Chapter 2 Operations Management

2.1 Sustainable Business

Recall from Chapter 1 "Introduction" that a sustainable business is one that is concerned about the social, environmental, and economic impacts associated with its current and future operations and the ability of the business to meet present needs while ensuring its and others’ long-term survival. Ideally, the sustainable business seeks to have a positive social impact, environmental impact, and economic impact. Taken together, a business’s contribution to social justice, environmental quality, and economic prosperity is collectively referred to as the triple bottom line.Elkington (1997). The triple bottom lineOrganizational success defined by three aspects: social, environmental, and economic factors, often referred to as people, planet, and profit. (social, environmental, economic) is sometimes referred to as people, planet, profit.

Once considered the purview of governments and nonprofit organizations (such as Heifer International, a global leader in developing sustainable communities), businesses are increasingly being called upon to address social, environmental, and economic issues. Rethinking the business in terms of its triple bottom line impact and performance (social, environmental, and economic) is critical in establishing the foundation for sustainable business. This requires a shift away from thinking of a business only in terms of its financial profit to shareholders. While financial profit is necessary for survival, the sustainable business applies a broader view of the business, its responsibilities, and its performance. Therefore, the sustainability of business is discussed in terms of three interrelated and interconnected dimensions: social, environment, and economic.

2.2 Social Impact

The first dimension of a sustainable business is its performance relative to societies and social justice, often referred to as social impactThe performance of a sustainable business relative to societies and social justice. Internally, the social impact of a business refers to practices related to employees and employment within the business; externally, social impact practices include participating in Fair Trade practices.. While there is no easy solution for reducing social costs while improving corporate performance and profitability, social impact should not be overlooked. The social impact of a business’s operations is viewed both internally and externally and ensures that the business’s entire operations across the supply chain are socially responsible and ethical.

Internally, the social impact of a business often refers to practices related to employees and employment with the business. The sustainable business’s social impact would include such items as the business’s practices and policies related to working conditions, diversity in hiring, opportunities for advancement for women and minorities, lack of discrimination, and the provision of affordable health care and other necessary benefits. In addition, social impact includes wages, breaks, adherence to employment laws, safety, training, and numerous other specific labor practices. Finally, social impact includes the impact on the local public and social services sector as a result of the business’s activities. These are only a sample of the many items considered within the social impact of a business’s operations. Many of these internal social impacts are discussed in greater detail in Chapter 3 "Human Resources".

The sustainable business is not only expected to treat its employees in a responsible manner but also ensure that it is engaged with suppliers that share similar values. That is, a sustainable business is also concerned for the labor practices and working conditions of companies within its supply chain to ensure that the supplies and products it purchases were produced responsibly and ethically. Sustainable businesses will make reasonable efforts to ensure they are not purchasing from suppliers engaged in the use of sweatshops, child labor, or other human rights abuses. In some cases, businesses have worked diligently with suppliers to correct these problems, while in other cases businesses have chosen to change suppliers.

When sourcing products from outside an industrialized country, some sustainable businesses will seek Fair Trade products. Fair Trade certification verifies that living wages were paid to producers and that fair and ethical employment practices were used in the creation of products. Many agricultural goods and handicraft items are Fair Trade certified.

In addition to employment practices, social impact refers to respect of others. This entails the respect of individuals and other businesses encountered locally and around the world. A sustainable business will make reasonable efforts to ensure its policies, practices, products, advertising, logo or mascot, and other aspects of the business are not offensive or disrespectful to clients in the global market. See Note 2.3 "Tips to Increase Your Social Impact" for tips on how to increase the social impact of your business.

TOMS Shoes is an example of a company making a commitment to maximize its social impact. In 2006, Blake Mycoskie founded TOMS Shoes with the singular mission of improving the lives of children by providing shoes to those in need. Shoes are produced in Argentina and China following fair labor practices while creating minimal environmental impact. Factories are monitored by TOMS and third-party independent auditors. TOMS Shoes are sold online and in retail locations around the world with the promise that for each pair purchased, TOMS will donate a second pair to a child in need in Argentina, South Africa, and other locations around the world. The public is invited to participate in “shoe drops” around the world and to experience firsthand the social contribution of TOMS Shoes.

