Green Purchasing
The Impact of Environmental Legislation and Heightened Awareness on the Procurement World
All of a sudden, green is everywhere.
It’s in the organic food that we eat, the
efficient buildings that we build, the hybrid
cars that we drive, and the renewable energy that
we consume. A decade ago, none of these products
were well known, let alone commercially viable.
Yet today, they are at the forefront of a growing
environmental movement that aims to reduce many
of the burdens that our progress has placed on
our natural world.
Ariba has noticed a growing awareness of environmental
issues in the markets that it serves. This article
will address the underlying trends that are causing
companies to incorporate these concerns into their
everyday business decisions, and the changing
role of procurement towards managing their supply
chains to become more environmentally friendly
and resource efficient. Buyers today must be aware
of these green purchasing trends and look for
ways to incorporate them into their business models.
As a long-time Ariba customer recently commented:
“If you’re not green, or looking at
areas where your company can be green, then your
long-term success will be in jeopardy.”
What is Driving Environmental
Awareness in the Supply Chain?
There are a number of significant and long-term
trends that are affecting companies and their
supply chains today. Broad-reaching environmental
regulations, growing consumer preference for “green”
products, and sustained high prices for commodities
are driving changes in business practices and
supply chain management.
Increased Government Regulation
As a result of growing environmental concerns,
governments are stepping in with increased regulations.
More government regulations are forcing entire
industries to address environmentally harmful
business practices. On a global basis, 95 percent
of companies comply with the legal requirements
in their Environmental Policy Statements, whereas
53 percent of companies exceed the legal requirements,
and only 12 percent adhere to accepted best practices.
Historically, Europe tends to be more environmentally
oriented and a leader from a regulatory point
of view. RoHS, the European Union’s Restriction
of Hazardous Substances directive that went into
effect on July 1 of this year, is a good example
of this. The directive, which prohibits the sale
of electronics equipment that contains lead, chromium,
mercury, and several other harmful substances,
legally applies only to the 25 EU member states.
However, due to the nature of global supply chains,
the RoHS directive has had a ripple effect throughout
the global economy, affecting almost all electronic
goods producers, even if they don’t sell
directly into the EU marketplace. While the health
of many will benefit from this legislation by
removing harmful substances from the environment,
there has been a downside. Cost estimates for
compliance have ranged from a low of two percent
added to the cost of goods sold to a high of 10
percent. Depending on market conditions, this
has resulted in a direct drain on corporate profits
for suppliers to the electronics industry.
In the United States, environmental leadership
typically originates from the state of California,
which is the sixth largest economy in the world.
Recently, it passed landmark legislation that
will reduce carbon dioxide and other greenhouse
gas emissions from the state’s major power-producing
industries by an estimated 25 percent by the year
2020. More directly aimed at curbing the potential
social and economic effects of global warming
than RoHS, the legislation will allow companies
to buy, sell, and trade emission credits as incentive
to install new technologies or be forced to pay
for the right to continue producing high emission
levels. This market-based compliance mechanism
is modeled after similar legislation in the EU.
The bill also applies to any out-of-state utility
that sells into the California market, broadening
its impact throughout the supply chain.
Globally, more legislation is already being planned.
China’s version of RoHS goes into effect
next March, and it may restrict more substances
and affect more of the supply chain than the EU
legislation. It applies not only to manufacturers,
but also to distributors, importers, and retailers
of electronic goods. As of this writing, California
has passed (and at least 20 other states are considering)
similar legislation to RoHS for the U.S. marketplace.
This appears to be just the beginning. Scheduled
to go into effect in August 2007 is another EU
directive called the Energy-using Products (EuP)
law. Products that utilize energy will be required
to meet energy efficiency standards during manufacture
and end-use. Similar to the Energy Star seal for
a product’s energy efficiency in the U.S.,
the EuP law will measure energy efficiency during
use but will also extend back into the manufacturing
processes to measure the amount of energy used
to process the raw materials into finished product.
In this way, an entire energy profile will be
available for consumers to consider when evaluating
a product to purchase. And given the impact that
RoHS has had on electronic goods producers, the
EuP law will likely have similar implications
for buyers today in how they manage their supply
chains in the affected industries.
