White paper

ERP and Environmental Footprint Management for Manufacturers

content Cultural barriers to Environmental Management............................................ 2 Technological barriers......................................................................................... 3 Selecting environmental management tools . ................................................... 5 Conclusion............................................................................................................... 7

ERP and Environmental Footprint Management for Manufacturers

ERP and Environmental Footprint Management for Manufacturers B y P ä r H a m m a rs trö m , P ro d uc t D i re c to r, I F S A B

Government regulators around the world are placing, or preparing to place, new and more stringent environmental monitoring demands on manufacturers. European directives on Registration, Evaluation, Authorization of Chemicals (REACH), Waste of Electronic and Electrical Equipment (WEEE) and Restriction of Hazardous Substances (RoHS) affect any company doing business in Europe. These regulations are also being emulated by state governments in the US, including California. Investors, with the encouragement of the US Securities and Exchange Commission and similar bodies elsewhere in the world, are paying more attention to the environmental liabilities of the companies they fund. Several statements of position (SOP) from the American Institute of Certified Public Accountants (CPA) also deal specifically with the need for accounting of environmental liabilities in financial statements of audited companies. Consumers are looking for proof of claims of environmental responsibility on the part of companies whose products and services they buy. And manufacturers are facing green supply chain mandates from their customers, who are intent on making purchasing decisions not only on the basis of price and quality, but on the basis of environmental impact and the contribution to global warming. Manufacturers are under pressure from all fronts to document their environmental impact. This documentation may be intended primarily to prove compliance with government mandates, compete for business in request for information processes, or to deliver decision support for sound environmental management practices. Regardless of how environmental impact is used, within the vast majority of manufacturing companies, data on how operations impact air, water and landfills is difficult if not impossible to get. Adequate information technology (IT) systems are not in place to collect the data. And data originates from virtually every activity and department of the company, making environmental management initiatives both a political and data logistics nightmare.

1

ERP and Environmental Footprint Management for Manufacturers

In this whitepaper, we will examine not only the technologies but the organizational dynamics necessary to successfully implement an environmental footprint management program that can encompass not just carbon emissions, but all organizational impacts on the environment. We will also suggest specific questions that should be asked of enterprise software vendors that say they can deliver environmental footprint measurement and management capabilities. A thorough and flexible environmental program, enabled by enterprise software, can prepare a manufacturer for virtually any environmental mandate from the private or public sector. But this degree of flexibility and agility really requires both a firm commitment from management and a very tight and intimate integration between environmental functionality and the system where most environmental impact data is already housed … enterprise resources planning (ERP).

Cultural barriers to Environmental Management Data on environmental impact originates from literally every part of a company, and can take many forms. This means that technologically, environmental footprint management is a major challenge. But the nontechnical barriers to launching an effective environmental management program are not to be underestimated, either. Many of the problems companies experience as they try implement an environmental program of this type stem from the lack of clear ownership. Who within the company owns the issue—is it the production manager, is it a district or regional manager, the marketing department or someone else? Within many companies, this is not decided with sufficient clarity, and therefore questions and tasks with regard to environmental management can tend to fall between chairs. In more and more companies, there is an assigned environmental manager. This person may also hold the position of quality manager or production manager. This is a positive development, but typically, these people still don’t have the power to get things done outside of a very narrow band of responsibility. They can order some reports from others in the organization, and perhaps induce people to fill out some forms to gather data, but they have very limited hard power. In other companies, environmental management programs are driven by the marketing or sales department. Sales-led initiatives can actually lead to a slight increase in power as the promise of increased revenue and sales results can motivate a number of people throughout the enterprise due to either direct fiscal incentives or a general desire to grow the company. Indeed, some companies have been able to market and brand themselves as “green” or environmentally responsible, and have by virtue of this been able to carve a competitive niche for themselves. But as more and more companies position themselves in this way, marketing on the basis of environmental responsibility will depend on having better documentation and proof points than competitors who are making the same claims.

2

ERP and Environmental Footprint Management for Manufacturers

But as successful as sales-led environmental initiatives may be, the mandate to launch a broader and more effective environmental management program is possible once it becomes an issue at the board of directors level. Once the importance of measuring and managing an environmental footprint becomes a part of the corporate strategy and a means of managing board-level risk, a company is in a position to put much harder policies into place and can in effect force the different departments and cross functional teams to collaborate around the issue. When the mandate for an environmental management program comes from the president or CEO, and when that chief executive is actively involved in advocating for and tracking deliverables, it is more likely that the required resources will be made available to assure success. One other alternative situation involves an environmental program being driven by the CFO. With increased pressure from the investor community, the CFO could in fact be the high ranking executive with an intimate understanding of the implications and importance of environmental footprint management when it comes to securing investment capital. The CFO also tends to have substantial hard and soft power within an organization, and can command significant organizational resources directly and through influence with other C-level and line managers.

