delivery excellence, is one area that the company has actively cut down. She cites the example of shipping products like network servers: Instead of wrapping each one in an order of 10 individually, wrapping them as a group cuts down on waste. “If we can convince more of our business partners of the advantage of having 10 servers wrapped up in one package, we'll find savings for them and us,” says Dillon.
GSK sets specific targets
At pharmaceutical giant GlaxoSmithKline (GSK) in Philadelphia, Vice President of Global Procurement Systems and Operations Gregg Brandyberry and his staff work closely with the company's R&D, manufacturing and environmental health and safety groups to set Green targets. “We will reduce our energy use from operations and transport and related activities by 20% per unit sales by 2010 and by 45% by 2015 from 2006 levels,” he says. “We're on track to meet these targets, with progress expected to accelerate in 2008.” It's all part of GSK's effort to increase material and manufacturing efficiency.
And those efforts don't end at the water's edge. GSK has manufacturing operations in 80 countries. In Ireland, an R&D team developed a new, simplified drug-manufacturing process that produces 40% of its new products from the same raw materials. The simplified process has cut production time. Formerly, the chemical reaction required for the product took 22 hours at 100 degrees Celsius. Now, it takes four hours at 86 degrees Celsius. Additionally, the plant cut its use of solvents and achieved a 70% reduction in waste.
In its packaging operations, GSK converted from glass bottles for its Lucozade nutritional drink to plastic bottles, which cut the weight by 14%. The company also improved the bottle design to facilitate recycling. “The plastic is composed of 20-30% recycled material, and we plan to increase that percentage as recycled material becomes available,” Brandyberry says.
For Herman Miller, it's lifecycle management
When implementing its Green initiatives, office-furniture maker Herman Miller asked its suppliers to help by essentially divulging their trade secrets. Scott Charon, program manager of Herman Miller's design for the environment team, says the company wanted to examine the environmental and health impact of materials in its Aeron chair. Part of what they examined was the chair's lifecycle—from the commodities used in making the chair all the way to end-of-life disassembly. One of the key questions, says Charon, was whether the materials used were recyclable at the end of the chair's life. The only way to know was to find out exactly what chemicals were going into the materials of the chair, which meant going through several tiers of the supply chain.
“We needed the chemistry for these materials, and it might not reside within tier-one or -two,” he says. “We don't do injection molding at Herman Miller for example—we're purchasing materials that are injection molded, so the materials for that might be in tier-two or -three.”
It came down to legwork in the end. Charon and the design for the environment team had to go to their tier-two and -three suppliers that provided the injection molding materials and ask to see what specific chemicals went into their formulas. Nearly 200 nondisclosure agreements later, all but two suppliers provided Herman Miller the information it wanted. The company bumped the two suppliers who didn't comply off its preferred vendor list. Of course, Herman Miller had to convince the rest of its suppliers that it wasn't going to do any reverse cost analysis with the data it collected. But, says Charon, it wasn't much different from negotiating a contract: “It's a matter of figuring out how to move strict confidential information through each others' hands.”
Though there were expenses in getting the information, such as the costs of travel to supplier's sites, Charon believes the long-term benefits outweigh the short-term cost. “While doing this work we feel that it really helps us be a better company and make money,” he says. “When we're Greening our supply chain we feel that we're eliminating our risk.” In the cases where suppliers don't want to comply with the environmental standards Herman Miller has set—using a particularly harmful form of chrome, for example—the company will opt for another supplier. “We kind of constrain ourselves in a way to come up with different solutions to different problems.”
It can be difficult to quantify in dollar terms what the impact has been, but Herman Miller is still forging ahead with its design for environment protocol, which emphasizes a Green design throughout the lifecycle of a product. The company's goal is to have 100% of its products comply with the company's policy of zero landfill and zero hazardous waste generation by 2020. Right now Charon estimates about 29% of the company's products hit that mark, with a goal of 50% compliance on the horizon by 2010.
A long-term perspective is key in keeping a Green program on track, says Charon, because Green procurement can keep a company ahead of the competition. “We're actively looking for advanced materials that are nonpetroleum based, because in the future if we're at peak oil and those resources go away, you need to know what other materials are out there to keep you in business so you can make products for customers,” he says.
In other words, it's a case of using Green to stay in the black.
For more information:
Green Buying: How procurement is managing environmental demands
Purchasing.com’s online archive of Green buying case studies and best practices.
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