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Information Systems and the Environment Environmental Information in Supply-Chain Design and Coordination PAUL R.KLEINDORFER and ELI M.SNIR The past decade has seen wave upon wave of change in business operations and strategy. Fueled by the quality revolution in the early 1980s, companies began to see their business processes as the key focus of value creation. Business process improvement teams first worked locally on their processes and then on the quality of interconnecting links to upstream and downstream processes. Quality management evolved into time-based competition, then into process reengineering, and finally into organizational transformation and the core competency movement. In all of this, process management remained a central focus for two reasons: first, because business processes provided a characterization of the business enterprise that enabled discourse at the strategic level; and second, because team-based approaches to continuous improvement found their best organizational match when assigned to well-defined processes. Certainly, the two most important business processes identified during this period were the supply chain and the new-product development process. The supply chain consists of the subprocesses of procurement, production, distribution, and after-sales support. The extended supply chain is the cross-company supply chain resulting from linking suppliers and customers (and possibly suppliers’ suppliers and customers’ customers) to the supply chain of a particular manufacturing or service company. The new-product development process consists of the business processes, from research and development to product and process design to product launch activities that are required to design a new product or service and to maximize the likelihood that the product is a success in the market. Thousands of papers and books have been written in the interim about both supply-chain management and new-product development. By the mid-1990s,
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Information Systems and the Environment excellence in these two processes was viewed widely as a sine qua non for competitive success, with the speed, quality, customer focus, and cost of these processes being central aspects of both profitability and long-term strategy and competence. At the same time as these revolutionary developments were occurring worldwide, a second and quieter revolution, sometimes referred to as industrial ecology,1 was also occurring. To use the metaphor of the extended supply chain, the basic driver of industrial ecology was the notion that business itself exists within an extended supply chain of environmental and ecological resources, and waste and inefficiency in this ecosupply chain must be eliminated, just as economic waste must be eliminated in the narrower supply chain of business activities. Indeed, in the industrial ecology framework, each company has a special role as a steward of the environment and the ecosystem within which it operates. Naturally, this role of product stewardship and environmental waste and risk management encompasses both suppliers and customers, just as extended value-chain analysis encompassed suppliers and customers in the traditional supply-chain improvement process. And just as in the traditional model, it also has been found in industrial ecology that product and process design at the front end are better than end-of-pipe continuous improvement activities. Our purpose in this paper is to review environmental stewardship activities in respect to the supply chain, with a focus on both design and continuous improvement processes. We consider in particular the issue of how environmental information is gathered and used in these activities.2 Our examples are primarily from the chemical and process industries, based on a series of interviews with leading companies in that industry connected to the Risk Management and Decision Processes Center of The Wharton School at the University of Pennsylvania. The concepts at the root of supply-chain design and improvement as a means of promoting sustainable development are not new. Life-cycle analysis, as a tool to understanding a product’s complete impact on the environment, has been known for some time (White et al., 1995). This understanding is also widespread in the business community. Product stewardship, as promoted by the Responsible Care Code of the Chemical Manufacturers Association (CMA), emphasizes the need to encompass a product’s entire span, from cradle to grave, to ensure environmental responsibility. Reverse logistics (Council of Logistics Management, 1993) is a related tool to reduce environmental impacts through recycling of packaging and products. Planning a product’s prolonged life span, after normal use, also requires comprehending possible uses for used material.3 Finally, the approval in 1996 of the first four of the International Organization for Standardization’s (ISO) 14000 standards for environmental management systems can be expected to add significant further impetus to internal and extended supply-chain environmental stewardship activities.4 Information technology (IT) could play an important role in furthering the environmental and revenue benefits of such initiatives. Some examples of
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Information Systems and the Environment potential IT uses include gathering information on inputs and outputs of different processes, surveying customers and using prototypes to understand environmental impacts during product design, tracking product movements, optimizing transportation policies, and analyzing recycling and reuse behavior. With data from these sources, companies may improve the environmental aspects of their products at three important levels: (1) product and supply-chain design to minimize environmental impacts, (2) ongoing waste minimization and risk mitigation after the product has been deployed, and (3) diagnostic feedback from supply-chain participants to assess opportunities for new products and processes and to spawn future environmental initiatives. These environmental improvements, in turn, can lead to economic benefits for companies in several areas: in helping customers to improve their performance and regulatory compliance; in reducing risk and strategic vulnerabilities internally and for their customers; in improving the atmosphere between themselves and regulators and possibly reducing compliance costs; and in improving their reputation and reducing transactions costs in dealing with local communities, environmental groups, and other external stakeholders. In all of these areas, careful tracking of environmental information (cost, value, and performance) is essential in understanding, managing, and legitimizing investments in product stewardship activities in the supply chain.5 Let us explore these potential benefits in a bit more detail. PROMOTING ENVIRONMENTAL EXCELLENCE Corporate Image Achieving environmental competence, and the use of IT to this end, is not only socially responsible behavior, it is good business. First, because of public concern about environmental issues, promoting environmental care can enhance a company’s and an industry’s image. Many companies are going out of their way to explain how they help environmental causes. The adoption of the Responsible Care Code by the CMA is a case in point. The chemical industry, led by the major chemical companies, is investing resources in and heavily advertising the importance of product stewardship to consumers and the public. A major factor in a company’s image is the occurrence of a major accident. Perhaps the most salient example of this is the chemical industry’s reaction to the Union Carbide accident in Bhopal, India, in 1984. Not only did Union Carbide have to pay for remediation, it also lost much of its credibility as a responsible company. This led the company’s reduction of the scope of its business through divestitures and closures by nearly 90 percent since the accident. The accident influenced many other companies in the industry and acted as a catalyst in reducing risks throughout the industry (Kunreuther and Bowman, 1997). In a recent assessment, Klassen and McLaughlin (1996), using event analysis, estimate that