2.3 Environmental Impact

The second dimension of a sustainable business is its contribution to preserving environmental quality; commonly referred to as environmental impactThe performance of a sustainable business relative to preserving environmental quality; this performance is viewed both internally and externally.. Numerous examples exist of companies reducing environmental costs while simultaneously improving company performance and profitability. The environmental impact of a business’s operations is viewed both internally and externally. The business that focuses exclusively on its environmental impact, rather than focusing on the triple bottom line emphasis of a sustainable business, is referred to as a green business.

Internally, the environmental impact of a business often refers to practices related to use of natural resources, waste, toxicity, and pollution. For manufacturing companies, the environmental impact can be large and efforts are generally made to reduce waste, toxicity, and pollution within the manufacturing process. International Organization for Standardization (ISO) 14000 is one example of guidelines for firms on environmental practices and reduced impact.

For service companies, the environmental impact is smaller but should not be overlooked. Consider, for example, the amount of waste the company pays to have removed; chemicals used that eventually find their way into the air, water, or ground (such as cleaning compounds, fertilizers, weed killers, and many others); and pollution created by energy usage, employee commutes, or business travel.

Green buildingBuilding that is done with the goal of reducing the environmental impact in the design, construction, and its ongoing life. (or remodeling) is a fast growing trend among businesses that wish to be more sustainable. Green building refers to the reduction of environmental impact in the design, construction, and ongoing life of the building. The most frequently utilized standards for green building are the Leadership in Energy and Environmental Design (LEED) of the U.S. Green Building Council.

Recycling programs are often part of a sustainable business’s efforts to reduce waste and toxicity. Sustainable companies consider both the purchase of recycled items for office supplies, furniture, and other needs, as well as recycling or donating its own unwanted items. While most companies or offices may already recycle paper, aluminum cans, and plastic bottles, there is little that cannot be recycled today. For example, clever artists and designers make purses and handbags from recycled soda pop tabs, newspapers, tires, potato chip bags, barcodes, candy wrappers, juice pouches, rice bags, and more. As another example of recycling, Caracalla, a salon and day spa in Little Rock, Arkansas, recycles cut hair by sending it to the nonprofit Matter of Trust to be woven into hair mats capable of absorbing chemical oil spills. Many restaurants recycle used grease through companies that purchase “yellow grease.” Companies can also recycle office furniture and equipment through donations to charitable giving programs at schools and other nonprofits. Numerous options exist to recycle or donate electronics. If you cannot find a suitable place to recycle or donate your company’s unwanted items, consider turning to The Freecycle Network, an online site to give away unwanted items. Many organizations, such as the Zero Waste Alliance, help businesses minimize waste and toxicity. Before discarding anything, the sustainable business will exhaust all possibilities in identifying a second life for the product.

Externally, the sustainable business also considers the environmental impact of suppliers in terms of services and products as well as transportation of goods. A sustainable business will seek out suppliers of services and products that are environmentally friendly. This results in the purchase of products that produce less waste, are less toxic, and generated the least amount of pollution in manufacturing and transportation. Sustainable businesses opt for local suppliers, when possible, in order to reduce the environmental impact caused through the transportation of goods.

Additionally, many sustainable businesses create a green procurement policy, or environmentally preferred purchasing policy, as an integral part of their operations to give preferential purchasing to products and services that are most environmentally friendly. An environmentally preferred purchasing policy would cover all types of products and services purchased by the organization. For example, this policy would give preference to green cleaning products that are less harmful to employees and the environment; or preference to Forest Stewardship Council (FSC) certified wood products that come from sustainably managed forests. As with other attempts to reduce environmental impact, a move toward green procurement can offer cost savings for the sustainable business. For example, Little Rock Athletic Club discovered that if it made the switch to recycled copy paper, the company could achieve a 10% cost savings, 13% fewer carbon dioxide emissions, and 35% fewer trees used when compared to the previous paper products. See Note 2.6 "Tips to Green Your Office" for more tips on how to green your office.

There are two additional considerations in determining a company (and supplier’s) environmental impact: water efficiency and energy efficiency. When a sustainable business considers water usage—often referred to as a water footprint—it is seeking ways to become more efficient by reducing its use of fresh water or increasing its recycle rate for water. For example, some businesses have collected water from sink, water fountain, shower, dishwasher, and washing machine drains (collectively referred to as greywater systems) or installed rainwater collection systems to recycle water for use in landscaping, decorative water features, and to flush toilets.