Consumers Prefer Green
At the same time as new legislation is hitting
the market, consumers are shifting their preferences
towards environmentally responsible brands. Recent
polls in the U.K. and in the U.S. have shown that
a growing majority of consumers prefer environmentally
responsible brands from companies whose business
practices are safe for the environment. As a result,
many of these niche market “green” products
have moved decisively into the mainstream. Most
CEOs have taken note and now recognize that they
risk damaging their corporate image if they ignore
the environmental impacts of their products and
business practices. The result—brands that
promote “green” and “sustainability”
are differentiating themselves in the marketplace
from mainstream brands and are capitalizing on
being “environmentally friendly”. This
in turn is fueling the trend among many corporations
towards a greater sense of corporate social responsibility.
Commodity Price Pressures
Another factor that continues to strongly influence
buyers today is the volatility and sustained high
prices of many commodities and raw materials.
The underlying factors affecting the supply and
demand of most commodity markets are larger scale
and longer term in nature. On the demand side,
the economies in countries like India and China
show no signs of slowing down as their huge middle
classes benefit from their growing prosperity.
Conversely on the supply side, markets are burdened
by the inherent risk associated with a large amount
of a given commodity’s supply coming from
a limited number of countries. Magnifying this
situation are the political instabilities in some
of these markets and the growing threat of terrorism.
Copper and oil are good examples of this. Demand
for these commodities continues to run at historically
high levels, and an overwhelming percentage of
the supply market is dominated by a small number
of countries in potentially unstable regions.
High commodity prices normally help enable innovation.
Companies can’t afford high prices for long
periods of time and expect to stay profitable.
To help reduce costs, companies will look for
new technologies and alternatives to high-priced
commodities. Oil, for example, has been at such
high levels for so long that many previously expensive
technologies are starting to make economic sense.
Factor in a heightened awareness of the environment
and a desire to more efficiently utilize our natural
resources, and it provides a business opportunity
for companies to capitalize on. New automobiles
incorporating gas-electric hybrid technology and
corn-based plastics are two examples that are
gaining commercial acceptance. And given that
less fossil fuel is being burned, fewer greenhouse
gases are being emitted into the atmosphere, and
a renewable and sustainable resource is being
utilized, the consumer appeal for these products
will be high.
So What are Companies Doing?
In order to cope with and indeed prosper under
these growing pressures, leading companies are
taking action to prepare for change and better
manage their supply chains. They are realizing
cost savings from alternative and recycled materials,
reducing supply risk with continued regulatory
compliance, and improving environmental performance
through broad-based supply chain initiatives centered
on collaboration and Design for the Environment
initiatives.
The Benefits of Alternative and Sustainable
Supplies
Although being environmentally friendly and compliant
is often associated with higher costs that lead
to higher prices for end users or lower profit
margins for suppliers, some industries have been
able to improve their environmental image and
reduce costs at the same time. Three innovative
examples that most of us see in the course of
our everyday lives are outlined below:
1) Supermarkets in
several European countries have gradually eliminated
plastic bags from their outlets. As a substitute,
they offer more robust reusable plastic bags and
boxes to their customers for a symbolic fee. In
this example, supermarkets gain from improving
their image by helping to limit non-biodegradable
waste, while at the same time they are lowering
their overall operating costs.
2) By now, most of us have stayed at hotel chains
that encourage customers to reuse their towels
during their stay. On one hand, this reduces the
impact on the environment by reducing the cleaning
“liquids” and water used. At the same
time, it reduces operating costs for the hotel
chains by cutting laundry fees.
3) With oil prices recently spiking over $70 per
barrel and still remaining at historically high
levels, many companies are exploring alternatives
to petrochemical-based plastics. As a result,
usage of polyactic acid (or PLA) is on the rise
in markets for plastic packaging. Marketed as
an environmentally friendly plastic, it is made
entirely from corn and is biodegradable. Although
PLA plastics are not yet cheaper than petrochemical-based
materials, continued investments to bring down
unit costs will soon allow PLA plastics to challenge
the market dominance of traditional polyethylene
terephthalate (PET) or high-density polyethylene
(HDPE) plastics in a variety of packaging applications.
In all of these examples,
companies are appealing to their customers’
environmental awareness and conscience while at
the same time driving potential cost reductions
in their operations. In a sense, they are reaching
a business utopia—cutting costs, increasing
customer satisfaction, and taking steps to improve
the global environmental condition.
Regulatory Compliance
In order to avoid disruptions in the supply chain,
buyers need to be aware of the environmental regulations
in all of the markets in which it operates and
understand how they relate to the capabilities
of the supply base and their level of compliance.
Depending on your supply chain, the scope of awareness
may need to be global. In the electronics industry,
many feared that RoHS would cause severe shortages
in both compliant and non-compliant components
as the July 1, 2006 effective date approached.