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Information Systems and the Environment losses in shareholder value for large publicly traded firms from environmental incidents can be on the order of hundreds of millions of dollars per incident. Regulatory Compliance Regulatory compliance requires companies to track the use of hazardous substances and emissions of pollutants. Although actual compliance varies widely, especially among small firms with less to lose in the event of environmental incidents, major companies in the chemical and process industries have devoted significant resources over the past two decades to improving environmental performance (Jaffe et al., 1995). Indeed, many companies have begun to commit themselves to go beyond compliance. This is promoted by government agencies (e.g., in the XL and 33/50 programs)6 that may apply different frequencies of enforcement and audit activities to companies with proven records. Such efforts also reduce the costs of changing technologies when new regulations are put in place because these regulations already will have been anticipated by companies with superior performance. A related benefit is the reduction of transactions and litigation costs when regulatory audits cite facilities. In ensuring compliance at the least cost, companies use state-of-the-art technologies, including IT, to ensure best practices. The role of IT in the compliance arena is in tracking current behavior, including wastes, releases, accidents, and “near misses,” and designing new processes based on this information. Liability and Negligence Another factor driving companies to improve their environmental performance is the risk of being held liable, or found negligent, for accidents or environmental damage. When a company experiences an accident or an incident with significant real or perceived environmental damage, the company may be held liable to pay for remediation. This is true even when the company is acting prudently and using state-of-the-art technology. If corporate action does not meet social requirements, companies also may face punitive actions for their behavior. To limit liability and negligence claims, a company may choose to implement strict risk reduction mechanisms. To this end, IT can be used to continuously evaluate the impact on the environment from industrial processes. This can be done by monitoring emissions from facilities, tracking the transportation of goods and services, collecting information on the effects of certain chemicals, and monitoring the use of products by customers and throughout the product life cycle. In general, the lower the level of pesticides, biocides, and toxics (PBT) associated with a company’s products, the lower the level of risk from such liabilities. Thus, many companies are now moving to assess the PBT content of their products and are attempting to
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Information Systems and the Environment find substitutes that lower this content. Reducing PBT content is also an effective tool to reduce perceived risks by customers. As the use of potentially harmful inputs is reduced, so are claims of damage. Supply-chain coordination plays a key role in limiting liability in three dimensions. First, to monitor a product’s use throughout the supply chain, a company must be able to follow the product’s flow. If a product is shipped to a customer who then uses it, perhaps mixing it with other products, and then passes it off to another party, it may be difficult to know how the product is used. If a client further down the supply chain uses the product and causes damage, the original producer still may be held liable. Proper design of supply chains is needed to eliminate such occurrences. Material Safety Data Sheets (MSDSs), mandated by the Occupational Safety and Health Administration (OSHA) for listed chemicals, have played an important role in explaining the proper use of chemicals in various production processes and ways to mitigate their environmental impacts (Baram et al., 1992). Second, under the Comprehensive Environmental Response, Compensation, and Liability Act, companies face a joint and several liability standard. This means that even if only the final user of a hazardous substance disposes of it incorrectly, other companies that were involved in the process of production and distribution may be held liable to clean up the disposal site. This is especially problematic when the final user is unaware that a product may be hazardous and does not have the means to properly handle the substance. As might be expected, these provisions have led to a significant increase in supply-chain stewardship activity over the past decade (Snir, 2001). Third, reducing liability in the supply chain can be achieved by not producing certain substances that have a high probability of being misused, or by choosing responsible supply-chain partners (Snir, 2001). Both of these tactics were evident in the product stewardship activities of the companies that we interviewed.7 Note that changing distribution channels or supply-chain partners does not guarantee a company less liability, and it has additional disadvantages. Liability may not be reduced if risky customers still purchase the company’s products through intermediaries (e.g., distributors or formulators). Thus, products still may be sold to unsophisticated customers, but the focal company does not have the means to train those customers in proper material handling and use. A further disadvantage is the increased distance between a company and its customers. In dealing through distributors, a company may not get enough feedback from its products’ end users and may not be able to respond to their needs. In this case (which is typical of agricultural products), product labeling and other communication media, including the Internet and trade association publications (e.g., to crop growers), are being used increasingly to improve stewardship.8 IT can be important in tracking awareness of product use and handling procedures, especially if coupled with electronic commerce methods (using direct or third-party fulfillment procedures)
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Information Systems and the Environment of ordering the product. Nevertheless, when multiple organizations are involved in the manufacture or distribution of products, environmental stewardship remains a difficult problem. Another important factor in the use of IT in reducing environmental liabilities is the ability to set industry standards and jointly define best practices. When there are common practices throughout an industry, adhering to these practices is a prima facie defense against negligence. This philosophy leads companies to share knowledge of substances and possible outcomes, set joint guidelines for use, and promote the use of industry best practices. However, such guidelines are typical only for commodity products or generic handling practices, because information (even on handling and use) for more proprietary products is usually quite sensitive and is distributed only to customers. Community Relations Improved relations with local communities and other external stakeholders are becoming increasingly important for companies, as a matter of both law and of best practice (McNulty et al., 1998). This has led companies to improve their environmental practices and the