When a sustainable business considers energy usage (often referred to as a carbon footprint or energy audit), it is seeking ways to become more efficient and reduce its energy usage. Through an energy audit, many companies have identified sources of wasted energy and accompanying opportunities to become more energy efficient. For example, in the past, landfills often burned off methane generated from decaying waste. Technologies now allow landfills to cap the methane and use it as a renewable energy source.

The generation and consumption of electricity creates emissions of carbon dioxide (CO₂), or carbon emissions. Within industrialized countries, a business emits a significant amount of carbon emissions. CO₂ is one type of greenhouse gas (GHG)An atmospheric gas that both absorbs and emits radiation. Carbon dioxide, which results from carbon emissions, is a common type. that contributes to climate changeChange in the earth’s climate, considered to be long-term and related to increasing atmospheric temperatures (i.e., global warming). (for an objective source of scientific information related to climate change, please visit the Web site of the 2007 Nobel Peace Prize winner, Intergovernmental Panel on Climate Change: http://www.ipcc-wg2.org). All other types of greenhouse gases are measured in their CO₂ equivalents; thus reference to carbon is the standard metric. As a result of the large energy usage and subsequently large carbon emissions (or carbon footprints), many businesses are actively engaged in finding ways to reduce carbon emissions by becoming more energy efficient.

The reduction of carbon emissionsA discharge of carbon that results from the generation and consumption of electricity. It contributes to climate change., or a reduction of the business’s carbon footprint, is particularly appealing to businesses today partly because of the possibility of a future carbon tax and the growing carbon trade market (see Chapter 4 "Finance"). A carbon tax is enacted and regulated by the government and would add a tax to businesses based on the amount of carbon they emit in their daily operations. A carbon emissions trading system allows businesses to trade “credits” for carbon emissions. Emissions trading, sometimes referred to as a cap-and-trade system, is enacted and regulated by the government, which determines a maximum amount (or cap) of carbon emissions permitted by businesses. Businesses with emissions in excess of the cap will be required to purchase carbon credits (or carbon allowances) from businesses with emissions less than the cap and that have excess carbon credits to sell. There are already several cap-and-trade systems in place.

European Union Emissions Trading Scheme. The European Union has had a mandatory cap-and-trade system since 2005, the European Union Emissions Trading Scheme. It is the largest multinational, multisector system in the world.

New South Wales Greenhouse Gas Reduction Scheme. The New South Wales Greenhouse Gas Reduction Scheme began in 2003 and is a voluntary regional initiative in Australia. The prime minister of Australia will be expanding this system into a mandatory national market by 2010. New mandatory systems are also being considered by leaders in Japan and Canada.

New Zealand Emissions Trading Scheme. The New Zealand Emissions Trading Scheme began in 2009. The scheme is an important component of the country’s goal to be carbon neutral by 2020.

Kyoto Protocol. The Kyoto Protocol is a voluntary multinational, multisector cap-and-trade system. According to the cap-and-trade system, companies from 39 Kyoto Protocol participating industrial nations have a cap on the amount of greenhouse gases to be emitted. Companies are issued carbon permits for their portion of the allocated emissions. The system also allows for emissions trading between member countries. Under the Protocol, industrialized nations can earn emissions credits (or carbon credits) for investing in clean technology projects in emerging economies.

In the United States, the only industrialized country in the world that has not ratified the Kyoto Protocol, there is an emerging infrastructure of voluntary cap-and-trade systems and emissions trading markets. These have arisen in response to the growing awareness of the impact of business activities on the environment as well as in anticipation of a forthcoming mandatory system. For example, as part of the solution to global warming, U.S. President Barack Obama supports the creation of a market value in ecosystem sustainability.Obama for America (2007). His plan would put forth a goal to reduce carbon emissions to 80% below 1990 levels by 2050, although there is no current mandatory mechanism in place to support or enforce this goal.

Chicago Climate Exchange. The Chicago Climate Exchange (CCX) is the most well-established North American voluntary cap-and-trade program. Although voluntary, the CCX becomes legally binding and provides third-party independent verification. The CCX also trades carbon futures through the Chicago Climate Futures Exchange.

Regional Greenhouse Gas Initiative. The Regional Greenhouse Gas Initiative (RGGI) is the first regional mandatory system in the United States. The initiative is administered by 10 Northeastern and Mid-Atlantic states to cap emissions and trade carbon permits. Rather than allocating carbon permits to businesses for free, the RGGI held its first auction of permits in September 2008 and raised $39 million to allow the participating states to invest in energy efficiency and renewable energy technologies.Gardner (2008). RGGI futures are traded on the Chicago Climate Futures Exchange as part of New York Mercantile Exchange’s new Green Exchange.

