Integrating Environmental Management and Supply Chain Strategies

The decisions related to managing the supply chain and supply chain strategy are already considered important in many organizations. As more executives adopt environmental practices, supply chain strategies will only increase in importance. In this paper, we review how companies develop environmental supply chain strategies. Our interviews with companies from The United States, The United Kingdom, Japan and Korea, along with prior research, are used to develop a framework for environmental supply chain strategy decision-making. We then use this framework to suggest guidelines for how companies might change their current supply chain practices to successfully integrate environmental issues into their supply chain strategy. Copyright © 2005 John Wiley & Sons, Ltd and ERP Environment. Received 17 January 2003; revised 22 October 2003; accepted 14 November 2003 Forces Driving Proactive Integration of Environmental Practices with Supply Chain Management S TRATEGIC SUPPLY CHAIN MANAGEMENT HAS GAINED STATURE IN THE STRATEGIC PLANNING PROCESS in organizations. Considerable research has shown that companies increasingly rely on their suppliers for competitive success (Hahn et al., 1990). As companies focus more tightly on their core competencies, they will rely more heavily on their suppliers for non-core activities such as new product development through early design and concurrent engineering (Prahalad and Hamel, 1990). With the added responsibilities being placed on the supply chain, businesses also find environmental risks can be passed on through suppliers. This additional risk brings about an opportunity for environmentally conscious supply chain management to impact both environmental and financial performance. * Correspondence to: Robert Sroufe, Wallace E. Carroll School of Management, 140 Commonwealth Avenue, Boston College, Chestnut Hills, MA 02467, USA. E-mail: [email protected] Business Strategy and the Environment Bus. Strat. Env. 14, 1–19 (2005) Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/bse.422 Robert Handfield et al. 2 With companies increasingly relying on their supplier’s environmental performance (Narasimhan and Carter, 1998), managers are coming to understand that environmental compliance is not sufficient; governments and consumers require better environmental stewardship. Environmental performance and the move to lean manufacturing, with its incumbent focus on cost effectiveness, exert greater pressure on materials departments to seek cost reductions in all materials-oriented processes, including disposal (Womack et al., 1990). Discussions of environmental performance have usually focused on industries such as chemicals, petrochemicals, mining and semiconductors. Recently, though, managers have come to realize that a large and increasing amount of environmental risk can be found in nearly every company’s supply chain. This realization highlights the fact that decisions in this area are increasing in importance. So, two apparently divergent business trends meet: the acceptance of supply chain strategy for competitive advantage and the role of environmental performance in competitive advantage. In addition to traditional performance dimensions of cost, quality, delivery and technology, managers must also consider the impact of their decisions on the environment. These forces together make it difficult for a company to manage suppliers based on strict compliance; they require a more proactive or strategic approach. The increasing interest in integrating environmental practices and business finds researchers considering ‘ecological sustainability’ as a framework for studying management practices (Sarkis and Rasheed, 1995; Klassen, 1993; Klassen and McLaughlin, 1993; Wood, 1991). ‘Environmentally conscious business’ now influences product design (Allenby, 1993; Sroufe et al., 2000), process design (Porter and van der Linde, 1995a, 1995b), manufacturing practices (Gupta, 1995; Klassen and McLaughlin, 1996; Thierry et al., 1995; Winsemius and Guntram, 1992) and more recently purchasing. In this paper, we draw on more than 34 interviews with purchasing managers from 17 global organizations in the US, Japan, the UK and Korea with the purpose of defining environmental supply chain management and presenting a framework that describes how strategic goals can be linked to materials strategy and specific commodity strategies. This is accomplished by examining the traditional ‘commodity strategy development process’, and identifying how the process is modified when considering the effect of environmental issues. The resulting framework provides some important guidelines for managers to follow in managing their supply chain relationships. Next, we discuss and describe commodity and environmental strategy development. We then discuss the methods used to obtain environmental supply chain information from several multinational companies and then review environmental supply chain management, and the steps used by firms to develop a green commodity strategy. Linking Business, Commodity and Environmental Strategies With the competitive landscape companies currently operate in changing so quickly, the activities of every function in an organization must be proactive if they are to continually enhance market position and competitive strength. These activities include better management of resources by focusing on minimizing environmental impact (Anderson and Bateman, 2000). This new focus for purchasing practitioners requires the sourcing function to develop strategies more comprehensive than ‘deliver maximum efficiency’ or ‘achieve lowest materials cost’. For the purpose of this study an environmental sourcing strategy formally integrates environmental issues with supply base and purchasing process activities. An effective environmental sourcing strategy must fit with the needs and goals of the company; strategic consistency is paramount. Unfortunately, one cannot assume that supply chain executives can easily claim their position in the business-level strategy development and planning process (Anderson and Bateman, 2000). Only when purchasing and logistics adopt a strategic orientation can they readily be Copyright © 2005 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. 