information they make available to the public concerning these practices. By doing so, a company can maintain its social franchise while enhancing its economic franchise. In communities, public-interest groups are increasingly pressuring companies to practice environmental prudence and to prove those actions. The availability of easily accessible information on a company’s environmental objectives and measurable performance criteria therefore can be expected to play an increasingly important role in assuring stakeholders that a company or facility is adhering to stated objectives.9 A frequently cited example of the interaction of information and performance is in the area of Toxics Release Inventory (TRI) reports. Parallel to the requirement to file TRI reports under the Superfund Amendments and Reauthorization Act Title III in 1986, many companies formed community advisory councils that played an important part in reducing toxic emissions. The fact that stakeholders had access to information regarding emissions, and the fact that this information was required by law, led companies and their communities to take action to reduce emissions. Accurate databases play an important role in such a process. They allow a company to monitor its own activities against industry averages and they allow external stakeholders access to (and influence on) a company’s environmental performance.10 A further example of the growing importance of public information systems related to a company’s environmental performance is the requirement, under section 112(r) of the Clean Air Act Amendments of 1990, that risk management plans (RMPs) be developed by a number of facilities that store certain chemicals and that summaries of these RMPs be made available to the public. Doing so will surely increase the importance of IT to companies and their supply-chain partners
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Information Systems and the Environment in ensuring that these plans are kept up to date and are responsive to public concerns.11 Another important area in which companies can enhance their reputation in the community is waste reduction. This pertains both to hazardous wastes and to other industrial wastes. In the United States, landfills and other means of disposal are becoming a large environmental problem, affecting many communities. Companies will be required by local communities to do their share in reducing waste. This can be done at all levels of product development and production: by designing for frequent reuse and recycling, by producing with less waste and fewer emissions, by reducing transportation and packaging, and by promoting recycling in local communities. Many of these measures also reduce costs because they require using less virgin resources and production inputs. Companies such as Procter & Gamble (White et al., 1995; Kindle et al., 1996) are making plain in their marketing and promotion programs, as well as in their internal practices, their commitment to producing “more with less.” IT plays an important role in waste reduction by monitoring the inputs and outputs of every stage of the supply chain and by providing key input to the design of future products and packaging. Employee Health and Safety Similar to community concerns, employee health and safety (H&S) is a key focus of product stewardship. It is promoted both by general duty clause requirements of prudent management as well as by specific requirements, such as the Process Safety Management Standard under OSHA. Employee H&S is not limited to company workers or on-site exposure, but includes all parties in the supply chain who may be exposed to a company’s products. Often, employees are the first victims of poor safety standards that later evolve to environmental dangers. Emphasis on responsible behavior in respect to employee H&S may truncate such processes before they develop, allowing timely and cost-effective measures to be taken. Emphasis on employee H&S also has direct effects on output and productivity. Improved employee health reduces costs associated with sick leave and health insurance. Worker relations may also be improved when health concerns are minimal, and safer conditions can boost employee morale, ultimately leading to greater productivity. These factors should be true both for the companies that promote product stewardship and for their clients. Customer Relations Gathering information about a company’s product and its uses allows for improved relationships with vendors and customers. A deeper understanding of a product’s uses and benefits promotes product innovation (von Hippel, 1988) and can lead to improved designs that minimize waste and unnecessary procedures.
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Information Systems and the Environment Such understanding also enables companies to offer their customers suggestions on ways to reduce their emissions or product liability. In cases where accident prevention is of interest (both on-site and to customers), learning the causes of accidents enables companies to take steps to reduce risks. To this end, MSDSs are helpful in explaining proper usage. Understanding product usage also helps in eliminating waste by encouraging source reduction and reuse (Willums and Goluke, 1992). These means of increasing a product’s user-friendliness depend on close ties with customers, so that product stewardship is not just a means of avoiding liability and ensuring regulatory compliance, but is also a business driver of product and process innovation for all supply-chain participants.12 Economic Motivation As noted above, several important tools have emerged in the past decade to promote stewardship in the supply chain and overall economic efficiency in the extended supply chain. These tools include life-cycle analysis, reverse logistics, and several gated “design for X” screens (where X includes factors such as environment, safety, disassembly, and recycling). Each of these tools is directed toward two complementary drivers of economic value in environmentally sensitive activities: (1) measurement and assessment of environmental impacts throughout the supply chain and (2) reduction of either impacts or capital and operating costs by product and process innovation. Life-cycle analysis assists in identifying the sources of waste and pollution from cradle to grave (Dillon, 1994). One advantage is the reduction of excess inputs and wastes throughout the supply chain, thereby lowering costs and promoting sustainable development. Other benefits include reducing accident risks and lowering emissions, each of which leads to lower costs in the long run. Reverse logistics is an additional tool to reduce costs, through recycling and reduced source inputs (see Box 1 for an example). By understanding a product’s use throughout its extended life cycle, a company may find ways to design modules for reuse, recycling, reclaiming, and reconfiguring. This typically requires modular design from the beginning of product design, which also enables maintenance and upgrading at different stages. Such design for disassembly, on and off site, is becoming widespread and allows for increased use of reverse logistics (Council of Logistics Management, 1993). Reverse logistics is especially well known for its applications in the reuse of packaging. Instead of single-use boxes, many companies are turning to nondisposable packaging to improve environmental impact and costs. One commercial example is the reuse of wooden pallets between distributors and clients. In the transportation of hazardous materials, reuse is especially important. IT plays an important role in tracking container location, materials within containers, and verifying that containers are not filled with substances that may react with residue. Reduced costs also are realized through reduced transportation usage.
