Forging New Links

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Forging

New Links

Enhancing Supply

Chain ValueThroughEnvironmental

Excellence


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3M

Abbott Laboratories

Altria Group, Inc.

Anheuser-Busch Inc.

Ashland Inc.

Aventis Pharmaceuticals Inc.

Bristol-Myers Squibb Co.

BNSF Railway Company

The Coca-Cola Company

ConAgra Foods

Dell Inc.

The Dow Chemical Company

Duke Energy

DuPont

Eastman Kodak CompanyEli Lilly and Company

FedEx Express

Georgia-Pacific Corporation

HP

Intel Corporation

JohnsonDiversey, Inc.

Johnson & Johnson

Johnson Controls, Inc.

Koch Industries, Inc.

Lockheed Martin Corporation

Merck & Company, Inc.

Mirant Corporation

Motorola, Inc.

Novartis Corporation

Occidental Petroleum Corporation

Pfizer Inc

Roche

The Procter & Gamble Company

Schering-Plough Corporation

Smithfield Foods, Inc.Southern Company

Temple-Inland Inc.

Texas Instruments Incorporated

Wyeth

About the Global Environmental Management InitiativeThe Global Environmental Management Initiative (GEMI) is a non-profit organization of leadingcompanies dedicated to fostering environmental, health, and safety excellence and corporate citizen-ship worldwide. Through the collaborative efforts of its members, GEMI also promotes a worldwide

business ethic for environmental, health and safety management and sustainable developmentthrough example and leadership.

The guidance included in this document is based on the professional judgment of the individual col-laborators listed in the acknowledgements. The ideas in this document are those of the individual col-laborators and not necessarily their organizations. Neither GEMI nor its consultants are responsiblefor any form of damage that may result from the application of the guidance contained in thisdocument.

This document has been produced by (GEMI) and is solely the property of the organization. Thisdocument may not be reproduced nor translated without the express written permission of GEMI,except for use by member companies or for strictly educational purposes.

GEMI Member Companies:


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Preface

June 2004

The Global Environmental Management Initiative (GEMI) is proud to introduce this report, Forging

New Links Enhancing Supply Chain Value Through Environmental Excellence. It is the latestin a series of GEMI tools showing how environmental, health and safety (EHS) excellence canenhance the business performance of companies.

GEMIs exploration of supply chain management began with the publication in 2001 of New Paths toBusiness Value: Strategic Sourcing Environment, Health and Safety . That report primarily examinedhow integrating EHS concerns into procurement processes could add business value. It became clearthat many other EHS value creation opportunities exist throughout the complex web of relationshipsknown as the supply chain. Forging New Links explores the potential value of integrating EHS capa-bilities into all of the business processes involved in providing products and services to fulfillcustomer needs.

The purpose of Forging New Links is to describe a broad range of opportunities for EHS profession-

als, in collaboration with other functions within their companies, to enhance supply chain perfor-mance. Both the report and the associated web site (http://www.gemi.org/supplychain) areintended as resources to assist managers in recognizing, prioritizing, and pursuing specific valuecreation opportunities. The intended audience includes both EHS and supply chain management pro-fessionals, as well as business executives.

With the globalization of companies and their supply chains, it is essential to look beyond the tradi-tional role of EHS as a compliance function. EHS professionals can play an integral role in achievingimproved financial performance and competitive advantage. This report reviews emerging trends insupply chain management that heighten the importance of EHS awareness, and shows howcompanies can construct a value proposition for EHS involvement. In addition, it provides a system-atic methodology for each company to assess its situation, identify key issues, and pursue high-value

opportunities. Case studies from GEMI member companies are used to illustrate these opportunities.

Forging New Links demonstrates that EHS professionals, working as part of a cross-functional team,can add value to typical supply chain processes and activities. Although much progress has beenmade, more needs to be done to integrate EHS value creation opportunities into supply chaindecision-making. This report offers a pragmatic step in that direction. In the long run, it is onlythrough collaboration between EHS and supply chain professionals that these business value oppor-tunities will be realized.

We hope that you, the reader of this report, will find it a useful tool for driving improvements in yourown supply chain that benefit both the enterprise and its stakeholders. GEMI would appreciatereceiving any feedback you have with regard to this report. Please submit your comments [email protected].

Hugh M. (Bert) Share John A. HarrisAnheuser-Busch, Inc. Eli Lilly and Company

(formerly with Ashland, Inc.)

Co-chairs, GEMI Supply Chain Work Group

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At 3M we use cross-functional teams to coordinate our supplychain management business processes, and the EHS functionoften provides valuable insights that help to improve ourcapabilities and performance.

Gary RidenhowerDirector, Supply Chain Platforms Strategy Development3M

Our EHS teams involvement in business activities, wellbeyond traditional EHS scope, has generated significant value,cost savings and competitive advantages for Motorola.

Larry GilbertDirector, North American Distribution and LogisticsMotorola, Inc.

Pfizer EHS Colleagues are full partners in evaluating thesuitability and performance capabilities of our contractmanufacturers. Their contribution to the management ofsupplier relationships is required and essential to the overallsuccess of our program.

Tom LawlorSenior Director, Global Contract ManufacturingPfizer Inc

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Executive Summary

The goals of environmental, health and safety (EHS) excellence are no longer confined tocompliance and cost avoidance. EHS groups are collaborating with other functions to enhanceshareholder value throughout the supply chain contributing to profitability, resource

productivity, innovation, and growth.

Supply chain management (SCM) is evolving from a traditional focus on purchasing and logistics to abroader, more integrated emphasis on value creation. Leading companies increasingly view supplychain excellence as a source of competitive advantage, with the potential to drive performanceimprovement in customer retention, revenue generation, cost reduction, and asset utilization. Cross-functional teamwork is essential to orchestrate the core SCM business processes managing relation-ships with suppliers and customers as well as managing the flow of goods, services, and informationalong the supply chain.

As the scope and cross-functional integration of SCM increase, there is a growing need for effective EHScapabilities in all supply chain business processes. The emergence of globalization, outsourcing, and

corporate social responsibility, along with regulatory changes and security concerns, has made EHSexcellence a key success factor. Moreover, EHS issues can no longer be addressed in a reactive fashion.Manufacturers are increasingly expected to take responsibility for the disposal of products andpackaging at the end of their useful life, so that designing for reverse logistics has become a strategicapproach for converting wastes into assets and thus generating shareholder value. Likewise, anticipatingsafety and security risks and developing contingency plans is critical for assurance of business continuity.

This report provides a comprehensive review of the opportunities for EHS to create business value in thesupply chain across a variety of industries. The broadening of EHS scope beyond compliance towardvalue creation is illustrated by case studies drawn from GEMI member companies. For example:

nn Motorola expanded a worker safety project into a Six Sigma initiative that is projected to save $5million dollars in 2004 through inbound logistics discrepancy reduction.

nnDuke Power worked with its cable supplier to devise an innovative reel-less cable technology thateliminates the use and disposal of wooden reels, and reduces supply chain costs by $500,000 per year.

nn Intel has saved millions of dollars annually by developing lighter-weight plastic trays that are usedto move microprocessor units through the fabrication process and deliver them to customers.

nn 3M, Eastman Kodak, FedEx Express, Dow Chemical and other companies routinely apply life cyclemanagement principles to design products and processes that reduce supply chain costs, improveenvironmental performance, and meet customer expectations.

In order for companies to realize these types of benefits, management needs to foster improved collab-oration between EHS and supply chain management professionals. Wherever appropriate, the EHSfunction needs to be integrated into cross-functional teams that are managing SCM business processes.

The focus of this report is on how EHS excellence contributes to shareholder value creation. Waste

reduction, business continuity, resource efficiency, and stakeholder satisfaction are intrinsic elementsof modern supply chain management. Thus, environmental and social benefits such as pollution pre-vention can be natural outcomes of supply chain business process improvements.

Sections 1 and 2of this report provide an introduction to SCM business processes, global trends, and EHS-related pathways for business value creation. Then, beginning on page 12, Sections 3 and 4provide a step-by-stepapproach for companies to identify and prioritize value creation opportunities, develop a business case, assemblethe needed resources, implement successful initiatives, and measure the results. Finally, Section 5presents guide-lines for cross-functional teaming and external collaboration.

