Tag Archives: financial

Lean Design, Lean Manufacturing, Lean Inventory/Supply Management – A Sustainability “Trifecta”

16 Aug

Source (Popular Mechanics)

You’d have to be living in a mountain cave or vacationing on the south coast of France to not know that world stock markets are being whipped around these past two weeks.  The USA Today has attributed what’s been happening in the markets here in the U.S. along seven key elements, all of which is related more to external factors such as the European money woes, general investor fear and lack of policy direction from the federal government.

The general market fear and scurrying for shelter reminds me that when hikers are caught in a sudden storm, they often seek shelter in a “lean-to” or other protective cover until the skies clear.

I thought that in light of the economic body slamming that has been going on this past week, it’s worth reflecting on some efficiency-based ways that  businesses can use to overcome (or at least buffer) some of the external factors that are causing such economic uncertainty.  Like the hikers seeking shelter from the storm, there are some “lean-to”-like steps that company’s can take to exert some control and influence — and it all relates to a leaner, greener, smarter enterprise.

The Lean and Green Enterprise

Last winter I wrote about how importance a “lean and green” enterprise was in establishing a smarter, leadership position in a rapidly changing global marketplace.  I noted then that a 2009 study suggested that “lean companies are embracing green objectives and transcending to green manufacturing as a natural extension of their culture of continuous waste reduction, integral to world class Lean programs.”  Lean was more rapidly accomplished with a dedicated corporate commitment to continual improvement, and incorporating ‘triple top line’ strategies to account for environmental, social and financial capital.  I also argued by looking deep into an organizations value chain (upstream suppliers, operations and end of life product opportunities) with a ‘green’ or environmental lens, manufacturers can eliminate even more waste in the manufacturing process, and realize some potentially dramatic savings

So I was reminded this past week that Lean in design, Lean in manufacturing, and Lean in inventory can individually or collectively be key success factors in managing waste in all its many forms.  Collectively, this can have a measurably positive effect on a company’s financial, and hence, business performance.  A couple of recent articles touched on this topic this week while you were watching your 401(K) equity or stock value tank.   But first let’s touch on Lean Design.

Lean Design

I came across an older but very relevant article written in the aftermath of the Internet stock crash in the early 2000’s.  The article described product development as involving “two kinds of waste: that associated with the process of creating a new design (e.g., wasted time, resources, development money), and waste that is embodied in the design itself (e.g., excessive complexity, poor manufacturing process compatibility, many unique and custom parts).”  The article cautioned that because the design process is the cradle of creative thinking, designers needed to carefully watch what they “lean out” or risk cutting off the creative process to reduce waste.  What has happened in the ensuing years has been an incredible emphasis on “green design” that focuses on full product life cycle value, such that “end of life management” considerations have taken on a more relevant and embedded nature in manufacturing.

A Lean Manufacturer Can be a Sustainable Manufacturer

In yet another recent article by manufacturing consultant Tim McMahon (@TimALeanJourney), he notes that “Lean manufacturing practices and sustainability are conceptually similar in that both seek to maximize organizational efficiency. Where they differ is in where the boundaries are drawn, and in how waste is defined”.  He notes, as I have in my past posts, that Lean manufacturing practices, which are at the very core of sustainability, save time and money — an absolutely necessity in today’s competitive global marketplace.

The key areas to control manufacturing waste and resource use during the design and manufacturing cycle, can be broken down  and managed for waste management and efficiency in the following five ways:

Reduce Direct Material Cost – Can be achieved by use of common parts, common raw materials, parts-count reduction, design simplification, reduction   of scrap and quality defects, elimination of batch processes, etc.

Reduce Direct Labor Cost – Can be accomplished through design simplification, design for lean manufacture and assembly, parts count reduction, matching product tolerances to process capabilities, standardizing processes, etc.

Reduce Operational Overhead –  Efficiencies can be captured by minimizing impact on factory layout, capture cross-product-line synergies (e.g. a modular design/ mass-customization strategy), improve utilization of shared capital equipment, etc.