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Information Systems and the Environment BOX 1 Reverse Logistics at DuPont: The Petretec Case An Illuminating reverse logistics initiative, born of the sustainable development philosophy at DuPont, is the methanolysis of polymers and plastics, popularly termed unzipping polymers, to recover near-virgin material. Petretec, the company’s polyester regeneration technology, unzips film, fiber, and plastics to their raw materials, dimethyl terephthalate (DMT) and ethylene glycol (E6), which then are used instead of virgin resources.1 This allows DuPont to reduce both the use of oil-derived feedstocks and the amount of waste buried in landfills. Currently, with shortages of DMT, the ability to recycle polyester materials is extremely worthwhile. DuPont invested more than $12 million to convert an existing DMT production unit to the Petretec facility near Wilmington, North Carolina. The facility should have the capacity to produce 100 million pounds of DMT and 30 million pounds of E6 per year. The process is extremely robust, and it can accept polyester with a variety of contaminants at higher levels than acceptable in other processes. An important market for polyester is auto manufacturing. With the growing awareness of design for disassembly and design for environment, technologies that offer to reduce the environmental impact of cars seem promising. Research is under way to produce cars that have a large percentage of recyclable material. With Petretec there is a new interest in attempting to design the entire interior of a car with polyester materials. This will allow car manufacturers both to reduce the costs of building cars and to increase the ease with which cars can be recycled. Another important market for recycled polyester is food containers. The Petretec process is approved by the Food and Drug Administration, so a syrup bottle can become a computer tape, then an x ray, then a videotape, then a popcorn bag, then an overhead transparency, then a polyester peanut butter jar, then a snack food wrapper, then a roll of film, and then a syrup bottle again. 1 For an early description of recycling in DuPont’s film division, see Council of Logistics Management (1993). The Petretec is described at http://www.dupont.com/corp/products/dupontmag/novdec96/pertec.html [October 20, 1998]. Optimizing the needs to transport material, or using more energy-efficient means, promotes environmental prudence and lower costs. In the logistics domain, transportation is a crucial environmental factor, accounting for 11 percent of U.S. expenditures for goods and services and 25 percent of recycling costs (Wu and Dunn, 1995). Promoting improved environmental transportation can have a positive impact on the bottom line. For example, transportation costs may be reduced by using efficient loading, scheduling, and routing techniques, including consolidation of freight and balancing of backhaul movements. IT obviously plays an important role in any attempt to minimize the environmental effects of product transportation. Another cost-effective means of reducing transportation-associated environmental effects is the use of alternative fuels. The U.S. government is taking a strong
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Information Systems and the Environment position for this cause. The Energy Policy Act of 1992 requires that, by 1998, 50 percent of all purchased federal cars must be powered by alternative fuels. One of the alternative fuels being examined by the U.S. Postal Service is compressed natural gas, which is 40 percent cheaper than gasoline and has a substantially lower total impact on the environment. Another example of the use of alternative fuels is the testing of liquefied natural gas by Union Pacific Railroad to power its locomotives. Again, the driving force behind this transformation is the need for cheaper, safer, and cleaner sources of fuel (Wu and Dunn, 1995). Environmental prudence throughout the supply chain lowers costs not only for the company, but also for customers and vendors. Reduced production and logistics costs allow for lower costs to customers, but this is not the only means of lowering partners’ costs. With life-cycle analysis, all processes that a product goes through are examined, and more efficient processes13 are developed, regardless of their position in the supply chain. This is especially true for source and waste reduction techniques used in life-cycle analysis. When new processes are developed that minimize waste, often the final customers are those that benefit most. Some of these benefits are derived from less waste being generated, but lowering emissions also gains customer approval. Enhanced use of reverse logistics also reduces costs for customers. Companies may offer different prices for modules that are reused, which may be a major advantage to certain customers. Promoting reverse logistics reduces on-site waste for customers and relieves them of the need to process such waste. With hazardous waste, this benefit becomes extremely important for some customers who do not have the means or the desire to deal with such waste. Ashland Chemical, a large chemical producer and distributor, is offering more services to customers who want to minimize the amounts of chemicals on site (Chemical Week, 1991). DRIVERS OF ECONOMIC VALUE AND ENVIRONMENTAL EXCELLENCE IN A SUPPLY CHAIN Figures 1 and 2 show the internal and extended supply chains, respectively, in relation to the drivers of economic value and environmental excellence noted in the above discussion. The key insight derived over the past decade is that the supply chain, from materials procurement to manufacturing to logistics to recycling and disposal, should be viewed holistically where the environment is concerned. Each stage gives rise to its own effects, impacts, and opportunities for improvement, but effective environmental strategies require an analysis that encompasses the entire supply chain. This not only reduces sources of risk and liability by reducing pollution, wastes, and hazards, it also promotes reduced costs and better products. This expanded view of product stewardship and supply-chain management is gradually transplanting the traditional view focused on internal environmental excellence and caveat emptor. In addition to the above-mentioned specific tools to promote this emerging concept of product stewardship, an important
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Information Systems and the Environment FIGURE 1 Internal supply chain.