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Table of Contents

Section 1. Introduction..........................................................................................................................................1A Strategic View of Supply Chain Management................................................................................................1

Supply Chain Business Processes.........................................................................................................................1Relevant Trends in Supply Chain Management.................................................................................................2Implications for EHS Value Creation..................................................................................................................5

Section 2. Business Case Formulation................................................................................................................6Supply Chain Value Drivers..................................................................................................................................6The EHS Value Proposition...................................................................................................................................7Reciprocal Value Creation...................................................................................................................................10Overcoming Barriers to EHS Engagement........................................................................................................11

Section 3. Opportunity Identification..............................................................................................................12Finding High-Value Opportunities for Your Supply Chain...........................................................................13

Assuring Compliance...........................................................................................................................................16Minimizing Risks..................................................................................................................................................17Maintaining Human Health and Safety.............................................................................................................19Protecting the Environment.................................................................................................................................20Raising Supply Chain Productivity....................................................................................................................21Enhancing Supply Chain Relationships............................................................................................................23Supporting Supply Chain Innovation................................................................................................................25Enabling Enterprise Growth................................................................................................................................28

Section 4. Value Creation Methodology..........................................................................................................30Methodology Overview.......................................................................................................................................30

Step 1: Identify Supply Chain Opportunities....................................................................................................31Step 2: Prioritize EHS Value Contributions.......................................................................................................34Step 3: Develop Business Justification................................................................................................................35Step 4: Implement, Measure, and Iterate...........................................................................................................36

Section 5. Effective Collaboration.....................................................................................................................37Engaging a Cross-Functional Team....................................................................................................................37Achieving Organizational Alignment................................................................................................................38Establishing Supply Chain Partnerships...........................................................................................................39Collaborating with Customers and Suppliers...................................................................................................41Collaborating with Stakeholder Organizations................................................................................................42

Section 6. Conclusion..........................................................................................................................................44

Appendix A. Tools and Resources....................................................................................................................45

Appendix B. Glossary of EHS and SCM Terms.............................................................................................47

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List of Figures

Figure 1: Pathways to Business Value..................................................................................................... 7Figure 2: Reciprocal Value Flow in a Supply Chain ......................................................................... 10

Figure 3: Diagnostic Tool for Opportunity Identification.................................................................. 13Figure 4: Overview of Methodology for EHS Value Creation in the Supply Chain.......................30Figure 5: Methodology for Step 3, Business Justification................................................................... 35Figure 6: Methodology for Step 4, Implementation............................................................................ 36Figure 7: Supply Chain Partnership Model.......................................................................................... 39

List of Tables

Table 1: How EHS Contributes to Supply Chain Performance......................................................... 12Table 2: Guide to Selecting Business-Specific Opportunities............................................................ 14Table 3: Potential EHS-Related Contributions to Supply Chain Business Processes.....................31Table 4: Potential EHS-Related Contributions to Supply Chain Value Drivers.............................32Table 5: Template for Opportunity Presentation................................................................................ 33Table 6: Criteria for Opportunity Prioritization.................................................................................. 34Table 7: Functional Group Roles in Supply Chain Business Processes............................................ 37

List of Case Studies

Motorolas Inbound Discrepancy Reporting System............................................................................ 9

Pfizer Standard for Contract Manufacturing and Research............................................................... 16Dow Chemical Behavior-Based Safety in Chemical Transport .................................................... 18Abbott Laboratories Contractor Safety Management......................................................................... 19Creating Environmental Value at FedEx Express................................................................................ 20Reel-Less Cable Packaging at Duke Power (a division of Duke Energy)......................................... 21Packaging Innovation at Intel Corporation.......................................................................................... 23Texas Instruments Banned and Restricted Materials Process............................................................ 24Environmental Progress in Kodak Consumer Digital Cameras........................................................ 263M Novec 1230 Fire Protection Fluid A Balanced Life Cycle Approach........... ....................27Anheuser-Busch Supply Chain Re-Engineering.................................................................................. 28Supplier Expectations at Eastman Kodak, HP, and Motorola........................................................... 40

Clean Cargo Group.................................................................................................................................. 41Automotive Suppliers Partnership........................................................................................................ 42

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AcknowledgementsForging New Links was developed through a collaborative process by GEMIs Supply Chain WorkGroup. The Work Group was co-chaired by Bert Share of Anheuser-Busch Inc. and John Harris of EliLilly and Company, formerly with Ashland, Inc. The development of Forging New Links was

managed by Joseph Fiksel of Eco-Nomics LLC, with support from Doug Lambert, Director of TheGlobal Supply Chain Forum at Fisher College of Business, The Ohio State University, and from LesArtman, retired Partner from Accentures Supply Chain Strategy Practice. The cover art and overallgraphic design were created by Dawne Brooks. The web-based version of Forging New Links wasdeveloped by Joseph Fiksel and Allan Dudek. GEMI staff contributing to this document includedSteve Hellem and Amy Goldman.

GEMI Supply Chain Work Group Members:

Special thanks: During the course of the project, helpful background information and advice wereprovided by Bill Copacino of Accenture, Jim Fava and Ralf Nielsen of Five Winds International,Robert Axelrod and Susan Russell of Steele, Lisa Ellram of Arizona State University, Erica Plambeckof Stanford University, and Mark Sharfman of the University of Oklahoma.

For more information, please contact GEMI at: 202-296-7449 or [email protected].

Don Brown, Dell Inc.John Carnall, WyethStan Christian, Motorola, Inc.

Ron DiCola, Pfizer IncKaren Ellis, FedEx ExpressJeff Forgang, Duke EnergyElizabeth Girardi Schoen, Pfizer IncPaul Halberstadt, ConAgra FoodsDavid Jacoby, Georgia-Pacific CorporationBen Jordan, The Coca-Cola Company

Jim Kearney, Bristol-Myers Squibb CompanyJohn Kindervater, Eli Lilly and CompanyKen Larson, HPDavid Lear, HPMike Loch, Motorola, Inc.

Keith Miller, 3MDean Miracle, Southern Co./Georgia PowerTim Mohin, Intel CorporationEdwin Mongan, DuPontLeslie Montgomery, Southern CompanyElizabeth Moyer, Texas Instruments Inc.Scott Noesen, The Dow Chemical Company

Jean Pdelaborde, Aventis PharmaceuticalsElsie Rivera Palabrica, Abbott LaboratoriesMary Beth Parker, Mirant CorporationLarry Porter, Texas Instruments Inc.

Ted Reichelt, Intel CorporationDavid Seep, BNSF Railway CompanyOrlean Thompson, Eastman Kodak Company

Robin Tollett, The Procter & Gamble CompanyLucian Turk, Dell Inc.Terry Welch, The Dow Chemical CompanyCarl Wirdak, Occidental Petroleum Corporation

Additional Contributors to Case Studies:Robert Accarino, Abbott LaboratoriesTimothy Arnold, Anheuser-Busch Inc.Carol Brewer, FedEx ExpressHugh Burns, Eastman Kodak CompanyDon Coy, 3MTodd Brady, Intel Corporation

Joan Gier, Motorola, Inc.Larry Gilbert, Motorola, Inc.Thomas Goodwin, Motorola, Inc.Cheryl Hoffman, Duke EnergyScott Kilpatrick, Texas Instruments Inc.Bob Leet, Intel CorporationWubbe Prins, The Dow Chemical CompanyHeather Tansey, 3MMike Virani, Intel CorporationMike Willis, Anheuser-Busch Inc.Sam Wong, Pfizer Inc

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A Strategic View of Supply ChainManagement

Supply chains were once seen merely asphysical channels for movement of rawmaterials or components and distribution ofproducts. Today, supply chain management(SCM) is increasingly practiced in a broader andmore strategic manner. The scope of SCM isexpanding to include all of the businessprocesses that enable rapid, precise fulfillmentof customer expectations, from product develop-

ment to relationship management. The supplychain itself is transforming into a network, ascompanies increasingly form partnerships tostrengthen their competitive performance. Thus,the traditional concept of a linear, static supplychain is giving way to a complex web ofdynamic relationships.1 Rather than focusingonly on tangible infrastructure (plants, vehicles,and depots), the strategic view of SCM alsoincorporates more intangible elements: collabo-ration, information, and connective technologies

that bridge time and space.The following definition of SCM reflects thisemerging strategic view:

Supply chain management is the integrationof key business processes from end userthrough original suppliers, which providesproducts, services, and information that addvalue for customers and other stakeholders.2

Supply Chain Business Processes

This report utilizes a reference model developedby The Global Supply Chain Forum at The OhioState University (http://fisher.osu.edu/scm),

which defines the following eight SCM businessprocesses.3

n Customer Relationship Management:Develops and maintains relationships withcustomers, including establishing product/service agreements (PSAs) between the firmand its customers.

n Customer Service Management: Provides thefirms face to the customer, includingmanagement of the PSAs, and provides asingle source of customer information.

nDemand Management: Balances thecustomers requirements with supply chaincapabilities.

n Order Fulfillment: Includes all the activitiesnecessary to define customer requirements,design the logistics network, and fill customerorders.

n Manufacturing Flow Management: Includesall the activities necessary to move productsthrough plants and to obtain and implementmanufacturing flexibility in the supply chain.

n Supplier Relationship Management:

Develops and maintains relationships withsuppliers, including establishing PSAsbetween the firm and its suppliers.

n Product/Service Development andCommercialization: Provides the structure fordeveloping and bringing to market newproducts or services, including collaborationwith customers and suppliers.

n Returns Management: Includes all activitiesrelated to handling and disposition of varioustypes of returns, including reverse logistics,

gatekeeping, and returns avoidance orabatement.

