By Mark Morrissey
Having discussed design for manufacturability and incorporating environmental considerations into supplier selection in my previous commentaries, it’s time to focus on how companies measure the effective financial impact. It is common knowledge that incorporating environmental friendly practices into business is vital, but the impact is difficult to quantify. Sourcing decisions are traditionally based on cost, fit for function, quality and vendor capability. Environmental considerations are gaining momentum in the decision process but still have a low threshold in the vendor selection. Price Waterhouse Coopers found that 70% of CEO’s surveyed consider corporate social responsibility important to profitability (Panayioutou, Aravossis, Moschou; 2009; p 130) but quantifying the profitability remains difficult, making it challenging for organizations to reiterate the benefits to their stakeholders.
Measuring cost benefits associated with environmental sustainability is intricate, primarily due to the lack of standardized reporting, hence convoluting the process of reporting the relative return on investment to shareholders. GRI or Global Reporting Initiative frame work provides guidelines for organizations to report their sustainability performance relative to standard indicators and on establishing their reporting structure, content and depth of reporting (Global Reporting Initiative; 2011). GRI started in 1997 and covers business vision, strategy, profit, governance structure and management systems plus TQM type pillars such as sustainability, economic, environment and social responsibility (Panayioutou, Aravossis, Moschou; 2009; p 132). The frame work is a method for organizations to incorporate environmental sustainability initiatives and objectives with a total quality management approach to measurement and continuous improvement which can be aligned to the 3P’s being “people, planet and profit”. The benefit of a structured GRI frame work within a TQM context is to benchmark the organization’s performance and ensure consistent reporting. This is then used as a performance measurement system conducted through balanced score cards or measured across various dimensions within process improvement (Oakland; 2003; p 121). Either method will allow the organization to consistently track results as they can be related to operational and process performance.
Although GRI reporting frameworks could be adopted by organizations to report financial activity it remains unclear whether this framework would allow organizations to relate finances to specific environmental sustainability activities. An organization I recently surveyed reported using the GRI framework allowed some measure of reporting financial benefits related to environmental initiatives. The framework enabled the organization to use a score card to measure financial benefits and costs relative to specific objectives. This standardized approach could allow organizations to adopt a credible and consistent methodology to quantify environmental initiatives which would be accepted by shareholders and industry bodies.
The opportunity lies in the fact the GRI reporting includes the consumption of materials and energy in the delivery of the organization’s product or service. This aligns with the objectives of Lean through
reduction of inputs or waste into a product such as excess movement, materials, waste and processing (Lamming, Hampson; 1996; p 51). Womack and Jones describe Lean as the measurement of value to the customer within an organization’s operations. (Jones, Womack; 2003; p 16) The reduction of waste can translate into environmental sustainability initiatives such as elimination of excessive packaging, design for disassembly, reduction of hazardous materials and reduction of energy and resources required to produce products or provide services (Lamming, Hampson; 1996; p 50). Thus reduced inputs and waste will improve an organization’s profitability as well reporting through the GRI Framework ties the reduced costs to environmental initiatives. The lack of ability to measure the financial impact of environmental sustainability is a hindrance to auxiliary initiatives undertaken; along the lines of TQM, there is potential that a GRI Framework will allow organizations to develop a standardized financial reporting model but ancillary modeling is required to perfect an industry benchmark for performance measurement. □
Global Reporting Initiative (2011) Reporting Framework [On Line] Available from: http://www.globalreporting.org/ReportingFramework/(Accessed November 16, 2011)
Jones P, Womack D (2003) Lean Thinking Banish Waste and Create Wealth in Your Corporation; 2nd edition; New York; Free Press
Lamming R, Hampson J (1996) The Environment as a Supply Chain Management Issue; British Journal of Management; Vol. 7; March; pp. S45 – S62
Oakland J (2003) TQM Text with Cases; 3rd edition; Oxford; ButterworthHeinemann
Panayioutou N, Aravossis K & Moschou P (2009); A New Methodology Approach for Measuring Corporate Social Responsibility Performance; Water Air Soil Pollut: Focus; Vol. 9; pp. 129- 138
Mark Morrissey resides in Toronto, Canada, and consults in procurement and global sourcing. Mark has worked in the high tech sector and has experience in low cost country sourcing, supply chain development and department organizational change. He holds a Master of Science degree in Operations and Supply Chain from the University of Liverpool where he wrote his dissertation on environmental sustainability within supply chains. You may contact Mark at: firstname.lastname@example.org.