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Information Systems and the Environment design phase, an extended supply-chain perspective on the traditional economic impacts of products as well as their broader ecological impacts. Transportation Optimization In optimizing transportation methods at the design stage, IT plays an important role. Deciding at which stage to implement certain production processes determines the amount and types of materials to be transported. The analysis of energy and environmental intensity of alternative supply-chain designs is in its infancy, but this can be expected to grow rapidly as sustainable management practices take root (Hart, 1997), especially if concerns about global warming intensify. Minimizing energy intensity and environmental impacts of alternative supply-chain designs is, in principle, a straightforward simulation exercise if data are available. Doing something about these impacts requires that this analysis be undertaken at the design stage. In addition to using IT to determine optimal transportation schemes, the design stage requires development of IT methods that will assist in coordinating the movements within the supply chain. This is true for forward logistics, such as product tracking, as well as for reverse logistics. Bar-coding of containers, for example, is important for tracking containers and materials throughout the supply chain. In addition to the recognized benefits of vehicle routing and replenishment improvements that such information can enable (Fisher et al., 1983), container sensors can provide telemonitoring of contents, pressure, and temperature, which is increasingly important for both improved order fulfillment as well as product stewardship assurance. At present, however, such information is gathered primarily for business purposes, and its use for the environmental assessment of alternative transportation and distribution systems is secondary.15 Emission Analysis Emission analysis is an important part of supply-chain design. Different production processes emit wastes using different media such as air, water, or land (which also are regulated under quite different laws and regulatory standards, although the current Sectoral Initiative of the U.S. Environmental Protection Agency (EPA) may bring some changes to this regime). Also, these emissions are at different physical locations and under the responsibility of different parties in the supply chain. IT plays two major roles in the design stage with regard to emission analysis. First, information is needed to understand how certain processes affect risks and emissions, as was stated in the discussion of life-cycle analysis. Second, means to monitor emissions must be put in place while designing processes throughout the supply chain. These are important for material balances ex-post. Measuring inputs and outputs of a process are crucial for those who wish to validate hypotheses
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Information Systems and the Environment concerning the actual behavior of processes. Currently, industry environmental leaders are quite proactive in reducing emissions, with specific, measurable targets set for each business unit and each facility. These include emission reductions as well as recycling and reuse. Increasingly, these are being used by senior management to review progress toward better environmental practices as well as reducing underlying drivers of cost and risk in a company’s businesses. IT is clearly a foundation for all of this activity. Reverse Logistics A final use for IT in the design stage is in the reverse logistics aspects of the supply chain to design the entire product life cycle from cradle to grave. Tracking the location of products and packaging is an important part of a reverse logistics network. Reuse of packaging is an important and cost-effective means of reducing environmental impact. To fully utilize this method, tracking of packaging location is important. This may be used to optimize backhaul routes or to optimize the transportation of hazardous materials. Tracking products is crucial in optimizing the reverse logistics process. In many areas, reused or recycled materials are, or are perceived to be, of lower quality than new items, and companies must be able to differentiate between them. This can be done by bar-coding products or implanting invisible footprints. Data on the number of reuse cycles that a product has gone through may influence product quality, perception, or price. For example, BMW has a longstanding policy to reuse and recycle parts from old cars. To expedite the process they code each recyclable part (Wu and Dunn, 1995). Coordination of the supply chain is facilitated by electronic data interchange (EDI). This allows different parties in the supply chain to gain knowledge about product use, product and packaging location, emissions, stock on hand, and customer use. Product use can be facilitated by making MSDSs electronically available. Customers access the MSDSs (and other just-in-time learning instructions) to ensure the safe and efficient use of a company’s products. Stock on hand at different sites or at customer locations is, of course, also beneficial for optimizing shipments of material. The great advantage of EDI is that it greatly reduces the costs of information transfer and allows multiple parties, including those with product stewardship responsibilities, access to all relevant data. Feedback from Information Technology Systems Another important advantage of implementing environmentally oriented IT systems throughout the supply chain is the ability to gain feedback concerning actual behavior to further improve the supply chain. This information may be useful in product environmental audits, ex-post investigations of accidents, reviews of near misses, establishing guidelines and verifying their adherence,
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Information Systems and the Environment and for product stewardship review boards (PSRBs). Clearly, for audits concerning a product’s environmental impact, actual information on all dimensions of environmental impact is key. Without such information, auditors may only examine the process design and hypothesize about whether original targets were met. Using actual data, original targets can be assessed, assisting to establish improved processes and to validate engineering designs. Moreover, in case of accidents and near misses, viable information is key to learning what went wrong and how to correct it.16 Similar to the use of black boxes in airplane accidents, solid information about processes and emissions is key to unraveling cause and effect. In addition to the business performance uses of environmental IT noted above, IT is also central in allowing senior management to measure progress for its employees, investors, and external stakeholders in achieving environmental improvements. Many companies have utilized IT to track and reduce their TRI and other key environmental indicators over the past few years. For example, Eastman Kodak’s top management has set specific performance goals, which include employee health issues and assessment of environmental responsibility. The company also monitors other environmental impacts and measures its improvement over time against targeted commitments.17 Similarly, the Brewers of Ontario publicly committed in 1991 to recover and reuse 100 percent of its sold beer packaging. Currently, they recover 99 percent of all bottles, 83 percent of all beer cans sold, and 98.4 percent of all beer packaging.18 Finally, PSRBs are one means whereby senior management can establish leverage and influence the company’s handling of environmental issues. The PSRB is established in accordance with the Responsible Care Code to periodically review a process or product. Major responsibilities of the PSRB are to assist line management in product stewardship and to reduce the environmental impact of the company’s products (Bond, 1995). Coupled with an overall environmental policy review board as part of the executive committee, the PSRB can be a powerful instrument for ensuring that environmental commitments are embodied in the new-product development process and in the operation of the extended supply chain. MANAGERIAL SYSTEMS USED TO DRIVE ENVIRONMENTAL EXCELLENCE Integrating the supply chain to ensure environmental excellence requires integration with key business processes, measurement of results, and commitment from top management. A number of managerial concepts exist that promote these steps toward environmental prudence; collectively, they are called environmental management systems (EMSs). Of these, the best known are EMS structures embodied in the newly approved ISO 14000 standards and the CMA’s Responsible Care Program. These managerial systems require IT to