INTRODUCTIONSECTION1

1 Some practitioners have introduced new terms such as value chain or value web to emphasize these changes. However, to avoid confusion, this

report will adhere to the established term supply chain.2 D.M. Lambert, M.C. Cooper, and J.D. Pagh, Supply Chain Management: Implementation Issues and Research Opportunities, The International Journal

of Logistics Management, Vol. 9, No.2 (1998). See http://www.ijlm.org.3 Douglas M. Lambert, Editor, Supply Chain Management: Processes, Partnerships, Performance, Sarasota, FL: Supply Chain Management Institute,

2004. See http://www.scm-institute.org.

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Different industries may have differing interpre-tations of the above business processes. Forexample, in the electric power industry, theorder fulfillment and manufacturing flow man-agement processes might be interpreted as fuelacquisition, power generation, system dispatch-ing, power transmission, and power distribution.Any specific company can tailor the abovereference model to fit its own particular businessprocess definitions.

Many leading companies have recognized thateach business process needs to be managed by across-functional team, and have deployed theirpersonnel accordingly. For example, SupplierRelationship Management involves thefollowing functions:

n

Finance: Tracking procurement-related costsn Logistics: Inbound flow & inventory

managementn Marketing: Product customization & supportn Purchasing: Supplier transaction managementn R&D: Material or component specificationn Production: Requirements planning &

scheduling

This report will clarify the important contribu-tions that the Environmental, Health and Safety(EHS) function can make to these cross-function-

al business process teams, and will demonstratehow a more collaborative approach can deliverincreased supply chain value.

Relevant Trends in Supply ChainManagement

Over the past decade, SCM has been a constant-ly changing landscape as competitors vie tointroduce both technological innovations andprocess improvements to increase speed, effi-ciency and responsiveness. As a consequence of

these changes, SCM is increasingly viewed as astrategic lever in many industries. While totalcosts are difficult to estimate, logistics costsalone can range from about 4% to 15% of totalsales, and the gap between the leading and

average players is two-fold or more and widen-ing.4 Thus, the impact of SCM on profit marginscan be a significant competitive factor. Forexample, the remarkable financial recovery ofApple Computer under Steve Jobs was largelycredited to a complete overhaul of the supplychain system, shrinking inventory from 27 daysto less than 2 days.5

The following SCM trends are particularlyrelevant for EHS engagement:

n Globalization. International capital flows andexports of products and services have made theglobal economy increasingly interdependent,while advances in logistics and communicationhave enabled global trade to progress rapidly.However, offshore sourcing results in greater

regulatory complexity and longer lead times. Inaddition, globalization has raised concerns aboutinequities between rich and poor countries, aswell as adverse environmental impacts such asenergy consumption and greenhouse gasemissions.6 Varying regulatory requirements aswell as cultural barriers tend to complicate theacquisition and integration of international busi-nesses. Thus, tensions between economic oppor-tunities and EHS and social concerns can beobstacles to global supply chain management.

n

Outsourcing of key functions. The trendtoward outsourcing has continued to expand,moving from basic logistics functions such astransportation and warehousing to broader andmore critical functions such as technology devel-opment and contract manufacturing. Companiesin many industries are now utilizing virtualenterprise models that blur the boundariesbetween suppliers and customers. For example,many semiconductor fabrication plants, whichpurchase and use large amounts of chemicals,are now utilizing supplier turnkey services to

provide total chemical management, includingprocurement, chemical handling, and waste dis-position.7 In these types of relationships, theEHS management capabilities of the supplier arean important competitive factor. Likewise, in

4A Global Study of Supply Chain Leadership and Its Impact on Business Performance, study conducted by Accenture, INSEAD, and Stanford

University, 2003.5D. Bovet and J. Martha, Value Nets, New York: Wiley, 2000.

6International Monetary Fund, Globalization: Threat or Opportunity?, January 2002.

7Chemical Management Case Study in the Semiconductor Industry, Semiconductor Fabtech, Spring, 2002.

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outsourcing to third-party providers such ascontract manufacturers, EHS competencies areneeded to perform due diligence, review providerperformance, and assure business continuity.

n Collaboration. To operate effectively in global

markets, companies are increasingly formingalliances with suppliers, customers, and evencompetitors. One survey of partnering withsuppliers projects a growth rate of over 60%between 2002 and 2005.8 It is generally believedthat supply chain collaboration leads to lowertotal cost and enhanced service performance.9 Inparticular, establishment of supplier-customerpartnerships enables companies to work moreclosely on designing integrated solutions for theend customer. For example, Procter & Gambleadds supplier experts to its planning teams to

implement Design for Environment for itsproducts and packaging, thus minimizing thetotal costs and adverse impacts of a productthroughout its life cycle.

n Reverse logistics. Management of returns,including recalls, repairs, and exchanges, is a nec-essary part of supply chain management. Anemerging trend is the deliberate recovery, recy-cling, re-use, and remanufacture of obsoleteproducts, components, and materials. This trendhas been spurred by government adoption in

Europe and elsewhere of extended producer respon-sibility for the full product life cycle, includingpost-consumer disposition (known as producttake-back). Companies are responding to newtake-back requirements by designing products inways that facilitate safe, efficient, and cost-effec-tive recovery at the end of their useful life.10

However, it is often challenging to assure the reli-ability of recovered parts and materials.

n Corporate social responsibility. The increasingdemands from stakeholders11 for social responsi-

bility and transparency are influencingcompanies in many industries to re-examine theirbehavior. Controversy over labor practices in

developing nations has raised customer sensitivi-ty to the conduct of upstream suppliers. At thesame time, governments and large corporationsare beginning to adopt environmentally prefer-able purchasing practices that favor productswith superior EHS characteristics, such as energyefficiency and absence of harmful emissions.12 Inresponse to these trends, the Institute for SupplyManagement recently announced a new set ofPrinciples for Social Responsibility (seehttp://www.ism.ws).

n Time-sensitive order fulfillment. The adoptionof lean manufacturing and related approaches,such as just-in-time replenishment, has helpedto reduce manufacturers working capital andstreamline their operations. An extreme exampleis Dell, which carries minimal inventory and

8B.J. LaLonde and J.L. Ginter, The Ohio State University, 2003 Survey of Career Patterns in Logistics.

9T.P. Stank, S.B. Keller, and P.J. Daugherty, Supply Chain Collaboration and Logistical Service Performance,Journal of Business Logistics, Vol. 22, No.

1, 2001.10

V.D.R. Guide Jr., L.N. Van Wassenhove, The Reverse Supply Chain, Harvard Business Review, Feb. 2002

11Important external stakeholder groups include employees, customers, suppliers, lenders, insurers, local communities, governments, advocacy groups,

religious groups and indigenous peoples.12

Green Procurement: Good Environmental Stories for North Americans, Five Winds International, 2003.

Sustainable Development

The emergence of extended producer respon-sibility and corporate social responsibility arepart of a broader phenomenon. Many globalcorporations have made a voluntary commit-ment to sustainable development, often definedas meeting the needs of the present withoutcompromising the ability of future genera-

tions to meet their own needs. In practice,sustainability involves:

n Supporting employee rights and quality of lifenPromoting community and societal well-beingnUpholding business ethics and transparencyn Building capacity for economic developmentnMinimizing adverse environmental impactsn Protecting and conserving natural resources

Sustainable business practices are describedin a GEMI report, Exploring Pathways to aSustainable Enterprise: SD Planner, which

includes a software tool for self-assessment andstrategic planning (see http://www.gemi.org).

