Using environmental cost accounting techniques to

1
Using environmental (cost) accounting techniques
to reduce supply chain costs (and reduce
environmental impact)
2
Relationship between environmental impact and
supply chain cost
Economic inputs
Economic outputs
Economic Process
Use phase
End-of-life
i input
p process
o output
eol end-of-life
3

• A hierarchy of costs
• Conventional
• Potentially hidden
• Contingent
• Image / relationship
• External

Full cost accounting
Total cost accounting
EPA (2000) The lean and green supply chain
4
Environmental management problems are, to a large
degree, material driven.

• Materials tracking
• Purchasing
• Handling
• Storage
• Recovery
• Disposal
• Take-back

Life cycle costing
EPA (2000) The lean and green supply chain
5
Definition and Types of Environmental Costs

• Definition of Environmental Cost
• Expenditures that arise from either compulsory or
  voluntary activities to achieve environmental
  objectives (does not include external cost).
• Environmental cost can thus be divided
  intoregulatory (or compliance) cost and
  voluntary cost.
• There are four types of environmental activities
  
• Prevention activities
• are undertaken to eliminate potential causes
  of adverse environmental impacts. Examples
  Product and process redesign, using clean
  technologies
• Assessment activities measure and monitor
  potential sources of environmental damage.
  Examples Measure emission levels, contamination
  build-up, environmental audits
• Control activities are designed to control
  and contain source of environmental impact.
  Examples End-of-pipe technology like scrubbers,
  waste water treatment, etc.
• Failure activities
• are undertaken to remediate accidental
  environmental damage Examples Industrial site
  clean-up, dealing with oils spills, leaks, etc.

6
Accounting for Environmental Costs

• EnvironmentallyRelated Activities
• Safe workplace
• Safe handling of materials
• Waste reduction
• Pollution control
• Product take-back
• Site cleanup
• Emission permits
• public relations
• Etc.

Regulatory Reasons (Laws)

• Purpose of
• Activity
• Prevention
• Assessment
• Control
• Failure

Costsof Activity
Voluntary Reasons (Society, Culture,Customers)
7
Magnitude and Sources of Environmental Costs

• In the S.C. Johnson case environmental cost
  exceeded operating profit for the product.
• In the Dow case the use of a seemingly
  inexpensive solvent created environmental
  problems that jeopardized an entire product line.

Source WRI 1995
8
Breaking down Environmental Costs
Fixed versus variable environmental costs for a
DuPont agricultural pesticide
15.3
3.8
33.9
47.0
Varying definitions are used for fixed and
variable cost Variable cost A Can be changed
in the short run B Is a function of economic
output Fixed cost A Can only be changed in the
long run B Is not a function of economic output
Source WRI 1995
9
Breaking down Environmental Costs
Direct versus indirect environmental costs

• Direct costs are directly attributable to
  environmental activities that are part of a
  companys operating, investing and financing
  activities (Example waste disposal fees,
  emission permits, pollution control equipment)
• Indirect costs are not directly attributable to
  environmental activities that are part of a
  companys operating, investing and financing
  activities (Example Overhead costs, corporate
  image and public relationship costs)

• All identified environmental cost, fixed or
  variable, direct or indirect, should be allocated
• to the activities that generate the
  environmental costs (cost center)
• and to the ultimate causes of the activities
  (cost driver).

