Economic

1
Analytical framework Environmental vs. Economic
dimension
Economic value
Environmentalimpact

• Use phase has a negative value added
• Product value at end-of-life can be positive if
  product can be reused/recycled

2
Steel section life cycle
Use of buildings and other structures
BF Section production 350 / ton 28.5GJ / ton
Fabrication of sections 350 / ton 4.8GJ / ton
Use of sections in construction 250 / ton 2.0GJ
/ ton
EAF Section production 300 / ton 10.8GJ / ton
Re-fabrication of sections 350 / ton 4.8GJ / ton
Section recovery via deconstruction 100 /
ton 0.4GJ / ton
Section recovery via demolition 50 / ton 0.4GJ /
ton
Landfill of sections 50 / ton 1.3GJ / ton
3
Result for steel section life cycle
4
Question Why is there not more section reuse?
Shift from recycling to reuse, total recovery
rate held constant at 99
Benchmark scenario Worst case - no recycling ,
no reuse 1050 / 37GJ per ton of steel section
over whole life cycle
5
Assignment for Wednesday, 15 April Q Why is
there not more section reuse? Answer in less than
100 words. Email answer to geyer_at_bren.ucsb.edu
(Subject Section reuse) before Wed, 15
April. There is no wrong or right answer, only
strong or weak arguments.
Reading for Wednesday, April 15 Geyer R,
Jackson T (2004) Supply Loops and their
Constraints The Industrial Ecology of Recycling
and Reuse, California Management Review 46(2),
55-73 Posted on course website as Geyer
Jackson 2004.
6
Reiskin 2000 Servicizing the Chemical Supply Chain
Q What is servicizing?
A Manufacturing enterprises shifting from a
product-focus to a service-focus.
Q How does servicizing decrease environmental
impact?
A Has the potential to dematerialize the supply
chain.
Q What are the two necessary preconditions for
servicizing?
A Function-to-volume ratio not fixed, shift from
selling products to services possible.
Q How large is the ratio of chemical management
costs to purchase costs?
A Can range ranges from 11 to 101.
Q Why are chemical management costs so high?
A Specialized transport, storage, EHS,
liability, handling, and waste management.
Q What are the two ways of reducing chemical
management costs?
A Manage chemicals more efficiently, reduce the
volume of chemicals used.
Q Why are chemicals not managed well?
A Not management focus, no internal expertise,
conflicting buyer/supplier incentives
Q What is the linchpin of CMS?
A Compensation of suppliers is not related to
volume sold.
7
Strategy to reduce environmental impact Increase
input productivity
y amount of output x amount of input
Input
Process
Output
8
Strategy to reduce environmental impact Increase
input productivity
Input
Process
Output
Problem Supplier has economic disincentive to
increase customers input productivity
9
Supplier Customer Relationship Industrial
Ecology Perspective
Production process
Direct materials
Economic output
Indirect materials
Wastes emissions
Low-entropy energy
High-entropy energy
Supplier
Customer
10
Supplier contracts and input productivity
Producer of yConsumer of x
Output quantity y
Input quantity x
(e.g. of doors)
(e.g. gallon of paint)
Input productivity

• Supplier contract
• Specifies how consumer of x (customer) pays
  producer of x (supplier).
• Contracts can be based on a variety of criteria
• Volume unit price of paint x volume of paint
• Service unit service fee x amount of service
• Volume and service (mixed contract) unit
  service fee x amount of service unit paint
  fee x volume of paint

11

• Reiskin et al (2000) Reducing chemical
  throughput through servicizing
• 2 key preconditions
• Function-to-volume ratio (productivity) of
  material is not constant
• Supplier able to change business model from
  selling material into selling service

• Motivation for supplier
• Building stronger relationship with customer
• Knowledge about the needs of the customer gives
  competitive advantage

• Motivation for customer
• Cost of chemical use typically far exceeds
  purchase cost (large savings potential)
• Direct access to expertise of the chemical
  producer
• Less resources diverted from core competencies

12
Volume-based contract and constant input
productivity
Input quantity x
Output quantity y
(e.g. of doors)
(e.g. gallons of paint)
Input productivity
Supplier profits
Customer profits
Sell more
Incentives aligned!
Economic driver regarding input x
Use more
13
Volume-based contract and constant input
productivity

• Paint/door example
• Supplier is paid per gallon of paint
• Input productivity fixed (constant amount of
  paint per door)
• The economic incentives of supplier and customer
  are aligned
• Customer Sell more doors, i.e. use more paint
• Supplier Sell more paint
• Other examples
• Manufacturer and wholesaler
• Wholesaler and retailer

14
Volume-based contract and variable input
productivity
Input quantity x
Output quantity y
(e.g. doors)
(e.g. paint)
y is not a fixed function of x
Supplier profits
Customer profits
Sell more
Conflicting incentives!
Economic driver regarding input x
Use less
15
Volume-based contract and variable input
productivity

• Paint/door example
• Supplier is paid per gallon of paint
• Productivity of paint can be increased
• The economic incentives of supplier and customer
  are conflicting
• Customer Sell more doors using less paint
• Supplier Sell more paint
• Other examples
• Direct materials Manufacturing yield of
  materials (prompt scrap)
• Indirect materials Solvents, lubricants,
  cleaning agents, packaging
• This is the standard situation for direct and
  indirect material suppliers

16
Service-based contract and variable input
productivity
Input quantity x
Output quantity y
(e.g. doors)
(e.g. paint)
y is not a fixed function of x
Supplier profits
Customer profits
Use less
Incentives stillnot aligned!
Economic driver regarding input x
Indifferent
17
Service-based contract and variable input
productivity

• Paint/door example
• Supplier is paid per of painted doors
• Productivity of paint can be increased
• The economic incentives of supplier and customer
  are not aligned
• Customer Sell more doors, ignore amount of
  paint used
• Supplier Use less paint per door
• Potential issues
• Customer may be wasteful with the paint, since
  not part of his costs
• Customer may not be interested in increasing the
  paint productivity
• Supplier needs to know how many doors where
  painted

18
Mixed contract and variable input productivity
Input quantity x
Output quantity y
(e.g. doors)
(e.g. paint)
y is not a fixed function of x
Supplier profits
Customer profits
Use less
Economic driver regarding input x
Incentives aligned!
Use less
19
Service-based contract and variable input
productivity

• Paint/door example
• Supplier paid per painted door only
• The economic incentives of supplier and customer
  are not quite aligned
• Customer Customer is indifferent with respect
  to paint use
• Supplier Use less paint per painted door

Mixed contract and variable input productivity

• Paint/door example
• Supplier paid per painted door and gallon of
  paint
• The economic incentives of supplier and customer
  are now aligned
• Customer Use less paint per painted door
• Supplier Use less paint per painted door

• Paint fee needs to be ,
  to leave supplier incentive in place
• Pain fee needs to be large enough to be working
  as customer incentive

20

• Reiskin et al (2000) Reducing chemical
  throughput through servicizing
• Challenges
• Difficulty of transferring such a complex task
  as chemicals management to a supplier
• Individual and organizational resistance to
  change
• Increase in interdependency between supplier and
  customer
• May be regarded as outsourcing (including job
  losses etc.)

Summary

• Goal of servicizing Increase productivity of
  input materials (direct or indirect)
• Obstacle Volume-based contracts gives suppliers
  incentive to sell more
• Response Contracts based on service rather than
  volume
• Danger Customer could now loose incentive to
  reduce material inputs
• Solution Find contracts and business models
  that align supplier and customer
  incentives in the best possible way