Minimize Non-Recurring Design Cost – Planners and practitioners should focus on platform design strategies to achieve efficiencies, including: parts standardization, lean QFD/voice-of-the-customer, Six-Sigma Methods, Design of Experiment, Value Engineering, Production Preparation (3P) Process, etc.

Minimize Product-Specific Capital Investment through: Production Preparation (3P) Process, matching product tolerances to process capabilities, Value Engineering / design simplification, design for one-piece flow, standardization of parts.

Can a Lean Inventory Management Drive Sustainable Resource Consumption?

Business Colleague Julie Urlaub from Taiga Company  (@TaigaCompany) summarized a post in a recent Harvard Business Review by green sage Andrew Winston (@GreenAdvantage).  The article, Excess Inventory Wastes Carbon and Energy, Not Just Money describes how the global marketplace “ is sitting on $8 trillion worth of ‘for sale’ inventory [the U.S. maintains a quarter of that  inventory].  These idle goods not only represent a tremendous financial burden but an enormous environmental footprint ” that was generated in the manufacturing of those goods.  Mr. Winston maintains that “If we could permanently reduce the amount of product sitting idle, we’d save money, energy, and material.”  The problem is predicting and managing inventory in such fickle times.   Winston went on about new predictive tools being advanced by companies that hold promise in nimbly driving inventory demand response up the supply chain.  For instance, he noted that “ using both demand sensing software and good management practices, P&G has cut 17 days and $2.1 billion out of inventory. All that production avoided saves a lot of money in manufacturing, distribution, and ongoing warehousing. It also saves a lot of carbon, material, and water.”

What Mr. Winston found shocking though (me too!) was that “even with the fastest-selling, most predictable products, the estimates are off by an average of more than 40 percent. Imagine that a CPG company believes that 1 million bottles of a fast-turning laundry detergent will sell this week. With 40 percent average error, half the time sales will actually fall between 600,000 and 1.4 million bottles. And the other half of the time sales will be even further off the mark.”  The process becomes self perpetuating and the inventory racks up along with the parallel environmental footprint, unless somehow the uncertainty can be better predicted.  While companies like to have on hand what Mr. Winston referred to as “safety stock”, I have come to know as reserve inventory driven by “just in time” ordering .  But that process was shown to have its own flaws such as when orders for goods dried up overnight in 2008 and when it came time to ramp up in early 2010, part counts were insufficient to meet the rising demand.

I really pity the supply chain demand planner, who like the weatherman is subject to the fickle nature of an unpredictable force.  Winston wrapped up his article by stating that “ reducing the inventory itself could be the greenest thing [logistics executives] can do”.  I had the chance to speak and attend the 2010 Aberdeen Supply Chain Summit where demand response planning was discussed at length and where green supply chain issues were recognized as one of many key attributes in effective supply chain management.  In such a volatile economy, its vital that companies keep inventory management in mind as a way to leverage its costs and simultaneously look toward environmental improvements that can reduce waste.

Partnering for Progress

A relatively recent pilot program in the State of Wisconsin just shows how partnering to create a lean focused sustainable manufacturing cluster can have enormous dividends.  According to a recent article in BizTimes.com, the Wisconsin Profitable Sustainability Initiative (PSI) was launched in April 2010 by the Wisconsin Department of Commerce and the Wisconsin Manufacturing Extension Partnership (WMEP). The goal according to the article is “to help small and midsize manufacturers reduce costs, gain competitive advantage and minimize environmental impacts”.  Forty-five manufacturers participated in over 87 projects evaluated. These projects focused on “evaluating and implementing a wide range of improvements, including reducing raw materials, solid waste and freight miles, optimizing processes, installing new equipment and launching new products.  The initial results show that the projects with the largest impact do not come from the traditional sustainability areas such as energy or recycling. Instead, outcomes from the initial projects suggest that transportation and operational improvements are places where manufacturers can look to find big savings, quick paybacks and significant environmental benefits.”

The program is projected to generate a five-year $54 million economic impact, including: $26.9 million in savings, $23.5 million in increased/retained sales and $3.6 million in investment.

