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Supply Base
Environmental Performance Management |
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Other themes in
this case study: |
For similar case
studies: |
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- Environmental
requirements at the purchasing phase |
Hewlett-Packard |
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- Prequalification of
suppliers |
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- Inform suppliers of
corporate environmental concerns |
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THE CHALLENGE
I n 1996 United Technologies
Corporation (UTC) revised its EHS policy, including the requirement to
"Make safety and environmental considerations priorities in new
product development and investment decisions and in our dealing with
contractors and suppliers" (emphasis added). Although UTC had
previously dealt with contractor EHS issues through its
contractor standard practice document, an extensive review of EHS
requirements, and criteria for evaluating contractors, the company had
not formally ventured into the area of merging EHS standards and
supplier standards. This new focus turned out to be especially
challenging.
The following year, UTC began to look
along its supply chain and saw a nearly unmanageable number of
suppliers�more than 150,000. In a company, at the time, with
approximately 175,000 employees, the situation seemed out of hand. Not
only did the high number of suppliers appear hopelessly inefficient,
but it made the prospects for a sustained supply-chain partnership
effort all but impossible. It was evident that something needed to
change.
The convergence of the issues of SCEM
and procurement policies created an opportunity to look
comprehensively at the role of purchasing. Although the circumstances
that brought about the new approach�the change in the EHS policy and
the new look at procurement�were unrelated, their repercussions
justified an integrated approach. Shortly, a third
factor�a shared services analysis�would create additional incentives
to rationalizing suppliers.
It would seem an insurmountable task to
address the complex issue of supplier chain environmental
management (SC[E]M) with such a high number of suppliers. Many
companies might respond by declaring the effort impossible and give
up. UTC did not. Their story involves a dual effort to make wise
business decisions and promote sound environmental measures
when dealing with suppliers. Their experience explores
the overlap between the two concerns and raises several important
questions, including: How can a large job, such as instituting SCEM
strategies, be best approached? What are the rewards of attacking the
issue, both for the company and for the suppliers? What are the
relationships between business and environmental concerns when dealing
with supply chain issues? And what makes SCEM successful?
THE SOLUTION
Shortly after the company realized that
its supply chain was unmanageably large, it launched a strategic
sourcing initiative. Reversing the long-standing policy of
decentralized purchasing, the program had ambitious goals: to cut the
number of suppliers on which UTC depended dramatically with the
intention of rationalizing the supplier base to approximately 10
percent of 1997 levels. Analyzing UTC�s procurement policy, it
concluded that this required a more organized and focused sourcing
policy.
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UTC Puts Supply Managers Through Basic Training |
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s |
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�Article
reprinted in part with permission from Purchasing Magazine, April
23, 1998
There�s a big
change brewing at United Technologies Corporation. The Hartford
Conn.-based multinational is making major changes in supply
management at its Carrier, UT Automotive, Otis Elevator, Pratt &
Whitney, Hamilton Standard, and Sikorsky divisions.
UTC�s chairman and
CEO George David has identified integrated supply chain management
(SCM) as a superhighway to long-term corporate competitiveness,
and he has empowered Kent Brittan, vice president of supply
management, to integrate sourcing activities across the six major
divisions and to make SCM a core competency for the corporation.
The battle call: "Supply chains�not companies�compete."
For corporate
procurement at UTC, this represents a major departure from
history. Until recently, the group had approached supply chain
integration through cross-divisional purchasing councils. But
while the councils were very effective at leveraging information
and knowledge among the supply units, they continued to operate
within a highly decentralized procurement structure (meaning they
could create corporate supply agreements but couldn�t always
deliver volume to suppliers). The councils were also focused
mainly on nonproduction aspects of supply, for example, MRO,
energy, capital equipment, and travel.