10
Allocation of Costs
Often, costs are treated as overhead and equally
allocated to all products and processes, when,
in fact, they should only be allocated to the
responsible product or process. Example
EPA (2000) The lean and green supply chain
11
Environmental Costs and GSCM
Process 1
Process 2
Process 3
yield 80 100/ton of input
yield 80 100/ton of input
yield 80 100/ton of input
input 20/ton
Output 560/ton
1250
640
800
1000
200
160
250
Disposal 20/ton of waste
Plant
Plant Performance
Total revenue 358,400 Input cost
25,000 Process cost 305,000 Disposal cost
12,200 Total operating cost 342,200 Operating
income 16,200 Profit margin 16,200 /
358,400 4.54
1250 tons x 20 3050 tons x 100 610 tons x 20
Disposal cost is 3.57 of operating cost and 3.4
of net sales.
12
Environmental Costs and GSCM
Process 1
Process 2
Process 3
yield 80 100/ton of input
yield 80 100/ton of input
yield 80 100/ton of input
input 20/ton
Output 560/ton
1250
640
800
1000
200
160
250
Disposal 20/ton of waste
All three process managers suggest pollution
prevention measures to the plantmanager that
would each create a zero-waste process and each
cost 5,000. What should the plant manager
decide?
13
Environmental Costs and GSCM
Process 1
Process 2
Process 3
yield 80 100/ton of input
yield 80 100/ton of input
yield 80 100/ton of input
input 20/ton
Output 560/ton
1250
640
800
1000
200
160
250
Disposal 20/ton of waste
Prevent the waste of process 1 Environmental
cost 20 / ton of waste Disposal savings 5,000
Prevent the waste of process 2 Environmental
cost 20 / ton of waste Disposal savings 4,000
Prevent the waste of process 3 Environmental
cost 20 / ton waste Disposal savings 3,200
14
Environmental Costs and GSCM
Process 1
Process 2
Process 3
yield 100 100/ton of input
yield 80 100/ton of input
yield 80 100/ton of input
input 20/ton
Output 560/ton
1000
640
800
1000
200
160
0
Disposal 20/ton of waste
Convert process 1 to zero-waste
process Disposal savings 5,000 Input savings
5,000
15
Environmental Costs and GSCM
Process 1
Process 2
Process 3
yield 80 100/ton of input
yield 100 100/ton of input
yield 80 100/ton of input
input 20/ton
Output 560/ton
1000
640
800
800
0
160
200
Disposal 20/ton of waste
Convert process 1 to zero-waste
process Disposal savings 5,000 Input savings
5,000
Convert process 2 to zero-waste
process Disposal savings 5,000 Input savings
5,000
16
Environmental Costs and GSCM
Process 1
Process 2
Process 3
yield 80 100/ton of input
yield 80 100/ton of input
yield 100 100/ton of input
input 20/ton
Output 560/ton
1000
640
640
800
160
0
200
Disposal 20/ton of waste
Convert process 1 to zero-waste
process Disposal savings 5,000 Input savings
5,000
Convert process 2 to zero-waste
process Disposal savings 5,000 Input savings
5,000
Convert process 3 to zero-waste
process Disposal savings 5,000 Input savings
5,000
17
Environmental Costs and GSCM
Process 1
Process 2
Process 3
yield 100 100/ton of input
yield 80 100/ton of input
yield 80 100/ton of input
input 20/ton
Output 560/ton
1000
640
800
1000
200
160
0
Disposal 20/ton of waste
Convert process 1 to zero-waste
process Disposal savings 5,000 Input savings
5,000 Process savings 25,000
18
Environmental Costs and GSCM
Process 1
Process 2
Process 3
yield 80 100/ton of input
yield 100 100/ton of input
yield 80 100/ton of input
input 20/ton
Output 560/ton
1000
640
800
800
0
160
200
Disposal 20/ton of waste
Convert process 1 to zero-waste
process Disposal savings 5,000 Input savings
5,000 Process savings 25,000
Convert process 2 to zero-waste
process Disposal savings 5,000 Input savings
5,000 Process savings 45,000
19
Environmental Costs and GSCM
Process 1
Process 2
Process 3
yield 80 100/ton of input
yield 80 100/ton of input
yield 100 100/ton of input
input 20/ton
Output 560/ton
1000
640
640
800
160
0
200
Disposal 20/ton of waste
Convert process 1 to zero-waste
process Disposal savings 5,000 Input savings
5,000 Process savings 25,000
Convert process 2 to zero-waste
process Disposal savings 5,000 Input savings
5,000 Process savings 45,000
Convert process 3 to zero-waste
process Disposal savings 5,000 Input savings
5,000 Process savings 61,000
20
Environmental Costs and GSCM
Process 1
Process 2
Process 3
yield 80 100/ton of input
yield 80 100/ton of input
yield 80 100/ton of input
input 20/ton
Output 560/ton
1250
640
800
1000
200
160
250
Disposal 20/ton of waste
Convert process 1 to zero-waste
process Disposal savings 5,000 Input savings
5,000 Process savings 25,000 Total
savings 35,000 Environmental cost
140 / ton of waste
Convert process 2 to zero-waste
process Disposal savings 5,000 Input savings
5,000 Process savings 45,000 Total
savings 55,000 Environmental cost
275 / ton of waste
Convert process 3 to zero-waste
process Disposal savings 5,000 Input savings
5,000 Process savings 61,000 Total
savings 71,000 Environmental cost
444 / ton of waste
21
Environmental Costs and GSCM
Process 1
Process 2
Process 3
yield 80 100/ton of input
yield 80 100/ton of input
yield 80 100/ton of input
input 20/ton
Output 560/ton
1250
640
800
1000
Disposal 20/ton of waste
Plant Performance
200
160
250
Total revenue 358,400 Input cost
12,800 Environmental part 12,200 Process
cost 244,000 Environmental part
61,000 Disposal cost 12,200 Operating
cost 256,800 Environmental part
85,400 Total operating cost
342,200 Operating income 16,200 Profit
margin 16,200 / 358,400 4.54
Environmental cost is 25.0 of operating
cost 23.8 of net sales
22
Speaker for Thursday, 26 AprilJill Dumain,
Environmental Analysis Director, Patagonia,
Ventura, CA
Tuesday, 1 MayNo class
Reading for Thursday, 3 MayBinder Kreissig
(2004) The use of life cycle engineering within
the design process of production facilities A
business case, PE International, Stuttgart,
Germany(is posted on course website)