Lean design,  Lean manufacturing, Lean inventory management – a Waste Containment and Efficiency “Trifecta”

Together, lean design,  lean manufacturing  and effective, lean inventory management offer a “trifecta” approach for industry to identify, reduce or eliminate and track waste.  Effective use of these tools cannot only drive both in how the product is designed and  produced but offers opportunities all the way up the supply chain to manage effective inventory and resource consumption. As the University of Tennessee studied concluded,  the implications of lean strategies are 1)  Lean results in green; and 2) Lean is an essential part of remaining competitive and maintaining a quality image.  Put the two together and a company can virtually be unstoppable…or a least a bit more recession-proof and “shelter from the storm”.

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Using Sustainability Metrics to Drive Business Performance, Innovation and Stakeholder Satisfaction

12 Jul

Environmental metrics were not much of an issue when I started as a young environmental coordinator at a Utah coal mine 30 years ago. The few environmental metrics I used were mainly driven by regulatory-agency permits, inspections and audits.  How many spill occurred this month?  How many fines did we get this quarter?  Did we exceed waste water discharge requirements? Our entire environmental compliance philosophy was driven by permit limits, rules and regulations.  My company was actually more concerned about environmental pollution and managing impacts of operations on the environment than most companies in a large western state at that time.   But at that time, there was a major disconnect between environmental performance and business performance. Environmental protection was seen by management as a cost “sink”, and not as an integral part of conducting business. Metrics weren’t designed to optimize our environmental performance or to understand the long-term impacts of our decisions on either our business or the environment. All decisions were made within a limited point of view.

Like the mining company I worked for, and like most businesses today, it’s clear that the ship has turned.  Companies are looking strategically at how environmental performance can have a direct impact on the bottom line of an organization.  Some are even taking a top-line approach to business success by accounting for social, natural and financial capital (http://bit.ly/93VBWG). Drivers such as globalization of markets, customer and shareholder preferences, regulatory pressures and business process re-engineering can claim a role in this sea change of decision-making.  This approach has fundamentally changed the way companies operate, design, manufacture, and distribute products.

Why Measure Anyway?

Well, the two old axioms state that “you are what you measure” and “what gets measured gets managed”.  Without a way to establish an internal benchmark for continual improvement, it becomes harder to innovate, advance and proactively respond to stakeholder expectations.  Key advantages to monitor and measure environmental and organizational performance include:

  • Setting Effective and Value-Added Priorities
  • Benchmarking to Continuously Improve
  • Encouragement of Bottom Up, Organization-wide Innovation
  • Reinforcing Personal and Organizational Accountability
  • Strengthening Strategic Planning and Goal-Setting Processes
  • Improved Internal and External Communication

Metrics can do one of two things: They can tell you what you should do, or they can tell you what you should have done. If you use them to tell you what to do, you’ll be using them to measure your successes. But if you use them to tell you what you should have done, you’ll be using them to measure your failures. So clearly it’s the first approach, not the latter, that forward-thinking companies should focus on.

The Advent of Verification and Triple Bottom Line Focused Metrics

In the not too distant past, as I noted above, environmental performance was primarily based upon a company’s compliance with local, state or federal permits and environmental regulations. With the advent of the ISO 14001-2004 Standard and Specification and its companion guidelines over the past 15 years, companies are taking a broader look at the ways they measure environmental performance (http://www.iso.org/iso/iso_14000_essentials). In addition, the ISO 14031 Guidelines on Environmental Performance Evaluation provide for establishment of measurable and verifiable environmental performance indicators (EPIs) appropriate to any public or private enterprise.

Many of the potential benefits from linking environmental and economic performance depend on the ability to integrate environmental management practices into the normal course of a company’s operations.  The ability to quantify environmental performance in a meaningful way is critical to the effectiveness of this integration.