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Information Systems and the Environment ensure that managerial goals are being met, but both leave considerable discretion to each company to decide how their EMSs will be structured. We review here the ISO 14000 standards and their relationship to supply-chain environmental information. ISO 14000 is actually a series of environmental management standards. These standards are voluntary, and, taken together, they provide guidelines for the development and maintenance of an overall management system, designed to meet individual company needs, but comporting with general requirements for effective environmental management. The standards themselves were written by international cooperating industrial groups and government environmental and standards organizations under the general guidance of ISO, a private-sector, international standards body based in Geneva. Founded in 1947, ISO promotes international harmonization and development of manufacturing, product, and communication standards. The closest relative to the ISO 14000 standards are the ISO 9000 standards for quality. ISO 9000 was set up as a management system standard in the 1980s and spread rapidly throughout the world, as organizations found that standardization of documentation, training, and data structures for quality could promote significant improvements not only within the boundaries of a single organization but across national and international supply chains. ISO 14000 began development in 1991, after the successful deployment of ISO 9000 standards, and the aspirations underlying ISO 14000 were motivated by the experience with ISO 9000. Indeed, many organizations recognize synergy between ISO 9000 and ISO 14000, and they hope to achieve superior environmental performance by extending their ISO 9000 experience and management systems to incorporate additional environmental features required by ISO 14000.19 As foreseen in ISO 14000, EMSs are management system standards for process guidelines, not performance standards. EMSs help an organization to establish policies and meet its own environmental objectives through documented accountability and responsibility structures, communication and training programs, and management control and review functions. Companies may choose to be certified for either specific facilities or for the company or division as a whole. EMSs may not set specific requirements for environmental compliance, but they do call for a commitment to compliance with environmental laws, prevention of pollution, and continual improvement of environmental performance. EMSs can include specific compliance statements and procedures, and these can be audited as part of the ISO 14000 EMS certification process. Thus, ISO 14000 could provide additional assurance of compliance with those laws and regulations with which the EMS asserts compliance. The following standards are the initial standards foreseen in the ISO 14000 series20: 14001: EMSs—specification with guidance for use. 14004: EMSs—general guidelines on principles, systems, and supporting techniques.
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Information Systems and the Environment 14010–12: Principles, qualification criteria, and procedures for internal and external auditing. 14014: Initial review guideline to determine a corporation’s baseline operating position, typically used prior to establishing EMSs. 14031: Guidance for measuring environmental performance over time. 14020–22: Describes labeling principles such as self-declarations of environmental benefits of products. 14040–43: Establishes a methodology for a product’s life cycle, including assessment impacts and improvement analysis. 14050: Terms and definitions. A closely related set of requirements and standards is that promulgated by the European Union (EU) under the Eco-Management Audit Scheme (EMAS). Like ISO 14000, EMAS is a voluntary program to promote continual environmental improvement in the private sector. EMAS identifies for the public and publishes every six months the names of those companies that meet EMAS standards. Companies meeting these standards may place an EU-approved logo and statement in their publications and letterhead. EMAS became operational for participation in April 1995. As currently implemented, EMAS has additional and more stringent requirements than ISO 14000, including the requirement that the certification statement itself, as well as containing specific information verifying continual performance improvement, be made public. Note that although the ISO 14000 standards require a commitment to continual improvement, at least in the company’s environmental management systems, they do not require a verification of continual improvement in environmental performance. Current plans call for the EU to reconcile EMAS and ISO 14000 by accepting ISO guidelines with an explanatory document specifying the additional EMAS requirements. However, the details of whether and how EMAS and ISO certification eventually will be reconciled are not yet resolved. One final point is essential. The auditing requirement for ISO 14000 can be executed by either the organization itself (an internal audit) or by a qualified third party. Requirements for auditors are spelled out in ISO 14010–12. What one can expect to occur is that third-party external auditors will become the vehicle of choice, because of the added element of objectivity of third parties as well as for economies of scale in performing the audit function and related value-added services provided by third parties.21 It is sometimes noted that small and medium-size companies, in particular, will want to undertake internal auditing procedures rather than hire external auditors. In our view, this is very unlikely to be the case. Either external auditors will add sufficient value to make their services worthwhile or small companies will not find it useful to become ISO 14000 certified in the first place. If, as was the case with ISO 9000, smaller companies become certified in order to satisfy larger customers downstream in the supply chain, then such customers will almost certainly require an external audit to verify ISO 14000
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Information Systems and the Environment compliance. Where there are sector-specific benefits (e.g., chemical distribution, dry cleaning), and small to medium-size firms are involved, one would expect trade organizations to help standardize generic EMSs to capture best practices and to ensure synergy with the regulatory process. Such generic EMSs would again logically be in the hands of external service organizations to deploy and to audit. Concerning the structure of implementation, ISO 9000 provides a reasonable model of what to expect. Third-party organizations, including consulting and auditing service companies, will provide services to assist companies to prepare for certification and as well as providing auditing and certification services. Business and trade organizations can be expected to play a major role in establishing generic EMSs and in assisting certification organizations to understand value-adding services that may accompany ISO 14000 certification or auditing. State and federal agencies may have responsibilities for licensing qualified auditors and auditing organizations and for continuing to monitor compliance with applicable laws and regulations. If ISO 14000 is an efficient way of improving compliance and performance, then one would expect it to become a global standard, just as ISO 9000 has in the quality arena, and to drive the very vision and structure of what constitutes effective EMSs and practice. Whether this will happen clearly depends on the balance of costs and benefits of ISO 14000 relative to other methods and systems for achieving effective environmental performance. The potential benefits from ISO 14000 stem in part from the commonality of practice that standards are intended to promote, together with improvements in both cost and performance. For our purposes here, we note only that ISO 14000 is being increasingly viewed as a potential standardized vehicle for structuring and auditing EMSs, both across business units in a given corporation as well as across the extended supply chain. Just as in ISO 9000, the promise here is that standardized practices will establish a discipline, understandable across organizations and business units, for identifying opportunities for environmental improvement and monitoring against agreed performance metrics and targets. Whether this promise will materialize for ISO 14000 remains a central open research question. SOME RESEARCH QUESTIONS CONCERNING ENVIRONMENTAL INFORMATION IN THE SUPPLY CHAIN The above analysis of environmental information in supply-chain design and coordination highlights a number of interesting questions that warrant further research. These questions are posed in a manner derived from our interviews with representatives of the chemical and process industries. They may be interpreted both as key questions of practitioners in the middle of the continuing revolution of industrial ecology and as the usual academic end-of-paper positioning for future funded research.