Technological barriers It is certainly true that in most companies, not much can happen without a mandate from the top. But even with that executive mandate and support, many companies are finding that they lack the technology to efficiently measure their current environmental footprint or make business decisions based on environmental impact. In a recent survey research project conducted by IFS North America, 83 percent of manufacturing executives participating indicated that they saw the importance in measuring and managing their environmental footprint. Yet 48 percent said that they could not measure their environmental impact at all within their ERP system, with only 7 percent saying they had comprehensive capabilities directly in their ERP system. Only 3 percent said they had functionality through an integrated third-party software product. The remainder of respondents said that they had varying degrees of limited capabilities. Sixty three percent of respondents said they would like their ERP vendor to offer environmental footprint management embedded directly into the solution as a standard component. This survey data points to a real and immediate need for ERP products with built-in environmental footprint management capabilities to help manufacturers meet the current demand for reliable environmental impact data. As is often the case in areas of the business ERP does not address or addresses poorly, many companies are using ad hoc systems like Microsoft Excel® spreadsheets or other tools that are obviously limited in their capability, require extensive manual intervention and keep data segregated from the rest of the enterprise. But this is on its face a very poor approach given that every activity in business has both

3

ERP and Environmental Footprint Management for Manufacturers

a cost impact and an environmental impact. If you move something, if you buy something, if you manufacture something, if you are consuming something, if you turn a light bulb on, if you turn on a computer, it all has an environmental impact— so you really need to keep track of pretty much anything that you do inside the company in order to measure an environmental footprint. So if you want to do it in a credible way, you need to actually keep track of activities across the enterprise, and that is extremely hard to do when your environmental management system stands alone, apart from the rest of your enterprise system. Adequately tracking environmental footprint data is virtually impossible while using ad hoc systems like spreadsheets because outside of an enterprise application, no combination of spreadsheets is comprehensive enough to do the job. Mastering the environmental footprint, after all, requires that we actually look across the entire product lifecycle from the raw material sourced from mines, forests, etc. to the end user or customer. You must actually see what affect your product has when it is used, and what will happen when it is eventually disposed of or decommissioned. True environmental footprint management can involve a complex and huge body of data —and the natural place for that data and where most of it is already to be found is within the enterprise system, the ERP system. After all, environmental accounting and financial accounting are very much alike in the sense that everything that you do has a financial impact and needs to be tracked in ERP and similarly, everything you do has an environmental impact that can also be managed in a centralized way within ERP. Yet even a tier 1 ERP system that had its origins before the current trend towards service oriented architecture (SOA) may be more of a hindrance than a help when it comes to measuring an environmental footprint. Many very robust and popular enterprise software suites were not initially designed to track and manage environmental impacts, and are designed in such a way that it is difficult for the vendor to simply add a new layer of functionality that would accomplish this. This is one reason that some enterprise software vendors have gone so far as to purchase companies that offer carbon footprint solutions. They are unable to simply add broad, environmental management capabilities to their existing ERP products, and are therefore opting to sell additional software packages that would require an expensive integration project to interact with the rest of their product portfolio. And even then, the resulting capability would be limited to carbon footprint measurement to the exclusion of other environmental impacts. On the other hand, a truly modern enterprise application built from the ground up on SOA is comprised not of a single block of code, but rather on thousands and thousands of small bits of functionality that interact with each other in a uniform, established fashion. This allows the product to be developed in new directions more quickly, and also allows companies using this software to reconfigure and change the way they are using the system more easily. In these modern enterprise suites, it is