Adding to the mix of the benchmarks for environmental indicators are the Global Reporting Initiative (GRI)  (http://www.globalreporting.org), Global Environmental Management Initiative (GEMI) http://www.gemi.org) and the World Business Council for Sustainable Development (WBSCD) guidelines (www.wbscd.org).  Each of these measurements and reporting frameworks provide for reporting on the sustainability-economic, environmental, and social – dimensions of an organizations activities, products, and services.  More recently, Joel Makower (@makower) and the staff at GreenBiz.com (@GreenBiz) have been engaged with UL Environment to develop and commercialize a company-level standard for sustainability. This latest effort is being initiated in an attempt to harmonize all three of the above approaches and dozens of others into one global, measurable and verifiable third-party standard for sustainability (http://bit.ly/ajHxKy).

What to Measure and How to Frame the Message

Do your performance metrics have you tied up in knots?  Once organizations decide they have to do more measuring then the key question becomes: What do we measure and how do we measure it?  A few tips:

  1. Measure things that add value to organizational decisions. Measuring for the sake of measuring is a waste of time.
  2. Think about ways to measure things differently that your competitors.  Novel and unique metrics are just as important to differentiating you as your products.
  3. Measure at a minimum the same way others around the world were measuring, as this assures that globally focused metrics are harmonized.
  4. If you are a large company with multiple department, divisions or sites, the metrics of the individual parts must be able to be “rolled up” in a way that addresses the entire organization but still meets site or department specific needs.

When establishing appropriate measures (whether they are social, environmental, operational or financial), consider that metrics must be:

  • Representative
  • Understandable
  • Relevant
  • Comparative
  • Quantifiable
  • Time-based and Normalized
  • Unbiased and Validated
  • Transferable

Also, make sure that the metrics address the needs of all internal and external stakeholders in other words, your employees, customers, local community, government and shareholders.

Finally, good metrics if applied properly will foster innovation and growth.  Focus on continuous improvement as the primary driver for monitoring and measuring performance. If metrics don’t add value, they will not support continuous improvement and eventually will not be used.

Summary

Many of today’s environmental metrics evolved from the end-of-pipe command-and-control regulatory approach that has been implemented in a piecemeal fashion over the past 30 years since I joined the environmental profession. Why let regulatory agencies drive the key performance metrics that in turn drive business performance?  While compliance is a key benchmark for environmental performance, don’t stop there!

In this highly competitive, quickly changing and unstable business climate, organizational success requires agility.  Success also depends on having the correct set of metrics in place to gauge progress in meeting short and long-term business objectives.  Measuring performance with a sustainability lens is just one of the new responsibilities that companies can quickly embrace to nimbly drive organizational value.

Sustainability that You Can ‘Bank’ On: Value-Added Steps to ‘Green’ Financial Institutions

7 Jun

This past week, the Financial Times and IFC (World Bank Group) announced the winners of the 2010 Sustainable Banking Awards (http://bit.ly/ZNISO).  The annual awards recognize banks and other financial institutions that have shown leadership and innovation in integrating social, environmental and corporate governance considerations into their operations.  Short of two funds, American banks were absent from the list.  Let’s face it, with the global economic collapse of the past two years, and the banking industry’s corporate social responsibility reputation in the tank, Wall Street firms and the banking industry in general is under pressure to “do good”  (http://bit.ly/a5D7r4).  But all is not lost and it’s not too late for banks to regain consumer confidence while improving their operations and bottom line.

Unfortunately, the current economic downturn and lending issues faced by the banking sector has created a threat to “triple-bottom-line” focused sustainability i.e. green programs that are meant to manage banking risk being neglected or moved to the bottom of the “to do” list.  I am not talking about the ‘low hanging fruit’ like lighting retrofits or e-statements or recycling programs (all good starts by the way).   My focus is on seeing banks implement deeper initiatives focused on governance, sustainability focused risk, reputational management, and value-added community benefit.