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Information Systems and the Environment Use of Environmental Information The first question of interest regards the actual use of environmental information in product and supply-chain design. For various industries, what is best practice and good practice regarding the assessment of a product’s or supply chain’s environmental impact during the design stage? What models or templates are used and how product- or process-specific are they? In particular, what criteria are important for both internal and external assessment of environmental impacts? Finally, is environmental information and supporting IT an add-on or is it fundamental to the new product or process development and design process? Investment Drivers A second question of interest concerns the drivers of investments in product stewardship and environmental excellence in the extended supply chain. Are these primarily in ensuring compliance and reducing internal risk (e.g., through reducing PBT content of products), or are they forward-looking, value-added aspects, with full environmental considerations, such as improved yield, reduced energy input, and improved customer loyalty, essential drivers? In a word, among the various elements of potential benefit noted in this paper, where is the “money” in practice resulting from product stewardship for the extended supply chain? In particular, do other partners in the supply chain fully appreciate initiatives taken on by one of their supply-chain partners? For example, it might be hypothesized that customers would be willing to reward a supplier in several ways for its environmental leadership and stewardship activities. These include paying higher prices for goods, giving a higher preference to the supplier for repeat business, and cooperating with the supplier in the development of new products or services. It would be of considerable interest to analyze in terms of rewards such as these what the returns are to customer support activities in the environmental area. Environmental leadership requires the support of top management. It also requires coordinating between different business units and different companies, within the supply chain. The coordination requirement would seem to lead to SHE activities being organized at corporate headquarters. On the other hand, organizational transformation and “flattening” in the 1990s have witnessed the mainstreaming of SHE activities from headquarters to the different business units. But many companies believe that maintaining the capability to launch new products and to monitor and lead SHE activities for existing products requires a continuing strong corporate presence. What factors drive the balance here? Are there facilitating mechanisms to overcome the coordination and monitoring costs arising from mainstreaming? What role can and will ISO 14000 and supporting IT play, both internally and across the supply chain, in facilitating this balance?
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Information Systems and the Environment Performance Metrics Performance metrics should be a continuing focus of research. Under ISO 14000, such performance metrics, and the definition of business processes, will provide the architecture against which audits will be conducted, with monitoring, learning, and mitigation activities triggered by these. If the area of quality management is any guide, and we think it is, what will be treasured is what gets measured. In particular, causing each business unit to analyze current PBT content in their products and other specific product and process environmental indicators will cause business units to review these indicators and to move in the desired direction, just as tracking TRI data and OSHA reportables have “caused” fundamental changes in the underlying processes giving rise to these data. Several questions arise here. What structure of environmental performance metrics is useful for management control? How can such metrics be made more visible to those who affect the outcomes? How should these be coordinated with environmental strategy for the business units and with various key business processes implementing this strategy (e.g., product and supply-chain design, product stewardship, regulatory compliance, customer support, community and investor relations)? Possible Downsides A final research question raises the issue of potential adverse implications of environmental information. Not all aspects of producing and disseminating environmental information are positive for the company producing that information. A company’s environmental behavior may be of interest to other companies in the supply chain, competitors, or external stakeholders including regulators, communities, and public-interest groups. Providing raw data may have some unwanted effects, such as increased vulnerability to liabilities (including provable negligence) and revealing technologies and performance to competitors. What is the appropriate balance between the trust-promoting and emergency planning benefits of environmental information to external parties and the costs of providing this information and coping with the impact of use and misuse of this information by external parties? ACKNOWLEDGMENTS Many of the results of this paper are derived from roundtables and interviews supported by a cooperative agreement from the EPA to the Wharton Center for Risk Management and Decision Processes. Their support is gratefully acknowledged. Helpful discussions with William Lorenz, Irv Rosenthal, Stan Schechter, and Ernest Weiler also are acknowledged.