4

ERP and Environmental Footprint Management for Manufacturers

easy enough to simply add new software components that interact with the existing functionality in order to track environmental impact data, using in essence the same conduits or pipes for data that are typically used to track values like cost and revenue. This SOA-enabled approach not only drastically reduces cost and complexity by an order of magnitude, but it allows for a more flexible, agile solution that can be configured to meet specific environmental measurement and management needs. An integrated environmental footprint management tool ought to be configurable to track not just carbon emissions, but all environmental impacts a manufacturer may want to report on or manage. It also delivers a more usable solution because users are not forced to learn two separate software programs with separate and divergent interfaces and navigation conventions. These enterprise software packages with embedded environmental management functionality will be particularly important for middle market companies, but as they increase in popularity, will become the preference of the largest enterprises as well. Why is this? Very large enterprises with several billion dollars in annual revenue or more often already have a myriad of enterprise systems running within their business, and they have become accustomed to building and maintaining numerous integrations. These large industries may even have a substantial IT department or a standing budget for a consultancy firm that integrates various software products for them and maintains those integrations. Middle market manufacturers—those with between $100 million and a couple billion dollars in revenue—cannot as easily afford to maintain numerous integrations. This is because implementing and maintaining complex, one-off integrations costs almost as much for a middle market company as it does for a Fortune 100 company, but the middle market company has a lot less revenue with which to amortize that cost. So middle market companies will have a real need for out-of-the-box solutions for environmental management because they have the same if not greater environmental reporting requirements placed on them by the market, customers and regulators but have a smaller budget for compliance.

Selecting environmental management tools Currently, manufacturers with any degree of environmental footprint measurement and management capabilities rely almost exclusively on either standalone carbon footprint software or on one-off integrations between ERP tools and either packaged or custom software. Above, we have established that a more elegant, affordable and flexible solution involves the inclusion of environmental footprint management directly in the ERP package as a native piece of functionality. Determining who truly has this functionality and who does not should be a major concern for those evaluating enterprise software packages designed to deliver environmental footprint management. To this end, here are seven questions to ask enterprise software vendors that claim to offer a solution in this area:

5

ERP and Environmental Footprint Management for Manufacturers

Question #1: Can you track environmental impacts like you can track cost? Because that is exactly what environmental impacts are … a cost, and they are driven by the same types of activities that drive financial cost. Every manufacturer keeps track of the costs to some extent, including standard cost or actual cost, at varying levels of granularity. Remember—everything that is purchased, every time materials or products are moved, every manufacturing activity, every business process, drives cost and also carries an environmental impact. How does the environmental footprint management solution take advantage of the existing costing system to reduce complexity in measuring environmental impacts? Question #2: How is the environmental management tool linked into supply chain and materials management? One major contributor to the environmental footprint of a manufacturing company is its supply chain. Manufacturers need to understand what their products are made up of on a raw material level, the environmental impact of creating those materials, manufacturing them or mining them and the impact of transporting them to your plant. Question #3: How is the environmental management tool linked to manufacturing operations functionality? After all, once you understand the environmental impact of your supply chain, you need to keep track of your own operations and your manufacturing processes. How will a solution help you see how much energy these processes consume, what emissions are associated with them, what chemicals they consume and what potentially dangerous chemicals like lead, cadmium or mercury are involved? Question #4: How will the environmental management tool track environmental impacts? The environmental management tool will need to allow you to measure how your product is used, how much energy it consumes, does it emit any substances when in use, can substances like cadmium, lead or other substances leak from it, etc. Question #5: How will the environmental management tool help us measure and plan for the end-of-life impacts of the product? Particularly if some portions of a product can be poisonous, end of life disposal or decommissioning can be a major concern. But even under ideal circumstances, attention will need to be paid to how much of the product can be reclaimed or recycled, how product design impacts the ease or difficulty of recycling, and certainly how any potentially dangerous substances within the product are to be taken care of. This type of data must be on hand for each and every part across the product structure, and that means you need to keep track of your product structures at a very granular level of detail.

6

ERP and Environmental Footprint Management for Manufacturers

Question #6: How much flexibility to change, expand and reconfigure the environmental management tool will we have, and what is the cost of that flexibility? Environmental measurement and management requirements are not static. New regulations will be promulgated. New reporting demands will be placed upon you by your customers and the market. New products will bring with them new challenges. So an environmental management solution that can measure only one impact, like carbon emissions, is of little value. Moreover, environmental management solutions that rely on extensive integrations that are limited in capability or expensive to change and expand are equally undesirable. Indeed, when it comes to environmental management a manufacturer ought to start small and plan to expand their program over time as needed or as it becomes desirable to do so. An initial decision ought to be what should be measured first. There might be immediate environmental reporting demands that must be satisfied, or obvious environmental impacts that receive priority. For instance, a company that manufactures industrial chillers may want to measure impacts stemming from refrigerants like ammonia, Hydrogenated Fluorocarbon Refrigerants (HFCs) and Hydrogenated Chlorofluorocarbon Refrigerants (HCFCs). Eventually, for that industrial chiller company, an environmental footprint management program may be extended to manufacturing and installation operations, but measuring impacts stemming from these chemicals is the best place to start. It is obvious, though, that for any manufacturer, it makes little sense to invest heavily in a solution that will meet only immediate needs and will require additional major investments to expand and be reconfigured over time. Question #7: How much will it cost to implement this solution, including integration costs and middleware? And how much will it cost each time I upgrade my ERP package to uplift any necessary integrations? What are the costs associated with maintaining this solution over time?