Neither scenario has materialized yet, but buyers
are still carefully monitoring market trends to
ensure that they maintain steady supply inventory
levels.
Another critical issue regarding compliance is
the potential financial impact due to inventory
obsolescence. Buyers can be exposed to inventory
write-offs if there are large swings in price
or demand for non-compliant components.
As new regulations go into effect, it will be
increasingly important for buyers to keep track
of their supply base compliance initiatives, to
monitor their inventory levels and component lead
times, and to consider alternative sources of
supply if incumbent sources fail to meet regulatory
compliance.
Incorporating the Environment at the Design
Level
Though not a new concept, Design for the Environment
(DfE) is taking on greater significance in helping
to green the supply chain. In addition to incorporating
design elements that minimize energy usage, toxic
materials, and waste-generating production processes,
DfE also helps enable the establishment of ‘closed
loop’ supply chains by encouraging that products
be designed for disassembly and recyclability.
Products that are modular in design, that minimize
the use of adhesives or other coatings, and that
can be taken apart with common hand tools allow
for efficient disassembly into core components
and materials at the end of its useful life. These
materials can then be recycled and reused into
new or updated products, thereby reducing the
harvest and consumption of virgin materials.
New Forms of Supply Chain Collaboration
To reduce costs and improve environmental performance,
companies are joining industry groups or creating
supply chain collaborations to adopt and support
environmentally sound business processes that
strengthen the entire supply chain. These joint
efforts can dramatically increase benefits by
ensuring that every member of the supply chain
supports a common set of environmentally sound
business practices.
Leading OEMs have implemented “Supplier Environmental
Requirements” programs in response to regulations
and a heightened sense of social responsibility.
These programs take on a variety of forms, but
they all have similar characteristics. Most programs
are based on strong mission statements that are
supported by the company’s top management,
who have a clear understanding of the benefits
of integrating the environment throughout the
company’s business practices. Most realize
that clearly communicating their environmental
policies with their suppliers is only the beginning.
These same OEMs understand that their roles are
to educate, evaluate and monitor, as well as encourage
and support their suppliers on environmental issues
and compliance adoption. Furthermore, suppliers
are being recognized for their efforts. Earlier
this year, a major U.S. automaker issued its first
ever “Environmental Excellence Award”,
which goes to the supplier that best supports
environmental improvement initiatives through
leadership and adoption of best practices, including
ISO14001 certification.
There are even collaborations involving the U.S.
Government. Leading OEMs from the automotive,
aerospace, healthcare, and pharmaceutical industries
have partnered with the U.S. Environmental Protection
Agency and the Department of Commerce to form
the Green Suppliers Network. Members of the network
share best practices on reducing their environmental
impact while adding value across the supply chain.
The goals are to continuously improve products
and processes, increase energy efficiency, eliminate
waste, and identify cost-savings opportunities
through optimized resources and technologies.
Your
Environmental Checklist
Cost continues to be a major driver and is really
what buyers focus on the most. However, as new
environmental regulations go into effect and as
new materials and technologies become commercially
available, the pressure will be high for companies
to incorporate them into their business models
to reduce their environmental footprint. In order
to raise awareness and help prepare your company
for new regulations and the adoption of best practices,
buyers today should be focused on the following:
- Stay abreast of environmental legislation and understand how they can impact your business and your supply chain. Legislative changes related to carbon emissions, waste generation and harmful materials are likely to accelerate in the coming years. As RoHS has shown, legislation in one part of the world will affect most everyone in the global economy. Being proactive in addressing these issues can help your company gain competitive advantage by being an early adopter.
- Join industry groups to stay abreast of what others in your industry are doing and look to share best practices. These groups can help you generate ideas on how to identify new savings opportunities through environmental compliance.
- Stay abreast of new materials and technologies that supply your company’s products. New materials and technologies normally have higher unit prices initially than traditional ones but may save money in other parts of your business due to reductions in energy consumption, increases in yields, or reductions in waste disposal costs. Utilize total cost of ownership analysis to accurately compare the costs of current with alternative materials.
- Work with your engineering and
design groups to look for ways to increase recycled
content or alternative materials in your products.
If an alternative material is from an environmentally
safe and renewable source, maximize its use
and promote its benefits throughout your organization.
Many times, it’s as simple as asking for
higher recycled content to be incorporated into
designs or for alternative materials to be considered.
- Market your environmental successes. As consumers continue to reward those products and brands that exhibit an environmentally friendly image, companies will have economic incentive to address those environmentally poor aspects of their businesses. Celebrate your successes and use them to gain market share from your competitors through effective environmental marketing.
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