Western Climate Initiative. The Western Climate Initiative is an initiative of several Western states and Canadian provinces. Although this partnership initiative was created in 2007, a cap-and-trade system is being explored but has not yet been implemented.

Midwestern Greenhouse Gas Reduction Accord. The Midwestern Greenhouse Gas Reduction Accord is an initiative of many Midwestern states and the Canadian province of Manitoba. It is a joint agreement established in 2007 to make efforts to reduce greenhouse gas emissions, although no cap-and-trade system is in place.

At this time, reduction of carbon emissions is voluntary in the United States and none of the aforementioned cap-and-trade systems is binding for U.S. businesses. Nonetheless, as mentioned, the possibility of mandatory carbon reductions has led businesses to analyze energy usage and carbon emissions and seek ways to reduce usage and emissions.

The first step to becoming more energy efficient is to conduct an energy auditAn audit of a company’s energy usage to gather baseline data about the company’s current energy usage. (of the company’s energy usage) or carbon footprint analysisAn analysis of a company’s full range of operations to gather baseline data about the company’s carbon emissions from operations. (of the company’s full range of operations) to gather baseline data reflecting current energy usage and subsequent carbon emissions from operations. The business can determine the scope of the analysis to be conducted. In a carbon footprint analysis, Scope 1 emissions will measure the direct emissions from energy created on-site through facilities owned by the company. Scope 2 emissions will measure the indirect emissions that result from the company’s purchase of off-site energy through facilities it does not own. Scope 3 emissions will measure other indirect emissions from sources the company does not own and which are created through business activities required to keep the physical facility in operation, such as employee and customer commutes. Scope 3 emissions also consider indirect emissions throughout the company’s supply chain as a result of the purchase of services and goods required for the business.

The analysis will help the business pinpoint areas in which energy usage and carbon emissions are high. Depending on the scope of the analysis, businesses often find that the carbon footprint is highest in the areas of energy consumption, waste, and travel and transportation. The business will then explore alternatives for reducing energy usage and reducing its carbon emissions. Within the area of energy consumption, companies may invest in energy efficiency improvements or purchase (or generate its own) energy from renewable sources (as detailed below in the discussion of renewable energy projects). Within the area of waste, companies will actively seek ways to reduce their own waste as well as purchase supplies with minimal packaging. Within the area of travel and transportation, the sustainable business will encourage the use of public transportation, telecommuting, ride sharing, flexible work schedules, and fuel-efficient cars for employees. Additional considerations are environmentally friendly alternatives for product and supply transport, such as increased fleet efficiency, the use of second-generation biofuels (or fuel created from waste), and local sourcing to reduce the number of miles products and supplies travel to reach their final destination.

Once the company has explored alternatives for carbon emissions reductions, the company will develop a plan for reducing energy usage and carbon emissions. The carbon reduction strategyA detailed plan of measurable specific goals with specific actions aimed at reducing energy usage and carbon emissions. (sometimes referred to as a climate change strategy, climate mitigation strategy, or climate abatement strategy) is a detailed plan of measurable specific goals with specific actions that will be taken and deadlines for achievement. Progress is then measured regularly (often annually or biannually) to determine progress toward the goals of reduced energy usage and carbon emissions.

After a business has done all it can to become energy efficient, it often seeks to compensate for the remaining unavoidable carbon emissions it is creating through its operations. This step is important in the plan if the business’s goal is to become carbon neutral (sometimes referred to as zero carbon emissions), which is the elimination of all negative environmental impacts from carbon emissions created through the business’s operations. To become carbon neutral and achieve zero carbon emissions, a business may purchase carbon offsets equivalent to the amount of greenhouse gases it is emitting through daily operations. Carbon offsets (sometimes called renewable energy certificates or credits [REC], green certificates, green tags, or tradable renewable certificates) are investments in renewable energy projects that would not be possible without the business’s investment in the offset project. Renewable energy projects are projects that create energy from sources other than fossil fuels, such as wind, solar, geothermal, methane, kinetic, hydropower, ocean waves, biomass, or other renewable sources. For example, zoos are capturing methane from animal waste and converting it to energy; subway systems are capturing kinetic energy from passengers to generate power; and nightclub dance floors capture kinetic energy to generate power.