Conclusion Manufacturers about to commit to an enterprise software solution that includes embedded environmental footprint management need to do extensive due diligence. They need to ensure that they are actually getting ERP with a native, built-in module that is pre-integrated with the rest of an enterprise suite. The degree to which other parts of an enterprise suite must be implemented in order to feed data into the environmental footprint solution will vary from one manufacturer to the next. But in the case of IFS Applications, the one additional module that is required in all cases is the inventory module, because IFS Eco-footprint Management is a parts-driven system that tracks environmental impact by component part. Most manufacturers

7

ERP and Environmental Footprint Management for Manufacturers

would also want to implement manufacturing-related modules because that will deliver the requisite product structures, work centers and other manufacturing data. Other modules from the IFS Applications suite can drive additional data into the Eco Footprint Management module, ranging from project data, supply chain management data and even service management and product lifecycle data. So once again, when it comes to evaluating ERP vendors claims in the area of environmental footprint management, the phrase “caveat emptor” certainly applies. Ask questions about the flexibility and broad capabilities of these tools. Ask questions about not only initial purchase cost but about the cost to reconfigure or expand the type of data included in an environmental footprint. And be sure to think not only of your immediate needs, but of how your needs could change in the coming years and how the various enterprise solutions can continue to accommodate these changing environmental needs.

8

About IFS IFS is a public company (OMX STO: IFS) founded in 1983 that develops, supplies, and implements IFS Applications™, a componentbased extended ERP suite built on SOA technology. IFS focuses on agile businesses where any of four core processes are strategic: service & asset management, manufacturing, supply chain and projects. The company has 2,000 customers and is present in more than 50 countries with 2,700 employees in total. Net revenue in 2009 was SKr 2.6 billion. More details can be found at www.IFSWORLD.com. For further information, e-mail to [email protected]

Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +1 888 437 4968 Argentina, Brazil, Canada, Mexico, United States Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +65 63 33 33 00 Australia, Indonesia, Japan, Malaysia, new Zealand, Philippines,  PR China, Singapore, Thailand Europe east and central asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +48 22 577 45 00 BALKANS, Czech Republic, GEORGIA, Hungary, Israel, KAZAKHSTAN, Poland, RUSSIA and cis, Slovakia, Turkey, UKRAINE Europe Central . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +49 9131 77 340 AUSTRIA, Belgium, GERMANY, ITALY, netherlands, SWITZERLAND Europe West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +44 1494 428 900 France, Portugal, Spain, United Kingdom Middle East and africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +9714 390 0888 India, South Africa, Sri Lanka, United Arab Emirates Nordic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +46 13 460 4000 Denmark, Norway, Sweden Finland and the Baltic area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +358 102 17 9300

www.ifsworld.com Thi s d o c umen t m ay c o n ta in stat emen t s o f p o s sib l e f u t u re f u n c t i o n a l i t y fo r IF S’ s o f t wa re pro d u c t s a n d t ec h n o l o gy. S u c h s tat e m e n t s o f f u t u r e f u n c t i o n a l i t y a r e f o r i n f o r m at i o n p u r p o s e s o n ly a n d s h o u l d n o t b e i n t e r p r e t e d a s a n y c o m m i t m e n t o r r e p r e s e n tat i o n . I F S a n d a l l I F S p r o d u c t n a m e s a r e t r a d e m a r k s o f I F S . Th e n a m e s o f a c t u a l c o m pa n i e s a n d p r o d u c t s m e n t i o n e d h e r e i n m ay b e t h e t r a d e m a r k s o f t h e i r r e s p ec t i v e o w n e r s .

IFS AB © 2010

En5904-1 Production: IFS Corporate Marketing, April 2010.

Estonia, Finland, Latvia, Lithuania