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Information Systems and the Environment NOTES 1 For an introduction and overview of industrial ecology, see Allenby and Richards (1994). For a discussion of international trends in industrial ecology, see Munasinghe (1996) and Kindle et al. (1996). 2 A very similar analysis applies to safety and health considerations, and, indeed, product stewardship is directed toward mitigating all such impacts. We focus here on environmental issues because they are typically more difficult to align with business value-added than health and safety issues. But much of our discussion applies equally to these latter issues as well. 3 Willums and Goluke (1992) provide background and case studies on extended product life. 4 Kleindorfer (1997) provides some background on the expected scope and impact of ISO 14000. 5 As a senior executive at a major chemical company noted to the authors, economic drivers at the business unit level are central in promoting product stewardship throughout the supply chain. Every initiative must be legitimized either as “required compliance” or adding value for the company or its customers. Many initiatives currently under way stem from customer demands and are the direct result of product stewardship activities. As business units develop a philosophy of improving environmental impacts throughout the supply chain, they become proactive in promoting changes that reduce environmental impacts for supply-chain partners. Many of these result in direct economic benefits as well, for example, through energy or material savings or through recycling benefits. 6 The U.S. Environmental Protection Agency’s (EPA) 33/50 Program (also known as the Industrial Toxics Project) is a voluntary pollution reduction initiative that targets releases and off-site transfers of 17 high-priority toxic chemicals. Its name is derived from its overall national goals—an interim goal of 33 percent reduction by 1992, and an ultimate goal of a 50 percent reduction by 1995, with 1988 being established as the baseline year. The 17 chemicals are from the Toxic Release Inventory. They were selected on the basis that they are produced in large quantities and subsequently released to the environment in large quantities; they are generally considered to be very toxic or hazardous; and the technology exists to reduce releases of these chemicals through pollution prevention or other means. The EPA’s Project XL was created under President Clinton’s Reinventing Environmental Regulation Initiative. Project XL involves the granting of regulatory flexibility in exchange for an enforceable commitment by the regulated entity to achieve better environmental results than would have been attained through full compliance with the existing regulation. 7 As one executive put it, “We have a very stringent screen for new products. We will not deploy a new product which we believe has a significant probability of causing environmental harm through mishandling or misuse, even though correct use of the product would not be harmful. In addition, in recent years [the company] has changed its distribution channels, relying more on large customers, who have a track record as being responsible. Riskier supply-chain partners have been dropped due to the possibility of accidents or product misuse on their part; we just can’t afford this.” 8 Further evidence is the fact that many companies, in diverse industries, now publicize their environmental policies on the Internet. The list of such companies includes DuPont, Procter & Gamble, Brewers of Ontario, Eastman Kodak, Rohm and Haas, and Exxon. Each company emphasizes its responsibility to the environment and the importance of environmental factors in its decision making, and many companies even inform the public of specific targets they have for reducing environmental impact. For example, Rohm and Haas publishes the findings of the Responsible Care Management Systems Verification conducted in 1996 under the guidance of the CMA. (See http://www.rohmhaas.com/company/msv.html [October 20, 1998].) We can expect such public outreach activities to increase and, with them, the need for better environmental IT systems to allow information of this type to be produced and accessed economically. For this to happen, such information increasingly is being collected as a routine part of business activity and not just for public relations purposes. 9 In this regard, the experience in Europe with the Eco-Management Audit Scheme and the growing experience worldwide with ISO 14000 are cases in point. Environmentalists have pressed very hard
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Information Systems and the Environment to see both of these standards include measurable performance results, not just general objectives. The balance between guarding competitive information and informing the public has yet to be worked out in detail, especially in ISO 14000, but this surely will remain an important focus in discussing the impact and acceptability of these standards by environmental groups. For further discussion, see Kleindorfer (1997). 10 For further discussion of the important role of information as a means of increasing the efficiency of environmental regulation and performance, see Kleindorfer and Orts (1998). 11 For further discussion of section 112(r) and the role of information in its implementation, see Rosenthal and Theiler (1998). 12 In the interviews surrounding this study, however, most companies indicated that they were still being driven by a liability and compliance mindset in product stewardship. Except in the safety domain, the value-adding potential of stewardship activities remains largely to be exploited in both design and improvement opportunities. 13 Efficiency here is with respect to the constrained cost minimization problem that the company faces, that is, minimizing total life-cycle costs while taking into account current and future regulatory and public policy constraints. 14 For an interesting application of material balances on environmental impact reduction, see Ayers (1997). 15 Indeed, in interviews with several chemical manufacturing and distribution companies, it is clear that the analysis of transportation alternatives currently is driven primarily by business factors such as cost and time, with safety in handling and routing also a consideration, but with very little explicit concern for environmental impacts. This could change quickly if control of nitrous oxides and volatile organic compounds related to ground-level ozone mitigation becomes more costly, or if carbon dioxide suppression related to global warming becomes an important priority. 16 In any case, such information will be required as part of the accident history database that all regulated facilities are required to file under section 112(r) of the Clean Air Act Amendments, which also will require the first five-year history to be filed by June 1999. In the United States, it is estimated (Rosenthal and Theiler, 1998) that there are some 66,000 facilities covered under this rule, so one can soon expect environmental information systems with the capabilities to record not only releases but accident histories to be standard practice. 17 See http://www.kodak.com/aboutKodak/corpInfo/environment/1995. 18 See http://www.io.org/~boo4env/Overview.html/1996. 19 BVQI, a leading company in registering organizations under the related BS-7750 and the Eco-Management Audit Scheme, asserts that “if a company has ISO 9001 in place, they already have about 70 percent of the implementation know-how of ISO 14001. Many companies will integrate the two standards to have a more complete management system that will cover more of their business activities” [from the BVQI Internet Web site (http://www.bvqi.com)]. In addition to ISO 9000, some sectors might be attracted to merge other standards and processes under the ISO 14000 umbrella. For example, in an industry such as food processing, a reconciliation of quality, health, and environmental systems under ISO 9000/14000 could be attractive, especially for small business where regulatory duplication is particularly onerous. 20 ISO 14001, 14004, and the audit standards ISO 14010–12 were approved in September 1996. Notwithstanding the early status of the ISO 14000 standards, many countries have already begun the process of deploying certification and registration procedures, and many companies have begun the process of preparing their EMSs for certification. 21 Such value-added activities could include consulting on technology, loss control, pollution prevention, quality improvement and energy conservation initiatives, training, and many other services that would naturally come to light as part of the process of conducting the EMS audits in a number of companies.
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