14, 1–19 (2005) 3 Environmental Management and Supply Chain Strategies included in business-level strategy, and inclusion is the only way to ensure integration of purchasing with business strategy. Integration of environmental performance with business and functional strategies is a dynamic, twoway process that relies on a number of information sources, including corporate objectives, business unit and functional capabilities, market objectives, competitive pressures and customer requirements. The direct environmental input provided by functional and business-level executives to the business strategy development process drives strategic integration. In the end, a top-down communication structure cannot result in an integrated business and functional strategy. Linking environmental business strategy to each functional strategy has the added advantage of linking all the functional strategies to one another, which helps to remove many of the barriers to environmental integration. The process of linking purchasing and business strategy results in clear functional objectives that drive the formulation of specific environmental strategies for purchased materials, or commodities. However, supply chain strategies are never truly ‘implemented’ until they are integrated at the commodity or product family level. What is a Commodity Strategy? Figure 1 shows that strategic consistency causes business-level strategy to drive functional-level strategies. Similarly, an environmental sourcing strategy becomes a driver for a series of lower-level tactical and operational decisions, including the use of an environmental commodity strategy. The term ‘commodity’ is used in supply chain management to refer to a general class of purchased items, so a commodity strategy is the specific decisions concerning sources of supply, number of suppliers, number of stocking points and relationship with suppliers that a company makes concerning any single commodity, while staying within the boundaries defined by the purchasing strategy. What has been overlooked in the literature to date is the integration of environmental concerns such as redesign, substitutes, reduction, extension of the product life cycle and support for environmentally conscious suppliers into supply chain management via the primary vehicle for deployment: the commodity strategy. The Role of the Environment in Supply Chain Strategy Development When a company makes supply chain decisions such as which supplier to buy from, whether to implement vendor managed inventory or what method of distribution to use, the company implicitly accepts the waste stream generated because of the decision. For example, in selecting a supplier the company ‘buys’ the item desired, the waste created during the production of the good or service purchased and the waste associated with the disposal of the product at the end of its useful life. Some companies worry about assuming legal liability for their suppliers’ environmental problems and would rather not know about problems with their supplier. These firms create barriers to environmental supply chain management and overlook the importance of documentation and strong relationships with proactive environmentally conscious suppliers. International certification programs such as ISO 14001 recognize this issue and place a high priority on documentation of processes (Tibor and Feldman, 1996; Cascio, 1996). Top management at the companies we visited recognized the importance of environmental issues in the supply chain. For example, furniture manufacturer Herman Miller goes beyond a myopic focus on financial returns because the company philosophy developed by its founder embraces ‘being a steward for the environment’. This strategy has driven many of their green supply chain efforts. Similarly, at Ford Motor Company, Jacques Nassar emphasized the importance of the environment in his weekly ‘memos’ to employees, and highlighted actions occurring within product design or supplier management that resulted in a cleaner environment. In some cases, top executive support was partly a result of Copyright © 2005 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. 14, 1–19 (2005) Robert Handfield et al. 4 a major environmental crisis. At Dow Chemical, their strategy for re-designing their supply chain logistics channels came about after a major chemical spill on a rail line that resulted in huge clean-up costs. In another case, the Korean conglomerate Doosan’s environmental policy was driven by an event in 1993, when one of the company’s facilities accidentally discharged polluted water into a river for 30 days. This affected the local town’s water supplies and the smell from the water in the river became a public embarrassment. The clean-up, using charcoal filtering, cost $30M. This provided the impetus for Doosan to adopt strict self-regulation. In an interview with the researchers, the company’s chairman offered the opinion that if Doosan had experienced one more similar incident, the public and the government would have driven them out of business. As such, they aim to limit their waste streams to levels that are 50% lower than the government’s environmental standards. The chairman also noted that environmental commitments such as Doosan’s can be difficult for companies operating in smaller countries where environmental regulations are not as tightly enforced. For example, many small Korean companies still simply discharge their untreated effluent. Executive leadership recognizing their role in supply chain environmental performance is an important beginning, but the difficulty in implementing this type of strategy becomes apparent at the busiCopyright © 2005 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. 14, 1–19 (2005) Corporate Strategy & Objectives Growth (ROI, ROA, etc.) Market Share Project Hurdle Rates Development of Core Technology Environmental Sourcing Evaluation of Outcomes Market share Profitability Time-to-market Customer Satisfaction Environmental Outcomes Environmental Management System