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actually has negative working capital. In Dellsdirect-to-customer, build-to-order business model,they collect from customers before their suppliersget paid. Ironically, these approaches tend to shiftthe inventory burden onto suppliers, who are

experiencing increasing demand for smaller, morefrequent orders that may be less resource-efficient.EHS insights can help to reduce order fulfillmentcosts by devising lighter-weight, more energy-efficient packaging and transportation solutions.

n Advanced information technology. New infor-mation technology has the potential to revolution-ize the field of SCM. For example, Procter &Gamble, Wal-Mart and others are introducingradio frequency identification (RFID) tags thatpinpoint the locations of products and thus enablereal-time, adaptive responses to supply ordemand fluctuations. Other examples include:Pioneer Hi-Bred International, a DuPont companythat markets hybrid seeds and uses a real-timeexpert system for remote diagnosis of crop dis-eases; and Nike, which uses an Internet-basedinformation system to monitor market patterns,enabling it to reduce speculative inventories from30% to 3% of volume.

n B2B networks. One of the most importanttrends in information technology is the growth ofB2B (business to business) as well as B2C(business to consumer) Internet links, whichenable networks of suppliers and customers tocommunicate seamlessly across the Internet.According to Forrester Research, despite thebursting of the dot.com bubble, over 50% ofbuyers now collaborate with suppliers on theInternet.13 One area of opportunity for EHS isextension of the B2B approach to include reverselogistics and management of waste materials.Advanced communication techniques andmaterial pooling could give companies much

broader access to low-cost sources of recycledmaterials or components, and to potential marketchannels for their unwanted byproducts.

n Supply chain security. International terroristactivities have raised awareness of the vulnerability

of supply chain networks and supporting infras-tructure to major disasters natural, accidental,and intentional. Many firms have not yet imple-mented formal supply chain continuity prepared-ness programs, and only about 61% of US firmshave disaster recovery plans.14 Most of theseplans cover data centers, and only an estimated12% cover total organization recovery. EHSexperience in identifying vulnerabilities and

developing emergency response plans can behelpful in reducing a companys susceptibility tobusiness interruption. For example, the AmericanChemistry Council has developed guidance forsecurity management.15 In both supply chain andEHS management, there is a renewed emphasistoday on resilience the capability to respondquickly to unforeseen disruptions.16

Implications for EHS Value Creation

The above trends suggest that EHS professionals

have the potential to play a unique and largelyuntapped role in helping to improve SCM perfor-mance. Due to a combination of regulatorypressures and stakeholder expectations, EHSperformance is becoming a more important driver

Strategic Sourcing

Integration of EHS considerations into sup-plier selection, outsourcing, and procurementactivities can identify hidden sources of busi-

ness value and enhance supply chain perfor-mance. Examples of opportunities include:

n Reduction of direct procurement costsn Reduction of indirect or contingent costsn Improvement in speed and efficiencyn Enhancement of image and relationshipsn Improvement in product characteristics

Tools for realizing these benefits are provid-ed in a GEMI report, New Paths to BusinessValue: Strategic Sourcing Environment,Health and Safety (see http://www.gemi.org).

13B. Temkin, Building a Collaborative Supply Chain, The ASCET Project, http://temkin.ASCET.com.

14O. Helferich and R.L. Cook, Securing the Supply Chain, Council of Logistics Management, 2002.

15American Chemistry Council, Implementation Guide for Responsible Care Security Code of Management Practices, Washington, DC, July 2002.

16J.B. Rice and F. Caniato, Building a Secure and Resilient Supply Network, Supply Chain Management Review, September/October 2003.

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of enterprise success. As a result, EHS know-howcan be valuable when shared with internal groupsas well as customers and suppliers. It is commontoday for EHS professionals to contribute to costreduction through regulatory compliance, riskmitigation, and improved efficiency. More

recently, leading companies have begun leverag-ing EHS-related strategic value drivers thatcontribute to top line growth this is describedfurther in Section 2.

Supply chain managers are continually searchingfor new approaches to increasing profitability andefficiency. This report shows that there are signifi-cant opportunities for EHS professionals to createbusiness value, in collaboration with other func-tional managers, by enhancing supply chain per-formance. Examples of such opportunities rele-

vant to supply chain management include:n Assuring business continuity by anticipating

and preventing potential disruptions such aspermitting delays or transportation accidents.

n Improving brand differentiation and customerloyalty by offering unique capabilities toaddress EHS-related requirements andexpectations.

n Enabling access to key markets through ISO14001 registration or eco-label certification.

n Gaining stakeholder approval by reducing thesupply chain environmental footprint.

n Designing innovative system solutions, such asclosed-loop material recovery and re-use,through supplier-customer collaboration.

These opportunities are illustrated throughout thereport by case studies of GEMI member companyexperiences. To realize the potential businessvalue, it is imperative that EHS groups reach outbeyond their traditional boundaries and establishstronger relationships with the cross-functionalteams engaged in SCM. This will help to develop

credible business justifications for new initiatives,and to gain top management support.

Shareholder value creation is the ultimate goal ofSCM, and this report seeks to demonstrate thebusiness case for EHS engagement in supplychain management, with a focus on business

performance. Rather than EHS issues placingconstraints upon the supply chain, EHS perfor-mance improvements ideally should be naturaloutcomes of a companys efforts to increase sup-ply chain speed, efficiency, and continuity.

Whats Next

The balance of this report is organized as follows:

n Section 2 develops the business case for EHSengagement more explicitly.

n Section 3 provides a framework for identifyinghigh-value EHS opportunities.

n Section 4 provides a step-by-step methodologyfor selecting the best opportunities,developing a business justification, andimplementing a successful project.

n Section 5 describes methods for collaboratingeffectively both inside and outside thecompany.

n Section 6 summarizes the conclusions.

It is imperative that EHS groups

reach out beyond traditional

boundaries to establish relation-ships with SCM teams.

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Supply Chain Value DriversHow can value creation be measured? In order tounderstand the potential contributions of EHS tosupply chain performance, it is helpful to use acommon financial metric known as economicvalue added (EVA).17 In essence, a firm that isable to generate a flow of profits greater than itscost of capital is adding shareholder value, whilea firm whose cost of capital exceeds its profits isdestroying shareholder value. EVA can be usedas a tool for measuring SCM performance and for

developing a business case for SCM improve-ment projects. While EVA is used widely, the fol-lowing description also applies to other commonfinancial metrics such as return on investment(ROI) or return on net assets (RONA).

This report focuses on three major shareholdervalue drivers that represent the tangible out-comes of SCM improvements: Profitability,Asset Utilization, and Service Level.

n Profitability: After-tax operating profits canbe increased through two main pathways:

revenue growth and operating cost reduction.n Revenue Growth: Companies can increase

revenues by growing their existing accounts,attracting new customers, acquiring newbusinesses, or entering new markets. SCMsupports growth by assuring the availabilityof the right products (or services) in themarketplace, strengthening customerrelationships, and identifying innovativesolutions to customer needs.n Cost Reduction: Companies can reduce

operating costs by improving their operatingefficiency and reducing the cost of goodssold. SCM supports cost reduction by stream-lining operations, reducing overheadexpenses, and establishing favorable contracts.

n Asset Utilization: Companies can reducetheir total capital requirements by simplify-ing processes, retiring obsolete equipment, orincreasing their production yields. SCMsupports improved asset utilization by recon-figuring the supply chain, operating assetsmore efficiently, avoiding business interrup-tions, and reducing working capital,including inventory and work-in-process.

n Service Level: A fundamental measure ofsupply chain performance is the ability tomeet product availability and deliverycommitments. Service level is an importantdriver for customer satisfaction and loyalty, aswell as for the ability to grow. One of thegreatest challenges to SCM is managing order

fulfillment and related processes in a waythat balances cost pressures against serviceexpectations.

The above value drivers are consistent with aworldwide Accenture study of how companiesderive competitive advantage from their supplychains, which included a survey of 636 companiesin 24 global industries.18 The study found that themost commonly cited operational performancedrivers were supply chain cost, speed and efficien-cy, and service quality. Moreover, a strong correla-

tion was observed between supply chain excel-lence and growth in shareholder value as mea-sured by market capitalization.

