Environmental Leadership - Proactive Strategies for Competitive Advantage

Author(s):

Eberhard E. Scheuing, Ph.D., C.P.M.
Eberhard E. Scheuing, Ph.D., C.P.M., Professor, St. John's University, New York, NY 11439, 718/990-6770
Jeffrey H. Schwartz
Jeffrey H. Schwartz, Executive Vice President Jellinek, Schwartz & Connolly, Arlington, VA 22209, 703/312-8570

81st Annual International Conference Proceedings - 1996 - Chicago, IL

Abstract. By managing inputs from external sources as well as disposal of residual materials, purchasing plays a pivotal role in ensuring an organization's compliance with environmental regulations and laws. But leadership means going beyond governmental requirements and doing what is right as a result of environmental conscientiousness. A broad array of options is available to resourceful environmental leaders, ranging from waste stream reduction to product conversion. They may even do well while doing good: creative environmental strategies can enhance bottom line performance while minimizing environmental impact.

Background. All organizations impact the natural environment in a number of ways. Environmental laws and regulations are designed to control the extent of the adverse impact that organizations inflict on the environment in carrying out their operations. Agencies at various levels of government bear responsibility for ensuring compliance with legal requirements and constraints relating to the protection of the natural environment. The list of federal laws in this area is long and growing and includes the following:

• Asbestos Hazard Emergency Response Act (AHERA)
• Atomic Energy Act
• Clean Air Act
• Clean Water Act
• Comprehensive Environmental Response, Compensation & Liability Act
• Emergency Planning & Community Right-to-Know Act (EPCRA)
• Federal Insecticide, Fungicide & Rodenticide Act (FIFRA)
• Hazardous Materials Transportation Act
• Marine Protection, Research & Sanctuaries Act
• Resource Conservation & Recovery Act (RCRA)
• Safe Drinking Water Act
• Solid Waste Disposal Act
• Superfund Amendments & Reauthorization Act (SARA)
• Surface Mining Control & Reclamation Act
• Toxic Substances Control Act (TSCA)

Under these and other environmental laws, organizations are required to minimize the adverse impact on the natural environment, human beings, and animals emanating from their actions and occurring under their responsibility. They must identify, control, monitor, and document hazardous substances present on their premises and used in their operations, and must inform, train, and protect their workers. Several other restrictions and obligations are imposed by law, including the requirement to inform public agencies and obtain proper permits.

The government considers a material hazardous if it exhibits one or more of he following characteristics: ignitability, corrosivity, reactivity, and/or toxicity. Treatment is any method designed to neutralize waste or make it non-hazardous, recover usable components, reduce volume, or render it safe to store or transport. The law requires that all allowable discharges to air, land, and water be disclosed in advance and permitted by regulatory authorities.

Environmental Compliance. Compliance with environmental laws is mandatory and enforced by government agencies. Purchasers have broad responsibilities for their organizations' compliance with these and other laws. They must preach and practice compliance to:

• avoid penalties
• prevent supply disruption
• avoid liability and litigation
• protect the organization's reputation
• enhance the organization's competitive advantage

Five examples illustrate the importance and urgency of compliance:
(1) Penalties: Company A purchased and imported chemical products without first checking whether these chemicals were listed on the Toxic Substances Control Act's (TSCA's) existing chemical inventory. They were not. Result: Civil penalties of $ 1.3 million, plus required detailed TSCA audit of 128 facilities with stipulated penalties for newly discovered violations.

(2) Supply Disruption: Company B entered into a purchasing agreement for a key chemical used in its production process without checking to ensure that the supply of that chemical was reliable. Subsequently, that chemical was discovered not to be on the TSCA inventory, and company B's supplier had to stop producing it. Results: A two-week shutdown of company B's production process; default in its contractual obligation to deliver its product on time; and customer dissatisfaction and litigation.

(3) Liability and Litigation: Companies C and D purchased off-site waste disposal services without getting indemnification from a deep-pocket waste management firm for cleanup costs under the Superfund law. There wastes were disposed of at the waste hauler's site, which became a Superfund cleanup site. Results: The two waste generator companies were held jointly and severally liable for $ 1.4 million in past cleanup costs, plus future costs (estimated at $ 4 to 6 million), attorney fees, and litigation to apportion these costs between the two companies.

(4) Organization's Reputation: Company E, a food processing company, bought sanitation services from a supplier who substituted a cheaper chemical for the specified one. Results: Contamination of the product and production equipment; production shutdown; a serious threat to the organization's reputation; and the need to dispose of the contaminated product, leading to a write-off of more than $ 160 million.

(5) Competitive Advantage: To cut cost, company F purchased a raw material from an offshore supplier without due attention to the packaging requirements for the transportation of hazardous materials. Upon arrival at the port of embarkation, the material had to be repackaged for ocean shipment. At the U.S. port of entry, it had to be repackaged again to meet U.S. packaging requirements. Results: Several months of delays; disruption of production (due to just-in-time inventory management); and a substantial increase in total cost over the domestically available competing raw material.