Carbon offset projects are not currently regulated; therefore, third-party independent verification of the project should be a part of any investment made in carbon offsets by sustainable businesses. Additionally, the type of project should be carefully scrutinized before purchasing carbon offsets. For example, there is controversy over the value of planting trees as a carbon offset since actual carbon removed from the air is dependent on many factors, such as climate, soil, type of tree, age of tree, survival rate of saplings, and so on. It is worthwhile to read third-party independent research comparing carbon offset projects and companies, such as those provided by Kollmuss and Bowell,Kollmuss and Bowell (2007). Clean Air-Cool Planet,Clean Air-Cool Planet (2006). and others. The state of Colorado and the city of San Francisco have both created local carbon offset programs to ensure any business’s (or individual’s) purchase of carbon offsets goes to fund local projects.

One of the leading examples of corporate environmental impact can be documented through Wal-Mart. In 2005, CEO Lee Scott created a sustainability vision for Wal-Mart and set forth three ambitious goals: to be supplied 100% by renewable energy, to create zero waste, and to sell sustainable products. According to the company’s latest progress report, Wal-Mart continues to experiment with the design of stores and its fifth-generation prototype store uses up to 45% less energy than a typical Supercenter.Wal-Mart Stores, Inc. (2008a). In 2007, the company purchased enough solar power for 22 facilities,Wal-Mart Stores, Inc. (2008a). and in 2008 the company purchased enough wind power for 360 stores and facilities,Wal-Mart Stores, Inc. (2008b). both of which will reduce greenhouse gas emissions. The company has achieved a 25% efficiency improvement in its trucking fleet and has recently installed small efficient diesel engines that allow parked truckers to turn off the motor engine and use the smaller engine for heating and cooling. This is expected to save the company $25 million, 100,000 metric tons of carbon emissions, and 10 million gallons of diesel fuel annually.Wal-Mart Stores, Inc. (2008a). The company is working with its trucking suppliers to manufacture more aerodynamic and fuel-efficient trucks. The company has also introduced a sustainability scorecard in working with product suppliers to make products with less packaging waste. These few examples represent only a fraction of the environmental improvements made by Wal-Mart over the past 4 years. See Note 2.13 "FREE Ways to Begin Greening Your Business" for small changes you can make to green your business.

2.4 Economic Impact

The third dimension of a sustainable business is economic impactThe economic effect on a community from the actions of a business.. The economic impact of a business’s operations is viewed internally and externally. The sustainable business will consider its own economic impact on the communities in which it operates, such as job creation, impact on local wages, impact on real estate in close proximity to the business, tax flows, investment in disadvantaged areas, impact on public works and social services systems, and other indicators that the business has positively contributed to local economic growth while maintaining corporate profitability. Economic impact does not refer to the profitability of the business as indicated on the financial statements, although profitability is critical for survival. The sustainable business will also look externally at suppliers to ensure they are engaged across the supply chain with other companies that share similar values and practices. It is assumed that the sustainable business’s contribution to a strong and healthy local economy will lead to a strong and healthy future for the business.

The El Dorado Promise, a strategic philanthropy initiative of Murphy Oil Corporation, is an inspired example of corporate economic impact.Landrum (2008). Murphy Oil Corporation, a Fortune 500 company, is headquartered in El Dorado, Arkansas, a small, rural township with an estimated population of 20,341.U.S. Census Bureau (2007). In order to address the interrelated problems of declining industry, population, school enrollment, and talent pool from which to draw, Murphy Oil Corporation announced that it would donate $50 million to a scholarship program for local students, creating the El Dorado Promise program. The program is expected to provide scholarships to students for the next 20 years.

One year after announcing the Promise program, there was an 18% increase in college-bound seniors.Hillen (2007). After 2 years, the community has seen a 4% increase in school enrollment, the local community college has seen a 16% increase in enrollment, and families from more than 28 states and 10 foreign countries have moved to El Dorado.El Dorado Promise (2008).

The inspiring examples of TOMS Shoes, Wal-Mart, and Murphy Oil Corporation demonstrate the significant impact a company can have in pursuing any of the dimensions of sustainable business. In each of these examples, we see how the social, environmental, or economic commitment has become central to the way in which the business conducts its operations. In Chapter 10 "Sustainable Business: Case Examples" of this book, we provide an array of additional examples that we hope will inspire your own business to begin its journey toward sustainability.