BUSINESSCASEFORMULATION

17The term economic value added was first introduced and trademarked by Stern and Stewart. It is defined as the difference between after-tax operating

profit and the opportunity cost of capital employed. Similar financial metrics are often designated by other terms such as shareholder value added. (See

http://www.sternstewart.com.)18

A Global Study of Supply Chain Leadership and Its Impact on Business Performance, Accenture, INSEAD, and Stanford University, 2003.

Economic Value Added =

After-Tax Operating Profitsminus Cost of Capital

SECTION2

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While EVA is strictly a financial metric, there aremany intangible factors that are important leadingindicators of financial performance but do notappear on financial statements.19 For example,companies can reduce their capital costs by reduc-ing the risk perceived by lenders and investmentanalysts. The following are examples of intangiblevalue drivers that are relevant to SCM:

n Customer Relationships: Flexibility,responsiveness, customer satisfactionand loyalty.

n Brand Equity and Reputation: Perceivedintegrity, social responsibility, and brandimage.

n Business Continuity: Stability of operations,ability to minimize interruptions.

n Alliances: Formation of partnerships andcollaborative agreements.

n Technology: Strength of process know-howand key technical capabilities.

The Accenture study referenced previously con-firms the importance of these types of intangi-bles, and predicts that future supply chainstrategies will emphasize leadership in collabo-ration and use of technology.

The EHS Value Proposition

The SCM value drivers above provide a contextfor describing concretely how EHS capabilitiescan add value. The business case for EHSengagement rests upon the ability of EHS pro-fessionals to enhance supply chain capabilitiesand performance. Figure 1 depicts three mainpathways for EHS contributions to SCM valuecreation:20

Pathway 1. Tangible: EHS capabilities oftencontribute directly to financial performance; forexample, by generating revenues from wastematerials or reducing the costs of site remedia-

19J. Low, and P.C. Kalafut,Invisible Advantage: How Intangibles Are Driving Business Performance, Cambridge: Perseus Books, 2002

20This analysis of pathways to value is based on J. Fiksel, Revealing the Value of Sustainable Development, Corporate Strategy Today, Issue VII/VIII,

2003.

Pathways to Business ValueFIGURE1

BusinessCase Formulation 7

Community

Quality of Life

EHS excellence:responsibility,

safety, security,

and efficiency

Employee

Satisfaction

Environmental

Sustainability

Stakeholder

Interests

Customer

Reputation

Continuity

Alliances

Technology

Intangible

Value

Drivers

Pathway 1

Pathway 3

Service

Level

Profitability

Asset

Utilization ShareholderValue

Tangible

Outcomes

Pathway 2


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tion. In addition, EHS makes the followingimportant indirect contributions:

n Profitability: Enabling revenue growth bysupporting expansion into new markets;reducing costs by helping to increase

efficiency and minimize hidden EHS-relatedexpenditures (see Motorola case study onpage 9).

n Asset Utilization: Conserving capital byhelping to prolong asset life, recover andre-use assets, minimize waste and obsoles-cence, and reduce downtime due tounplanned incidents.

n Service Level: Satisfying customers byproviding timely information and technicalassistance, reducing cost of ownership, andavoiding interruptions in order fulfillment.

Pathway 2. Direct, intangible: EHS capabilitiescontribute directly to improvements in keyintangible value drivers that influence share-holder value (see box).

n Customer Relationships: Supportingcustomers in the safe and effective use ofproducts; helping to improve the quality ofproducts and services by addressing EHS-related needs of customers.

n Brand Equity and Reputation: Establishing

an image of corporate responsibility, integrity,and transparency, which increases the trustand satisfaction of both employees andexternal stakeholders.

n Business Continuity: Decreasing risks ofbusiness interruption by helping to monitorsuppliers, assuring product and processsafety, intervening rapidly and effectivelywhen incidents do occur, and maintaining thecompanys license to operate.

n Alliances: Helping to establish mutuallybeneficial supply chain partnerships, and

engaging with external stakeholders that mayhave concerns about the impacts of supplychain operations.

n Technology: Incorporating EHS skills andspecialized knowledge into SCM technologiesand business processes, e.g., reverse logistics.

Pathway 3. Indirect, intangible: EHS capabili-ties further enhance intangible value driversby creating value for external stakeholders.

Commitment to environmental and socialresponsibility implies responsiveness to theneeds of society, including employees, com-munities, public interest groups, and regulato-

ry agencies. Because a companys supplychain extends outward beyond the companyboundaries, both organizationally and geo-graphically, it is critical that supply chainmanagers understand the needs and expecta-tions of the many stakeholders that areaffected by their operations.

Improving EHS performance, and thuscreating value for society, indirectly benefitsshareholders. The perceptions of key stake-holders influence many of the above intangi-

ble value drivers, including CustomerRelationships, Brand Equity and Reputation,Business Continuity, and Alliances.Companies often choose to address thosestakeholder issues that are aligned with theirown interests and core competencies. Forexample, FedEx Express collaborated with the100% Recycled Paperboard Alliance in theconversion of its overnight envelopes to 100%recycled materials (see page 20).

Linking EHS to Shareholder Value

EHS practices are known to contribute tothe bottom line through reduced operatingcosts, insurance premiums, and capitalcosts. However, EHS excellence also con-tributes to shareholder value in a broaderand more strategic way by buildingcritical intangible assets such as:n Customer relationshipsn Product and service innovationn Leadership and strategyn Brand equity and reputationn Transparency and trustn Risk and opportunity managementn Alliances and networksn Technology and business processes

n Human capital and talent retentionThese EHS-related value drivers are describedin a GEMI report, Clear Advantage: BuildingShareholder Value Environment Value to theInvestor, which supports investor relations (seehttp://www.gemi.org).

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CASE STUDY of Creating EHS Value:Motorolas Inbound Discrepancy Reporting System

Motorola, a global leader in integrated communications and embedded electronics solutions,prides itself on excellence in EHS. In one Six Sigma project, that commitment to excellence tran-

scended traditional EHS boundaries, as an initial EHS-led effort to reduce pallet-related injuriesevolved into a major initiative yielding significant supply chain and customer service benefits.

Motorolas cross-functional team, comprised of EHS, Logistics, Quality, Finance, Packaging, andSourcing representatives, developed a comprehensive approach that standardizes packaging andpallets; dramatically reduces the pallets handled, stored and disposed; maximizes the packagingdensity to reduce transportation costs; and addresses associated injury costs and occurrences. Thisproject has already yielded over $1 million in cost reduction, and is expected to save over $5million in 2004.

Critical to realization of these benefits is the compli-ance of Motorolas suppliers with new guidelines andspecifications for all inbound shipments. To insurethat compliance, the Motorola cross-functional teamdeveloped a customized Inbound Discrepancy Report(IDR) system. IDR is the key vehicle that Motorola isusing to track supplier compliance, update supplierscorecard performance, and quantify the cost of non-compliance for potential recovery of costs due tosupplier defects. IDR users at Motorolas distributioncenters record all inbound discrepancies at thereceiving dock, using simple keystroke entries,scanning, and digital imaging. The IDR system is linked to several other enterprise systems (pur-chasing, inventory, order entry, etc.) to provide access to detailed vendor, shipments, purchase

order, and stocking information.This robust information system is providing significant and valuable real time information toboth Motorola management and vendors that are linked on-line through the purchasing system.Automated Pareto reports can be viewed online or selectively emailed to focus on the vital fewsuppliers or defects that have the greatest impact upon distribution center operations. The IDRsystem uses discrepancy data to influence the supplier scorecard performance ratings, and auto-matically generates detailed cost breakdowns for use in supplier negotiations.

The IDR project has achieved significant, tangible results in the first two years, 2002-2003:

n 58% reduction in pallet-related injuries, saving $400,000 in avoided Workmens Compensation cost

n 12% reduction in discarded pallets, which equates to $120,000 of cost avoidance in pallet purchases

n$400,000 savings in reduced transportation expenses

n $100,000 savings in reduced handling and storage of pallets

n 16% improvement in recycling rate of non-hazardous wastes.

As the global adoption of the IDR system continues at all Motorola distribution centers, costsavings and improved EHS performance are expected to increase exponentially. In April of2004, the project received a Motorola CEO award for developing the IDR as a permanent institu-tionalized tool that drives not only EHS savings but also improvement in multiple Supply Chainorganizations.