Strategic Environmental Risk Management. Clearly, the risks of paying insufficient attention to issues of environmental compliance loom large. Here are two examples of organizations that practice proactive approaches to managing environmental risks:

(6) Supplier Compliance Audit: Company G sought to enhance the reliability of its suppliers and its reputation by implementing a supplier Environmental, Health, and Safety (EH&S) assessment and support program. Significant noncompliance with environmental regulations and exposure to liabilities were discovered at one contractor site. Results: Company G won a national environmental leadership award; eliminated the substandard supplier and transferred the work to a supplier with solid financial condition and a well-established EH&S program; strengthened relationships with other supplier partners to whom company G gave support and awards; boosted the organization's reputation; and established a distinctive advantage over its competitors.

(7) Improved Control: Company H undertook a strategic review of EH&S issues in purchasing and identified opportunities to consolidate the purchasing of a large number of hazardous materials from a single source. The supplier agreed to purchase company H's existing dispersed inventories and maintain and restock them on a timely basis in a leased on-site secured facility. Results: Company H improved its cash flow; reduced cost; reduced worker exposure and risks of accidents, spills, fires, and improper disposal.

Enlightened purchasing professionals realize that:

• ensuring compliance is not enough; what is needed is a strategic plan for managing EH&S risks and seizing opportunities for competitive advantage.
• the EH&S component of purchasing needs to be explicitly linked to both the organization's business strategy and its EH&S strategy.
• strategic supplier management systems need to integrate an EH&S component.
• a number of forces drive greater attention to EH&S risk management in purchasing strategy:
• the globalization of markets and worldwide spread of EH&S requirements
• ISO 14000
• pollution prevention/toxic use reduction mandates
• governmental acquisition incentives for environmentally preferred products
• increased public reporting of toxic releases/chemical uses

Environmental Leadership. Environmental leaders are individuals and/or organizations who undertake exceptional initiatives to move beyond the requirements of the law and demonstrate an unusual level of environmental concern, sensitivity, and commitment. They also serve as examples and sources of inspiration to others by practicing responsible organizational activism.

As the title of a study by the electronics and computer industry indicates, environmental consciousness is a major strategic competitiveness issue for organizations everywhere. Purchasers have the unique opportunity to exercise leadership in environmental quality and conservation and help create a culture of environmental consciousness throughout their organizations and supplier bases by:

• proactively affecting product and packaging design to minimize environmental impact
• fostering design for easy disassembly
• highlighting consequences of overpackaging
• promoting reuse of packaging.
• rejecting non-recyclable materials
• considering disposal issues in purchasing decisions
• suggesting conversion or donation at the end of a product's life cycle
• advocating disaster avoidance, preparedness, and recovery
• conducting environmental audits and remediation
• establishing systems to highlight environmental issues
• serving as an information resource on environmental matters
• offering education on environmental laws and regulations
• participating in new product processes from their beginnings
• assessing suppliers' environmental records
• requiring environmental compliance from suppliers
• writing creative contracts to encourage and reward environmental leadership by suppliers
• holding suppliers responsible for the environmental consequences of their actions.

Benefits of Environmental Leadership. Rather than being absurd and dysfunctional overkill, going beyond legal requirements in environmental matters can be brilliant strategy. Ingenious purchasers can proactively turn the cost of compliance into opportunities for savings and profits and transform an apparent burden into an asset and a profit center.

Herman Miller Inc., an office furniture maker based in Zeeland, Michigan, has long demonstrated that environmental leadership mixes well with cost consciousness. Several bold actions taken to dramatically reduce the firm's environmental impact have paid significant bottom line dividends:

• building an $ 11 million waste-to-energy heating and cooling plant has cut the trash it hauls to landfills by 90% and produces annual savings of $ 750,000;
• eliminating 70% of the Styrofoam and cardboard packaging for office partitions and moving to reusable packaging results in annual savings of $ 1.4 million; and
• turning 800,000 pounds of scrap fabric into insulation for car roof linings and similar deals translate into annual savings of $ 900,000.

Many other organizations have taken similar environmentally responsible actions that have benefitted their bottom lines. AT&T struck a deal with a paper company to accept and reprocess all of its waste paper. AT&T, in turn, completes the cycle by purchasing the output of the process in the form of paper towels and toilet paper at a reduced cost.

Conclusions. As John Gardner has stated, a problem is merely a brilliantly disguised opportunity. To this very day, all too many organizations consider environmental laws and regulations as nuisances, challenges, problems, threats, or costs. Few view them as opportunities.

Visionary purchasers, though, demonstrate their insight and foresight by seizing environmental challenges and turning them into strategic opportunities by saving their organizations money while exceeding legal requirements. Like Joe Azzarello at Herman Miller, they may be able to sell engine waste oil to reprocessors instead of having to pay for its disposal. Like purchasers at major telecommunications companies, they may pay dearly for transporting and burning old utility poles now but avoiding the impact of any future legislation regarding this issue.

The essential point is to be proactive:

• avoid future exposure by permanently disposing of hazardous wastes
• creatively turn costs of environmental compliance into profits from environmental leadership.

Environmental leadership should make money, rather than cost money. It also should earn an organization the reputation of being a leader in its field, instead of an also-ran. Most of all, an organization should leverage its record of environmental accomplishments into a unique competitive advantage.

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