The Environmental Minefield that Banks Walk Through

The banking sector generally perceives itself as environmentally neutral.  However, the regulatory landscape that large commercial and community banks often find themselves walking through is constantly changing and looks more like a minefield.  Although banks themselves do not largely impact the environment much through their own ‘internal’ operations like a large scale manufacturer or developer might, the ‘external’ impact on the environment can be substantial.  That is because banks like any other business may be potentially liable for environmental damage that their operations or fiduciary involvement may cause.  In banks cases, the concern is on derived environmental liability through debt and equity transactions.

The “Green” Question

Environmental and corporate social responsibility issues highlight both risks as well as opportunities to banks.  The banks and financial institutions that made the FT 2010 list are serious about greening their operations and financing sustainably-focused projects that put sustainable governance at the heart of decision-making.  Not only does this leverage a bank’s risk, but it’s value-added in the long run.  How?  Because substantial evidence is available that demonstrates how environmentally responsible investments and projects that ’give back’ to a local economy more than they “take’ are better investments in the long term.

There are no specific legislative drivers to encourage better performance in terms of sustainable lending or project finance.  However, several voluntary standards and sets of principles exist and are gaining steam in the business marketplace.  Examples include the Equator Principles (http://www.equator-principles.com) , World Bank IFC Guidelines, Global Reporting Initiative (GRI) Finance Sector Guidelines (http://bit.ly/aFmaYe), and even Securities and Exchange Commission federal reporting requirements.  Leading international finance and local banking institutions have signed on to many of these guidelines, which are rapidly becoming the “norm” in the banking industry.  Only a few U.S. financial institutions have stepped up to the plate so far, notably Citigroup, Wells Fargo, Bank of America and JP Morgan Chase.

The Risk Management Challenge

Environmental   issues present the banking sector with a daunting and often long term challenges. Banks can face financial risks from borrowers defaulting on the repayment of their loans because of fines imposed for poor environmental performance.  As I already noted, current environmental regulations in the U.S. can make banks liable for environmental damage caused by borrowers.  Banks, therefore, need to strive to minimize these risks with the introduction of measurable and verifiable environmental criteria into their credit policies and overall lending processes.  All too often, evaluations are often made on unverified business pro-formas, deficient appraisals, or on applicants environmental reports, often compiled on a voluntary basis.

However, the lack of environmental and other sustainability criteria in a loan-vetting process may prevent banks from estimating the full risk premium of investments and expose the bank to further short and long term risk. Therefore, banks might consider starting by reassessing their credit policies and loan screening processes to assure that sustainability is accounted for.

Solutions that Add Value and Real Sustainability

A growing body of quantitative and qualitative data demonstrates the bottom-line benefits of sustainability-focused credit risk management performance in the banking industry are evident in the market place. Some key benefits of such an approach, reported by over 85% of banks surveyed that have implemented similar programs) include:

  • Improved Financial Performance
  • Reduced Operating Costs
  • Enhanced Brand Image and Reputation
  • Increased Loan Originations and Customer Loyalty
  • Increased Ability to Attract and Retain Employees.

To be and to stay on the leading edge of our new financial world, forward- thinking banks must consider developing robust, performance based lending policies and processes to ensure that 1) the organization not only offers competitive products to its customers and gives value back to the community in which loan assets are located, but 2) the organization protects its fiduciary position, environmental and reputational risk from servicing questionable projects.   So far here in the U.S., efforts by established banking institutions in the “deep-sustainability” space is scant, and I can only point to a few real, demonstrable leaders with a firm track record in this area.

My company’s approach to ‘green’ banking focuses not only on helping our clients find the obvious ‘low hanging fruit’ as I noted earlier, but get to the “core” risk management success factors that can make or break a bank:

  • Sustainability focused operations procedures & policies;
  • Value-added bank loan/credit risk management tools and sustainability scoring indices, leading to innovative customer products and enhanced profit streams.
  • Working with compliance and regulatory agencies interacting with financial institutions.

How well banks handle social and environmental risks is increasingly important because, in today’s global economy with unrestricted information flows, such risks can affect a bank’s reputation and long-term business success.  Who knows- with a little guidance, innovation, determination and daring, more U.S. financial institutions may make the FT Sustainability Banking 2011 list.  I’ll be watching where my money goes- will you?