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Reciprocal Value Creation

The emphasis of the EHS value propositiondescribed earlier was on creating value forcompany shareholders. Because successful supplychains are based on mutually beneficial relation-

ships between suppliers and customers, it isimportant to extend the scope of EHS valuecreation to other members of the companyssupply chain. Embedding EHS expertise into theCustomer Relationship Management and SupplierRelationship Management processes will benefitcompanies in several ways (see Figure 2).

n By sharing intelligence and know-how aboutEHS regulatory issues and emergingtechnologies, suppliers and customers canstrengthen each others performance.

n By incorporating EHS advantages into theirproducts and services, e.g., reducing thecustomers cost of ownership, suppliers canenhance differentiation and customer loyalty.

n By collaborating, customer-supplier teams canaddress EHS-related technical challenges that

affect the profitability and performance of theoverall supply chain. For example, Intel hasworked closely with its customers to developefficient, low-cost packaging solutions (seecase study on page 23).

In order to reinforce this type of reciprocal valuecreation, it is important that suppliers andcustomers be able to recognize and quantifyeach others value contributions. Unfortunately,most existing supply chain management perfor-mance metrics (e.g., inventory turns) are inter-nally focused, and do not take into account theinterests of other supply chain participants. Onepossible improvement would be for suppliersand customers to share appropriate financialinformation, and align their SCM efforts in away that improves profitability for both par-ties.21 An example is the shared savingsapproach, in which suppliers can benefit fromreduced consumption that lowers overall supplychain costs and environmental impacts.22 Thecharacteristics of mutually beneficial partner-ships are explored further in Section 5.

21D. Lambert and T.L. Pohlen, Supply Chain Metrics, The International Journal of Logistics Management, Vol. 12, No. 1 (2001), pp. 1-19. (See

http://www.ijlm.org.)22

C.J. Corbett and G.A. DeCroix, Shared-Savings Contracts for Indirect Materials in Supply Chains: Channel Profits and Environmental Impacts,

Management Science, Vol. 47, No. 7 (2001), pp. 881-893.

Reciprocal Value Flowin a Supply ChainFIGURE2

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Communication & Collaboration

Shareholder

Value

Suppliers

supplier

EHS

Shareholder

Value

Supplier

EHS

Shareholder

Value

Customer

EHS

Shareholder

Value

Customers

customer

EHS

Stakeholder Interests

Consumer

ValueProduct Flow
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Overcoming Barriers to EHSEngagement

Proponents of EHS value creation opportunitieswill need to recognize and overcome thecultural and institutional barriers that exist in

many corporations. The traditional responsibili-ty of EHS groups has been liability avoidancethrough regulatory compliance and risk man-agement. Therefore, EHS is generally seen as anecessary cost of doing business. Even amongcompanies that are viewed as leaders in EHSand sustainability, it is common for employees,including EHS and SCM professionals, to retainthese traditional perceptions. One study ofsupply chain environmental practices cited thefollowing barriers to EHS value creation

opportunities:23

n Lack of resources or accountability forinvestigating innovative opportunities

n Limited capacity in EHS and sustainabilitycapabilities due to personnel cutbacks

n Complexity of SCM practices that differ byregion, business unit, and customer segment

n Fragmented supply chains characteristic ofmany global industries

n Lack of experience with partnership-basedstrategies and management practices

n

Business opportunities seen through the lensof existing products, processes, and customersn Fluctuating business conditions that lead to

emphasis on short-term performanceimprovement.

The above types of barriers can be overcome if achange initiative is armed with a strong business

justification and supported by effective internalcollaboration. A common weakness of EHSinitiatives is the lack of a clear business valueproposition. Merely invoking the principle of

doing the right thing does not providesufficient business logic for making decisionsthat involve value trade-offs.

EHS value creation initiatives should focus onhow EHS can contribute to shareholder value,rather than on how supply chain improvementscan help to meet EHS goals. In many cases,

benefits to society and the environment, such aspollution prevention, can be natural outcomes ofefforts to improve the productivity of supplychain business processes. Inevitably, there willalso be cases that require trade-offs betweenfinancial objectives and strategic objectives suchas continuity and customer satisfaction. EHSfactors typically need to be considered on bothsides of the equation.

Even projects that have both business and EHSmerits will need to compete for investmentdollars. As a rule, limitations on resources willforce companies to favor projects with a signifi-cant, plausible return on investment. To gainacceptance from supply chain executives, thebusiness case for EHS value creation needs to bearticulated clearly. As demonstrated by theMotorola case study (page 9) and numerousother examples from GEMI member companies,

institutional barriers can be overcome througheffective cross-functional teamwork with a con-sistent focus on business value.

Whats Next

The balance of this report is organized as follows:

n Section 3 provides a framework foridentifying high-value EHS opportunities.

n Section 4 provides a step-by-stepmethodology for selecting the bestopportunities, developing a business case,

and implementing a successful project.n Section 5 describes methods for collaborating

effectively both inside and outside thecompany.

n Section 6 summarizes the conclusions.

23 Creating Value Through Strategic Supply Chain Partnerships, Natural Logic, Inc., 2003, http://www.natlogic.com.

Benefits to society and the

environment can be natural

outcomes of efforts to improvesupply chain productivity.

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The EHS function has gradually expanded itsscope of activities to better support enterprise-wide business processes. The traditional role ofEHS has been to assure regulatory complianceand avoid liabilities, and even today thisremains the dominant perception of EHSresponsibilities. However, progressive organiza-tions both in the U.S. and around the globe havefound that EHS excellence can be leveraged tocreate business value in many ways. Table 1summarizes both traditional and recently

emerging EHS contributions that benefit supplychain performance. Additional descriptions andcase studies of these EHS contributions are pro-vided on pages 16 through 29.

The following pages provide guidance for focus-ing on the particular types of EHS contributionsthat will be most valuable for a specific compa-ny. This information is also available in theform of an interactive tool on GEMIs web site,at http://www.gemi.org/supplychain .

Key EHS Contributions Potential Supply Chain Benefits

n Assure compliance of products andbusiness processes with laws, applicableregulations, and industry standards (see p. 16)n Minimize risks and maintain businesscontinuity by assuring process safety andpracticing product stewardship (see p. 17)n

Maintain health, both for employees andlocal communities, through industrial hygieneand facility management (see p. 19)n Protect environment, including publichealth and natural resources, throughpollution prevention and ecologicalstewardship (see p. 20)

n Avoid unplanned costsn Reduce potential liabilitiesn Avoid delays and downtimen Improve asset utilizationn Improve asset security and personnel safetyn

Improve employee satisfaction andproductivityn Enhance relationships with key external

stakeholdersn Strengthen license to operaten Enhance public image

n Raise productivity of business processesthrough material conservation, energyefficiency, and conversion of wastes intobyproducts (see p. 21)n

Enhance relations with customers, suppliers,and other external stakeholders that influencethe companys license to operate (see p. 23)n Support innovation in products, services,and process technologies that enhance financialperformance or customer satisfaction (see p. 25)n Enable growth, including acquisition andsales expansion, by performing duediligence and supporting access to newmarkets (see p. 28)

n Reduce operating costsn Reduce inventory requirementsn Reduce resource requirementsn

Improve customer satisfactionn Enhance strategic supply chain alliancesand relationships

n Improve competitive position due toproprietary technology

n Strengthen value proposition for marketingand sales

n Enable competitive entry into globalmarkets

OPPORTUNITYIDENTIFICATIONSECTION3

HowEHSContributes to Supply Chain PerformanceTABLE1

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Finding High-Value Opportunitiesfor Your Supply Chain

The range of opportunities suggested in Table 1is very broad. Every company has uniquesupply chain characteristics, so that there are no

clear-cut rules for identifying the highest-valueopportunities. However, there are some usefulguidelines that managers can follow in order tofocus on the particular types of EHS initiativesthat are likely to be most promising for theircompanies.

Table 2 on the following two pages provides asimple Diagnostic Tool to help you identifypotential high-value opportunities for EHSvalue creation across all of your supply chainbusiness processes. The tool, depicted in Figure

3, consists of a series of questions organized intofour major blocks that characterize yourindustry, your market, yourprocesses, and your

stakeholders. Each question will lead you to oneof the eight specific opportunity areas defined inTable 1 (EHS Contributions) that may be worthexploring further. These eight areas aredescribed on pages 16 to 28, and are demon-strated by company case studies.