Now this is changing. David, for
one, suspects that the company is leaving money on the table by
failing to act as a unified whole. Noting that UTC spends well
more than $10 billion per year with suppliers, Sam Farney, senior
manager of education and training for corporate purchasing, says
"We wanted to see what could happen if we began to integrate our
supply chain management efforts at the corporate level and to
extend our efforts to include production purchasing."
|
Led by a Strategic Sourcing
initiative, UTC formed cross-divisional commodity teams to source for
a larger portion of UTC�s needs. The teams� focus was on sourcing for
those goods and services that were most in need of centralized
purchasing and were currently used significantly by different
operating units with high strategic value. As of April 1999, EHS is
represented on each team and the EHS representative has an opportunity
to identify and manage EHS risks at a number of key phases. She or he
is able to influence the language and scoring of both the requests for
information and the requests for proposals and participate in any site
visits that occur and ultimately in the final selection process. The
goal of EHS involvement is to advise on potential EHS risks and
identify EHS opportunities at both supplier and UTC sites where better
EHS management may benefit both parties by controlling costs. The
program is intended to bring order to the process of procurement, not
only by achieving a sensible number of suppliers but also by
implementing procedures that ensure comprehensive and efficient
supplier assessment.
With such large changes under way in
terms of how the company thought about procurement issues, it seemed
to be a prime time to address the EHS mandate to prioritize
environmental considerations in dealing with suppliers. UTC�s enhanced
"greening the supply chain" initiative was, at least partially, a
result of this convergence. A number of observations have fueled and
informed UTC�s program:
- Partnership to meet environmental
goals. Having established ambitious EHS goals involving
reductions in the company�s emissions levels, waste generation,
energy and water use, and safety incidents, UTC recognized that it
could not meet its targets on its own. No matter how environmentally
conscious UTC�s operations were, the goals would not be met if the
company inherited a legacy of dirty production and unsafe and
energy-intensive technologies from its suppliers. This was
particularly true because approximately $14 billion of UTC�s $24.5
billion in sales was from purchased products or services. UTC�s
emphasis on meeting its own goals required the company to involve
suppliers; communicate about environmental, health, and safety
strategies; and enhance efforts to incorporate EHS criteria into
purchasing decisions.
- Evolving supplier relationships.
UTC has recognized a progression in the maturity and
sophistication of the dialogue that has taken place between buyers
and suppliers concerning EHS issues. Such concerns may not be
recognized at all in the less advanced stages, but they will be
incorporated (primarily on the basis of risk) as both buyers and
suppliers begin to take EHS issues into account. At the more
sophisticated stage of interaction, both parties are forward
thinking, concerned about EHS impact, and willing to work in
partnership to achieve EHS results.
- Improving business performance
through greening the supply chain. A focus of UTC�s program
has been using SCEM and business performance to complement one
another. The recognition that SCEM can result in lower costs is a
key incentive, and over time the company has found that programs
that do not advance both business and environmental goals are
unlikely to be attractive or sustainable. The basic business goal of
avoiding risk leads immediately to establishing regulatory
compliance as an important standard for environmental performance.
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"Through much experience, UTC and US-AEP have learned that
manufacturing that considers environmental impacts can result in
significant savings in cost and efficiency. Also, cleaner
production can significantly reduce the risk of regulatory
enforcement."
�UTC report |
In 1998 UTC had an exciting
opportunity to address the benefits of good environmental practices
through the Asian Environmental Supplier Outreach Program (AESOP),
which is now an ongoing project. The 1998 program was a joint venture
between UTC, US-AEP, and UTC�s suppliers. It emphasized a shared
commitment to sound EHS management in Asia and was a pilot to test the
impact of a structured assessment process for manufacturing
efficiency, operating costs, and environmental impacts.
UTC and US-AEP joined in the
partnership, because each had an interest in demonstrating
environmental commitment, sharing expertise with Asian suppliers, and
exploring means of outreach. Leslie Carothers, UTC vice-president for
EHS, addresses the opportunity of events such as the AESOP program:
"In developing countries, improving environmental performance of
suppliers will require large-scale sharing of technology and know-how.
Although governments can be a catalyst for this activity, most of the
resources and opportunities are in the business sector."
The AESOP pilot took place in Malaysia
in June 1998 and involved a small, representative sample of Malaysian
suppliers. The eleven-day event entailed conferences, site visits,
debriefing and feedback opportunities, and report production. The
opening and closing conferences took place at UTC facilities in Penang,
Bangi, and Klang, Malaysia, where representatives of each supplier had
an opportunity to tour and see the EHS measures implemented at the UTC
sites. This framework set the tone of the event as an opportunity to
exchange information and advances, rather than conduct an audit of the
suppliers involved. Eight days of site visits to the suppliers
followed the opening conference. At each site, the AESOP team:
- Toured the facility with site management
- Had an opportunity to informally discuss general
impressions and opportunities
- Held a brainstorming session with the site
participants over potential EHS risks and opportunities
- Formed a list of observations and recommendations
on process improvements to reduce costs and risks and to promote
environmentally sensitive operations.
