The intersection of lean and green

Once considered to be of interest only to “tree huggers,” sustainable or green business practices are more widely embraced now by companies. But it’s not sheer concern for the environment that’s driving these initiatives.

Instead, companies are discovering that business practices that preserve the planet’s future can pay substantial financial dividends today.

Hexagon Metrology is a prime example. In 2006, the maker of precision coordinate measuring systems moved into a new production plant in North Kingstown, R.I. By relocating, the company benefited from a facility that was built to meet its manufacturing needs. It also began realizing a savings of $500,000 a year in energy-related costs.

Despite the significant savings, Hexagon Metrology was still spending approximately $350,000 a year on energy. So when the company learned it could save even more by participating in a program to reduce demand on the electricity grid, it welcomed the opportunity—and ultimately realized an additional $115,000 in annual savings.

Hexagon Metrology reuses aluminum chips left over from the manufacture of its precision coordinate measuring systems. The company also reaps additional revenue by reselling the leftover materials.

This kind of bottom-line benefit is why some industry experts predict “going green” will soon be standard operating procedure across all sectors of the economy—including manufacturing.

“Once a CEO realizes that the company can save hundreds of thousands or millions of dollars from a very strategic environmental initiative, they’re behind it 100 percent,” says Pamela Gordon, founder of Technology Forecasters , an Alameda, Calif.-based firm that offers consulting services for companies seeking to reduce their environmental impact.

Gordon, author of Lean and Green: Profit for Your Workplace and the Environment , says the general public’s heightened sensitivity to environmental issues also can give a manufacturer that is known as “a green company” a competitive advantage in the marketplace.

It wasn’t always this way—at least in the United States.

“In the United States, unfortunately, many executives have seen the environment as an emotional issue rather than a business opportunity, but every day more and more executives are seeing things like waste reduction and pollution prevention as business opportunities,” Gordon says.

Participating in a program to reduce demand on the electric grid during peak usage times certainly proved to be a business opportunity for Hexagon Metrology.

The program, operated by EnerNOC , a provider of intelligent energy solutions, reduces peak electricity demand by paying businesses and institutions to scale down energy use during emergencies or other instances in which the grid threatens to become overwhelmed. Doing so reduces the chances of brownouts or blackouts while also stabilizing energy prices and decreasing the need for other power sources.

With the EnerNOC program, energy use is only reduced in nonessential areas of Hexagon Metrology’s operations. Critical areas, such as the company’s calibration room and data center, continue to receive a steady flow of electricity. The system is automated, requiring minimum effort from Hexagon Metrology.

Cumulative savings

By participating in EnerNOC’s program, says William Durfee, VP of operations for Hexagon Metrology, the company is not only helping the community, but itself as well.

“A brownout is a very bad thing for any manufacturer,” Durfee says. “This program keeps the grid loaded properly so you have a steady flow of power, but you’re cutting back the nonessential power to keep the essential power at 100 percent.”

Hexagon Metrology has seen the bottom-line benefits of these practices. Along with receiving payments of $15,000 a year from EnerNOC for participating in the program, Hexagon gets to use EnerNOC’s free PowerTrak energy monitoring software, which has reduced energy-related costs by an additional $100,000 a year.

The EnerNOC demand-response program is only one of a number of green initiatives that Hexagon Metrology has embraced. The company also recycles aluminum chips left over from its manufacturing processes, which reduces waste and generates additional revenue from reselling the leftover materials.

“Normally with these green initiatives, there may be some investment up front, but virtually everything we’ve run into has a pretty good return-on-investment [ROI],” Durfee says. “So we continue to dig deeper, and as natural resource prices rise, the return-on-investment for us just makes sense.”

Gordon says executives become even more enthusiastic about green initiatives when they discover the up-front investment typical required—and how it all leads to a return on that investment.

For example, an initiative that reduces a company’s energy requirements through the use of daylight and motion sensors can pay for itself in about a year through lower utility costs. And there are initiatives with even faster ROI.

“A program where companies proactively take back the more valuable products they sell once their customers no longer need them and mine them for parts and subsystems that they can use in refurbished products pays for itself in two to three months,” Gordon says.

After gaining $500,000 a year in energy cost savings through a move to a new production facility, Hexagon Metrology reduced those costs by an additional $115,000 by participating in a program that reduces demand on the electricity grid.

With more companies embracing green business practices, information technology suppliers are responding by emphasizing and expanding their sustainability offerings. In 2008, enterprise software vendor SAP published its first-ever sustainability report, which not only outlines the products it offers to assist companies with green initiatives, but also describes SAP’s own green practices.

Calling it sustainability

“A lot of customers have said, “We want to know how you can help us become more sustainable, but we’re also curious about what you, SAP, are doing to make yourself a more sustainable company,” explains Marty Etzel, SAP VP of sustainability solutions.

According to the SAP report, the central tenet of Lean manufacturing—eliminating waste from processes wherever possible—in turn makes a company more environmentally friendly. In fact, many of the software products mentioned in SAP’s sustainability report aren’t solely focused on enabling green business practices; rather, they’re designed to improve operational efficiencies, which lead to a reduced carbon footprint.