This diagnostic tool represents one method ofidentifying opportunities, but there are othermethods available. Section 4 describes some ofthese other methods, and provides moredetailed guidance in the form of a step-by-stepValue Creation Methodology for selecting andimplementing the highest-value EHS-relatedopportunities.

NOTE: You can also access an interactive,Web-based version of Forging New Links that

includes the Diagnostic Tool, EHS Contri-butions, and Value Creation Methodology athttp://www.gemi.org/supplychain.

Diagnostic Tool for Opportunity IdentificationFIGURE3

Opportunity Identification 13

Your Industry

Your Market

Your Processes

Your Stakeholders

Diagnostic QuestionsEHS Contributions

Raise Productivity

Enhance Relations

Support Innovation

Enable Growth

Assure Compliance

Minimize Risks

Maintain Health

Protect Environment

Traditional:

Cost

Avoidance

Emerging:

Value

Creation


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Does this statement fit your business? If so, consider these opportunities pages

We have a small number of dominantcustomers. Include the EHS function in cross-functionalcustomer account management teams 23

We view customer acquisition and retention ascritical issues.

Strengthen sales and customer retention bysupporting compliance with EHSrequirements

16

We tend to customize our products andservices.

Incorporate customized EHS technicalsupport into the product or service offering

25

We perform a great deal of customer serviceand support.

Offer EHS expertise to customers as a value-added complement to products or services

23

We have tight product delivery requirements.Work with suppliers and customers toexpedite and streamline order fulfillmentprocesses

21

We have short product life cycles.Develop product innovations that enablevalue recovery and reduce cost of ownership

25

We have a high cost of product development.Include early anticipation of EHSrequirements in product development andcommercialization

25

We need to manage a large flow of productreturns.

Develop cost-effective capabilities for returnsmanagement, including re-use or recycling

21


We provide services (e.g., energy, communica-tion, waste management) to industrial customers.

Enhance customer appeal by developing EHSsolutions that lower their costs

23

We provide services to retail customers.Collaborate with suppliers to improve EHSperformance of supply chain operations

21

We extract and process raw materials.Seek affordable options for energy andmaterials derived from renewable sources

20

We convert raw materials into commodities(e.g., energy or industrial feedstocks).

Build customer loyalty by sharing EHSregulatory and technical expertise

23

We manufacture specialty materials orpackaging.

Differentiate your products in terms of theirsuperior EHS characteristics

28

We manufacture components for durable goods. Work with customers to design technologiesthat reduce the supply chain footprint 25

We manufacture and sell retail durable goods.Design EHS-enhanced product attributes tosupport brand differentiation

25

We manufacture and sell retail consumablegoods.

Apply risk management to protect humanhealth and safety and supply chain security

17

Guide to Selecting Business-Specific OpportunitiesTABLE2

Your Industry

Your Market

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Guide to Selecting Business-Specific Opportunities (continued)TABLE2

Your Processes


We procure inputs from numerous suppliers. Incorporate EHS review into supplierselection and performance monitoring

19

We procure inputs from a few key suppliers.Collaborate with key suppliers to reducethe footprint of products or services

20

We outsource many of our supply chainoperations.

Provide technical support and auditing toassure compliance and best practices

16

We handle hazardous or controlled substances.Conduct exposure and risk assessment toidentify cost-effective risk mitigationoptions

17

We generate significant industrial waste streams.

Evaluate technical options to reduce, re-use,

or recycle wastes into beneficial by-products 20

We have a relatively high cost of materials.Explore strategies for reducing materialintensity of products and services

25

We carry a relatively high level of inventory.Identify hidden and indirect EHS costs to beincluded in inventory carrying costs

21

We have a relatively high cost of transportation.Develop innovative methods for reducingfuel use, transport volume, or fleet size

21

Your Stakeholders


We have numerous facilities in populated areas.Engage in dialogue and voluntary initia-tives with local community organizations

23

We are heavily regulated by multiple agencies.Integrate and streamline enterprise-wideregulatory compliance processes

16

We operate our business(es) globally.Leverage superior EHS and socialperformance to penetrate global markets

28

We rely upon alliances to be competitive.Collaborate with business partners toimprove supply chain EHS performance

21

We need to protect our brand image and

reputation.

Report to key stakeholders on EHS and

sustainability performance improvements 23

We need to retain our highly skilled employees.Promote progressive EHS practices andemployee well being at company facilities

19

We need to assure correct handling of ourproducts.

Communicate pro-actively withdownstream customers regarding safeproduct use

17

We are frequently challenged by advocacygroups.

Undertake collaborative initiatives topromote ecological and social well-being

20



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Assuring Compliance

Compliance with laws and regulations is oftentaken for granted and only attracts attentionwhen a company is penalized for inadvertentviolations. Yet a lapse in compliance has the

potential to cause significant disruptions insupply chain continuity. For example, inNovember 2001 Dutch officials banned the saleof Sonys PlayStation PS one console becausethe cadmium content in the accessory cablesexceeded allowable limits. As a consequence,Sonys lost sales and rework costs totaled about$150 million.24 With the increasing complexityof sourcing practices, the maze of regulatoryissues at the state, Federal, and internationallevel can be bewildering. Compliance issues that

influence supply chain performance include:n Product-related issues such as consumer

safety, product constituents, and labeling

n Process-related issues such as operating permits,emission regulations, and process safety

n Logistics-related issues such as import-exportand hazardous material transport requirements

nAdherence to non-governmental standards suchas ISO 9000 for quality management and ISO14000 for environmental management, which arefavored by some industrial customers.

EHS professionals can help to reduce the costand effort associated with compliance by inte-grating and streamlining the required reporting,documentation, and monitoring procedures.Using environmental management systems (seeAppendix A), they can systematize these proce-dures so that operations personnel can betrained to carry them out routinely. Moreover,by studying emerging regulatory issues andpositioning the company to meet them rapidlyand efficiently, the EHS group can create lastingcompetitive advantage.

CASE STUDY: Pfizer Standard for Contract Manufacturing and ResearchPfizer, the worlds largest pharmaceutical company, outsources a portion of its manufacturing andresearch activities, including active pharmaceutical ingredients, drug products, and packaging. Toassure its revenue stream, guard against liabilities, and protect its brands, Pfizer emphasizes closemonitoring of its Contract Manufacturers and Researchers (CMRs).

Since the mid-1990s, Pfizer has had a company standard for managing its worldwide outsourcing

partners, and since 1998 has systematically conducted EHS reviews of these partners to assure thatthey are managing the EHS aspects of their business. The experience gained from over 100 on-sitereviews has been codified into a new internal performance standard, which was released in 2001. Itsobjective is to safeguard against undesirable consequences resulting from unacceptable EHS perfor-mance at Pfizers CMRs.

Pfizers performance standard requires each operating group to:n Determine whether a new CMR is acceptable before deciding to use itn Assure that CMRs receive all relevant EHS information on its proprietary compounds and

technology and update it as warranted so that they can manage EHS risks effectivelyn Devote resources to conducting periodic EHS reviews of all CMRsn Develop and implement a management system for EHS relationships with CMRs.

CMR reviews are conducted by the operating group EHS Staff, collaborating with facility andin-country colleagues. Issues covered as part of these reviews include:n Adequacy of permits to operaten Site conditions that may reflect environmental sensitivityn Emissions and waste management and pollution prevention capabilitiesn Occupational health and safety procedures, including process safetyn Financial resources for EHS management

24Source: Reuters.

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Minimizing Risks

Supply chain continuity is essential for sus-tained profitability. As supply chain networksgrow more complex and sophisticated, they areincreasingly vulnerable to a variety of uncertain

factors that could interrupt the flow of goods orinformation, impose significant cost burdens,threaten personnel safety, generate negativepublicity, or potentially damage key relation-ships. Examples of such risks include:

n Shortages of raw material supplies or naturalresources (e.g., water)

n Interruptions in incoming deliveries due tosupplier compliance or performance problems

n Loss of continuity in manufacturing or distributiondue to spills or releases of hazardous materials

n Failures of critical equipment, includingcommunication or data management systems

n Deliberate vandalism or sabotage.