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"Importantly,
the highest priority for the suppliers was improvements that would
cut costs along with reducing waste and energy use."
�Leslie
Carothers, vice-president for EHS, UTC |
Following the site
visits, the AESOP team had a day to brainstorm and review notes and
prepared a confidential final report. The team also had an opportunity
to prepare short reports specific to each site visited.
The pilot ended with a closing
conference; exit briefings with each supplier, providing an
opportunity for questions and discussion as well as distribution and
discussion of the short reports; and distribution of the team�s
program report. The specific contents of the report and site visits
are confidential, but a number of observations and approaches
highlighted the event:
- Consistently emphasized were the
financial benefits of environmental performance. Presentations on
environmental and financial benefits of improved pollution
prevention projects were part of the UTC site tours and conferences,
and the AESOP team also took pollution prevention case studies with
them on the supplier site visits. Significantly, during the
brainstorming and exit briefing sessions, cost and benefit factors
were explicitly discussed with site management whenever new project
ideas were introduced.
- The suppliers involved exhibited a
variety of EHS awareness and compliance postures. Some suppliers had
no exposure to EHS issues, but most had at least some awareness and
had some EHS programs and goals in place. Existing programs required
varying degrees of attention, but the team found that all suppliers
were eager to improve their respective EHS performance.
- "Greening the supply chain" is not a
one-way monologue. Many of the suppliers, after gaining greater
detail on UTC�s EHS goals and programs, had specific suggestions on
how use of their products could improve UTC�s EHS performance.
- Stand-alone EHS assessments do not
replace a comprehensive program, but significant opportunities exist
to incorporate EHS issues into current supplier assessment and
development programs, such as quality assessments that may already
be in place.
The event was considered an unqualified
success. "All participants involved benefited from the discourse and
used the event as an opportunity to advance both financial and
environmental performance," reported Nicholas Shufro, manager of
regulatory affairs and policy planning for EHS, in a post-AESOP
summary. Furthermore, "suppliers demonstrated real willingness to
adopt the recommendations of the AESOP team and have committed to
implementation of a variety of measures." For the hosts, AESOP was a
useful approach because it allowed UTC and US-AEP to work on a smaller
scale, while assessing the likely success of extension
to similar programs in the future. UTC had a valuable opportunity to
work directly with an important group of suppliers and demonstrate its
commitment to EHS considerations. Perhaps most important, it provided
a manageable project that would help UTC design a focused program.
Following the event, the AESOP team
felt that it had learned a great deal and was in a position to offer
potentially valuable advice to companies interested in expanding their
own SCEM efforts:
- It is helpful to start with some
type of pilot and begin to understand the magnitude of issues rather
than decide supplier initiatives are too complicated.
- A stand-alone EHS assessment of
suppliers will not be a sustainable program. Assessment activities
need to be integrated with existing supplier programs, such as
purchasing and quality programs. Few companies have the EHS staff to
conduct supplier assessments apart from ongoing programs.
- Make sure to work with the
purchasing organizations so that they understand the company�s
concerns and understand where opportunities may exist.
- To green the supply chain, one must
constantly emphasize the business benefits of doing specific EHS
projects or programs. Projects that do not consider the financial
costs and benefits will not succeed.
- Suppliers will often surprise you
with new ideas and opportunities. Greening the supply chain is not a
one-way street, and any customer working with its suppliers should
listen to suppliers� ideas.
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"Having
performance of suppliers is paramount for getting success--both
financial performance and EHS performance."
�Nicholas
Shufro |
THE RESULTS
At the time of writing, UTC has had
less than a year to digest the lessons of the AESOP experience and is
preparing to further the evolution of the Greening the Supply Chain
initiative. EHS staff are currently at work on a statement to
suppliers, which is expected to redefine the supplier relationship in
the context of UTC�s EHS expectations. The statement will be
distributed to suppliers as a means of alerting them to UTC�s
expectations, but for key suppliers it will mean more. It will
establish a "higher bar" of EHS standards to be met by suppliers who
want to achieve long-term relationships with UTC, and it will,
therefore, establish a framework for increased vigilance and closer
long-term relationships. This launch will represent a significant step
in an evolving SCEM program and demonstrates the continual progression
that companies are making toward careful examination of these issues.