As Etzel says, “We’ve been helping customers for a long time with efficiency in the supply chain. We just never called it sustainability.”

Oracle is another vendor looking to package its offerings to fulfill increasing demand for technology that can support green initiatives. Currently, a section of its Web site is devoted to the topic, and the vendor has made moves to strengthen its green positioning. In September 2008, for example, Oracle announced a partnership with ESS—a provider of environmental, health and safety software—to offer environmental sustainability information management capabilities.

Jon Chorley, VP of supply chain strategy at Oracle, believes incorporating sustainability into business practices is simply smart accounting.

“If you think certain externalities are free—like water, the environment, air, and waste disposal—then you make one set of business decisions,” says Chorley. “But if you realize they are not free, you make different business decisions. And that’s really about proper accounting. So when you embed that concept into all aspects of your business, you’re going to intrinsically drive a sustainable business. So we say yes, there are certain specific applications here and there that focus on green business processes, but it’s more important to deliver all of our applications through a lens that helps users do the proper accounting required to get a clear picture of their sustainability profiles.”

This accounting also benefits the bottom line. Take product design, for example.

“Obviously, if you can design products that are intrinsically more sustainable, that comply with regulations, reduce the amount of hazardous materials used, and are easier to dispose of—or can even be reused—you’ll have a better, more cost-effective product line,” says Chorley.

Moving beyond product design, there are opportunities throughout the product life cycle—from sourcing and manufacturing to distribution—in which manufacturers can reduce their carbon footprints—and cut costs.

Despite the potential benefits, the current economic downturn may make some manufacturers hesitant about spending money on green initiatives. But Chorley believes a slow business cycle is the perfect time to make such investments.

“It’s easier to install new systems when you know you’re not spending all of your time building or shipping product,” Chorley argues. “It’s easier to take on initiatives like this when you have some breathing room—providing, of course, that you can finance them. But the kinds of initiatives we’re talking about often yield good ROI. If you eliminate a whole bunch of transportation costs, if you drive down your energy bill, that’s bottom-line savings.”

In the end, it seems those bottom-line savings, more than anything else, are selling more and more manufacturers on the benefits of going green.

“The most important thing is the cost-benefit analysis—the reduction of energy, the better management of fleets, the better management of product,” says SAP’s Etzel. “There must be real benefits. Just doing it for the sake of carbon footprint calculations is not a compelling enough business case.”

One by one

Yet while more manufacturers are adopting green business practices, there are many still at the starting line. For them, Technology Forecaster’s Gordon says the push for sustainability should start at the top. “Once the CEO is onboard,” she says, “everything else moves more efficiently.”

After that, though, management should encourage all employees to get involved. As Gordon explains, “Often the best green ideas come from employees who are masters in their own part of the business. They see day to day the wasteful practices, and the materials that are thrown away that could be reused. So it’s important to get everyone involved.”

By embracing green business practices, manufacturers will see significant results.

“We’ve seen companies that have indeed saved millions of dollars by reducing wasted resources,” Gordon says. “We’ve seen companies get terrific recognition both within and outside their companies. We’ve seen tons of waste diverted from landfills or incineration. We’ve seen companies use creative solutions to cut the distance their products travel, reducing their products’ own weight and power consumption. There’s so much creativity involved in arriving at the intersection of lean and green. It’s a whole new passion for this century.”

Experts not required: Optimization tool offers easy way to measure true cost of carbon footprint

For many manufacturers, optimizing transportation networks achieves the twin goals of lowering operating costs and reducing environmental impact.

Now supply chain optimization specialist ILOG has equipped the latest version of its transportation planning application with functionality for calculating the carbon footprint associated with various transportation strategies.

Companies can use this solution—called Transportation Analyst 2.0—to determine the optimal size of their fleets, find opportunities for combining forward and reverse logistics, or decide how often they should schedule deliveries to certain locations or customers.

Derek Nelson, an ILOG product manager, expects the solution to attract widespread interest partly because it doesn’t require an expert in optimization techniques—or even a professional transportation planner—to operate. “It allows the supply chain person or business professional to ask the kinds of questions they want to ask,” Nelson explains.

As the name implies, Transportation Analyst 2.0 is an upgraded version of an existing ILOG application. Nelson says this version allows companies to more than manage their own private transportation fleets.

Now users can analyze the trade-offs between using private fleets, commercial delivery services, and less-than-truckload shipping. They also can model consolidation and deconsolidation options to determine whether it’s more economical to go through a hub or to ship directly to a customer.

Transportation Analyst 2.0 also helps companies calculate their transportation-related carbon footprints. And as David Simchi-Levy, professor of engineering systems at Massachusetts Institute of Technology and chief science officer for ILOG, points out, carbon footprints and costs often go hand in hand.

“Why do we see more companies looking to reduce their carbon footprint?” Simchi-Levy asks. “In many cases, it’s driven by oil prices, which directly impact transportation costs. The point being that a high carbon footprint isn’t just a problem for the environment—it’s also a sign of an inefficient transportation system. So reducing your carbon footprint implies improving your transportation system—or vice versa. When you look at it this way, you realize there are specific benefits to be gained by focusing on reducing your carbon footprint.”

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