Risk management has evolved from the tradition-al, passive approach of purchasing insurance to amore active, rigorous, and anticipatory approach.This involves several interrelated processes:

n Risk identification and prioritization:

Anticipating the most significant threats or

hazards, and screening their potentiallikelihood (or frequency) and magnitude (orseverity)

n Risk assessment and option analysis:

Quantifying the potential human, environ-mental, and financial consequences and

evaluating alternative control measures forcost-effectiveness

n Risk mitigation and monitoring: Striving toreduce or eliminate risks through disciplinedimplementation of safety and securityprocedures, and measuring performance.

Effective risk management requires close collab-oration between EHS and operations, engineer-ing, and logistics groups. For example, periodicaudits of plants and distribution centers, includ-

ing outsourced operations, can help to assureoperational integrity. Emergency planning andresponse capabilities are also important for min-imizing the impact of unexpected events.Moreover, risks associated with the full productlife cycle, including product distribution, use,and disposal can be reduced through productstewardship communicating with customersand other supply chain participants regardingpotential hazards and preventive practices.

CASE STUDY: Pfizer Standard for Contract Manufacturing (continued)

n Existing or potential EHS-related liabilitiesn Regulatory compliance status, including violations.

These EHS reviews are conducted before contract manufacturing

begins and at least once every four years thereafter. Review resultsfall into three categories: approved, approved with qualifications,or not approved. If not approved, the contract manufacturer is notused. If approved with qualifications, Pfizer follows up to assurekey action items are completed.

In addition to addressing fundamental EHS requirements, Pfizers on-site visits to CMRs often result inconstructive suggestions regarding advanced EHS practices and opportunities for improving theircost-effectiveness. In India, for example, Pfizer collaborated with 3M and a local consultant to conducta training workshop for Contract Manufacturers on the subject of workplace hazards.

Rather than merely policing its business partners, Pfizer hopes to stimulate EHS performance improve-ment. Pfizer has joined with several other companies, the U.S. Environmental Protection Agency, and

the National Institute of Standards and Technology to form a pharmaceutical industry Green SuppliersNetwork. This collaborative venture plans to work with all levels of the manufacturing supply chain toachieve environmental and economic benefits, including improved products and processes, increasedenergy efficiency, cost savings, and waste elimination.



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CASE STUDY: Dow ChemicalBehavior-Based Safety in Chemical Transport

Both in Europe and the U.S., the chemical industry considers safetransportation of its products as an integral part of theResponsible Care initiative (see Appendix A), and strives for

continuous improvement of safety performance. Increasingvolume and work pressures have been imposing greater stresseson drivers of heavy goods vehicles. In an effort to further reducethe incidence of chemical transport highway accidents, aBehavior-Based Safety (BBS) program was launched by a groupof industry associations the European Chemical IndustryCouncil (CEFIC), the European Chemical Transport Association(ECTA), and the European Petrochemical Association (EPCA).Two GEMI members, Dow Chemical and DuPont, were amongthe participating companies. Dow Chemical introduced the BBS program in North America andsubsequently has extended it to Europe, Latin America, and the Pacific. BBS is being systematical-ly applied to each transportation mode, and Dow Chemical is measuring the results of implemen-

tation by its carriers.

BBS principles offer a proven, effective approach for influencing the behavior of drivers throughobservation, coaching and communication. To encourage consistent implementation of BBS inEurope, a joint working group with representatives from chemical and transport companiesreviewed existing European programs and developed a set of best practice BBS Guidelines(available at http://www.cefic.org/Files/Publications/55908_Guidelines21102003.pd f). TheseGuidelines outline how to improve transportation safety performance, and also demonstrate thatsafety and economic interests go hand in hand for all parties involved. For example, safetyimprovement has a positive effect on fuel consumption and other related costs such as mainte-nance costs and insurance premiums. The results of a pilot project at a Dutch transport companyshowed a decrease in fuel consumption of 4 to 8%, a decrease in accidents of more than 40%, and

an annual net saving of approximately $1000 U.S. per driver.The recommended process for a carrier to implement BBS involves the following steps:1. Company management develops a BBS implementation plan and training program based on best

practices.2. BBS trainers are recruited internally or externally (e.g., from a training institute) and provided

with instructional training.3. BBS trainers provide individual training to drivers, including on-the-road observation and

coaching.4. BBS trainers produce an assessment report for each trained driver, which is stored in a database.5. The drivers have access to a copy of their assessment report.6. The company tracks performance indicators such as incident/accident statistics, fuel consumption,

maintenance costs, insurance premiums, and fines.7. Management analyzes the results and determines further steps toward continuous improvement.8. The BBS implementation is verified during a tri-annual safety and quality assessment of the

carrier.

The program requires active participation by various functions, including transportation planners,dispatchers, trainers, and drivers. For example, dispatchers need to avoid extended workinghours, rush-orders, delayed or late instructions, and unrealistic delivery times. Therefore, success-ful implementation of BBS requires a top-down management commitment, and full integrationinto the carriers culture, organization, and management systems.

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Maintaining Human Health and Safety

Supply chain speed and efficiency depend uponthe smooth operation of a variety of facilities,from major manufacturing centers to distribu-tion depots. Human health, safety, and satisfac-

tion are important intangible value drivers inSCM. A healthy and productive workforceincreases the quality of products and services,while a thriving community provides the socialcapital to support facility operations. Anincreasing number of companies have out-sourced parts of their logistics and manufactur-ing, so that they no longer own and operate allsupply chain facilities. Nevertheless, the viabili-ty of the supply chain may be influenced by theEHS and labor practices of suppliers or contrac-tors. Providing adequate care for employees andneighboring communities may involve activitiesbeyond compliance, such as:

n Promoting employee well being, includinghealth and safety, ergonomics, indoor air

quality, lighting and climate control, as wellas overall benefits and work-life balance.These factors contribute to employee satis-faction, pride, productivity, and retention, aswell as recruitment of new talent

n Monitoring of health and safety practices

through periodic auditing of company-ownedsites, as well as technical support andauditing of outsourced operations to assurecompliance and best practices

n Incorporating EHS criteria into supplierselection and performance monitoring, in orderto assure that the supplier practices conform tothe companys own EHS policies and values

n Promoting supplier diversity, as does Bristol-Myers Squibb (see http://unitedinpurpose.com)

n Engaging in dialogue and voluntary initiatives

with local governments and communityorganizations; examples include helping toorganize community events and conveningcommunity advisory panels.

CASE STUDY: Abbott Laboratories Contractor Safety ManagementAbbott Laboratories has for many years utilized comprehensive, highly interactive contractorsafety programs to assure the best possible safety performance. But to be most successful, safetyelements need to be fully integrated into business man-agement systems. Therefore, when Abbotts corporate

engineering division began work on its new electroniccontract management system several years ago, EHSprofessionals were part of the team from the veryearliest stages of development.

The Engineering Tool for Communication (ETC) wasdesigned to automate and simplify contractor manage-ment including selection, contracting, invoicing,project tracking, and performance reporting. Its develop-ment was championed and coordinated by the engineering divisions contract administrationgroup, which established a multi-divisional Engineering Review Team to approve and supportevery element of ETC; including the embedded elements of the contractor safety program.Integrated into the ETC system are all key aspects of the contractor safety program, includingpolicies, procedures, and training. Abbott engineers can access and edit safety-related pre-qualifi-cation requirements, contractor meeting records, EHS incident reports, and contractor performancereviews. Contractors must maintain positive safety performance to remain on Abbotts preferredlist and retain access to the paperless ETC system.

ETC was implemented at Abbotts Lake County, Illinois operations where the number of on-sitecontractor employees averages greater than 700 each day and where each year over 2,500 contrac-tor employees attend the Abbott-required Safety Orientation. These operations have seen signifi-cant improvement in contractor safety performance in the past several years, with both Lost TimeAccidents and Total Recordable Incident Rates falling well below industry averages.

http://unitedinpurpose.com/http://unitedinpurpose.com/


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Protecting the Environment

At a minimum, environmental protection involvescomplying with regulations that govern emissionsand waste management at supply chain facilities.However, the environmental policies of most

companies extend beyond compliance, reflectingan ongoing commitment to corporate citizenshipand environmental stewardship. Sometimes thisinvolves incremental expenditures (e.g., landrestoration), but in many cases reducing pollutionalso improves operating efficiency and reducescosts. Moreover, EHS programs create value byimproving employee satisfaction and communityrelationships (see page 8). Appr

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