A few anecdotes illustrate the success
of UTC�s effort to green the supply chain. As a direct result of the
AESOP pilot, a number of positive and mutually beneficial partnerships
were established. One of the suppliers involved with the pilot was a
small, relatively sophisticated firm with no previous EHS expertise
and no internal EHS program in place. Immediately following the site
visit on his premises, the supplier voiced an interest in being a
"Little Brother" to the UTC unit for which he was a supplier. His
frank request to establish information exchange and participate in EHS
training at the UTC Malaysian facility was more than a perfect way for
him to enrich his own EHS background. For the firm using his services,
it also provided a sense of security to know that he was implementing
EHS measures, enhancing the supplier relationship.
The AESOP team achieved another
tangible outcome at the site of a larger supplier. One of the energy
specialists made a simple, yet highly effective suggestion. The
supplier was preparing to install a new piece of equipment�a
sludge-drying machine�and the AESOP team member recommended installing
it in the vicinity of a furnace. This simple recommendation, involving
no additional costs, saved an estimated 15 to 20 percent in energy
costs. The supplier implemented the suggestion, and, as a result,
UTC�s supply chain was not only greener, but more cost-efficient.
The success of the AESOP pilot,
demonstrated in these stories, was experienced universally among the
participants. Julie Haines, managing director of the Clean Technology
and Environmental Management Program of US-AEP, comments on the
factors that facilitated the program�s achievements: "The UTC/US-AEP
AESOP partnership really worked, primarily for one reason�everyone
involved won. Both UTC and their suppliers won by building a stronger
relationship centered on improving efficiency and jointly improving
their environmental performance. The host government and surrounding
communities got cleaner industries. And, finally, US-AEP catalyzed an
innovative program that proves government and industry can
successfully work together as agents of positive change for long-term
sustainable development."
Another story illustrates the point
that greening the supply chain is not a one-way street but a two-way
dialogue leading to improvements for both sides. At a UTC facility in
the United States, a logistics supplier noticed that six chemicals
were being stored in a single crib, despite the fact that each
chemical had its own recertification schedule, toxicity rating,
inventory management, material safety data sheets (MSDSs), and
manifesting and disposal costs. The supplier�s observations led to an
analysis of the use of chemicals at the UTC site, which generated EHS
benefits, process improvements, and cost savings.
More broadly, the results of UTC�s SCEM
efforts, particularly with respect to their returns to business
performance, are positive, yet difficult to quantify. Leslie Carothers
notes just that fact: "While there is a growing recognition that
advanced environmental management can save money, the evidence is
usually anecdotal. The business benefits are certainly less clear to
purchasing staff than the contribution of, say, product quality
programs to the value offered by a supplier. Consequently, it has been
difficult to sell EHS performance as an important way to differentiate
among suppliers based on cost and quality criteria alone." Yet, UTC�s
efforts demonstrate that cost and quality are affected by EHS
performance, even if other factors remain important motivations behind
the drive to improve EHS. And, as more companies expand their SCEM
programs, a great deal of attention is likely to be given to measuring
the rewards of that effort. UTC has helped to define where others
should begin the process.
COMPANY INFORMATION
United Technologies Corporation
provides a broad range of high-technology products and support
services to customers in the aerospace and building industries
worldwide. In 1997 UTC had revenues of $24.7 billion, employed 180,100
people, and was 130th in the Global 500. UTC�s best-known products
include Pratt & Whitney aircraft engines, Otis elevators and
escalators, Carrier heating and
air conditioning systems, Sikorsky helicopters, and Hamilton Standard
aerospace systems. The corporation also supplies equipment and
services to the U.S. space program.
CONTACT INFORMATION
The UTC web site is
http://www.utc.com.
| Contacts: |
|
| Leslie Carothers |
Nicholas Shufro |
| Vice President, EHS |
Manager, Regulatory
Affairs and Policy Planning, EHS |
| United Technologies
Building |
United Technologies
Building |
| Hartford, CT 06101 USA |
Hartford, CT 06101 USA |
| (860)728-6540 |
(860)728-6352 |
|
carothl@corphq.utc.com |
shufrona@corphq.utc.com |
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REFERENCES
Carothers, Leslie. 1999.
"Integrating EHS into Purchasing." The Environmental Forum
16(2) (March/April). |
