Economic performance and supply chains: The impact of upstream firms׳ waste output on downstream firms׳ performance in Japan

Highlights

• We model supply chain assemblers׳ green procurement and firm performance.

• Suppliers׳ environmental performance improves assemblers׳ firm performance.

• Improving supply chains׳ environmental performance enhances sustainability.

• We use input–output analysis to model the generation of wastes along supply chains.

• Environmental regulations must consider green procurement and supply chains.

Abstract

A novel application of input–output analysis is used to statistically map out average levels of generation of unwanted solid and liquid waste materials and also greenhouse gases along manufacturing supply chains for the final demand products of manufacturing industries in Japan. One key finding is that assembler dominated manufacturing supply chains have different within-chain waste generation patterns than manufacturing supply chains that are not assembler dominated. A second key finding is that assemblers with suppliers that produce less waste tend also to have better economic performance. This suggests that for manufacturing supply chains in Japan at least, the adoption by a downstream assembler of green procurement policies can improve both environmental and economic performance. This in turn suggests that both the private sector and public policies aimed at reducing manufacturing waste should take account of the incentives for achieving waste reduction all along a supply chain of a downstream assembler or other focal firm in a position to coordinate product/service flows, knowledge flows, information flows and flows of funds within a supply chain.

Introduction

“Sustainability: The key issue is not what we do, but how we do it. For example, if we make something with less energy and less waste, we save money that can be invested to further increase productivity.”

John Wiebe, CEO, The GLOBE Foundation, March 25, 2014 (Wiebe, 2014)

Production of goods people need and want also yields unwanted waste materials and atmospheric emissions. Landfill space is filling up, and growing citizen resistance makes it increasingly hard to create new landfill sites. Waste incineration creates new solid wastes as well atmospheric emissions. Emissions of CO₂ and other greenhouse gases (GHG) are raising global temperatures and causing more severe storm activity. So far, the efforts of governments have failed to arrest the global warming in progress. Boin et al. (2010) warn we must prepare for disasters that will outstrip local capacities to help the affected population groups.

Silva and Zhu, 2009, Silva and Zhu, 2011 remind us too that the activities of production and the burning of fossil fuels also generate traditional pollutants including sulfur dioxide, nitrogen oxides, volatile organic compounds and particulate matter. In addition to local area damage,¹ these pollutants can travel with prevailing winds and via waterways (including spreading through underground aquifers). New research keeps uncovering new ways in which pollution can cause health problems (Kawamoto, 2008, Memon, 2010).

Moreover, in addition to the damages caused by unwanted products of production, the costs are large of the pollution abatement being carried out already on an ongoing basis by companies. Hadjiyiannis et al. (2009) note that in many advanced nations, a large share of the costs of pollution abatement activities are covered by public funds. Thus there are multiple reasons why growing numbers of firms are striving to reduce at source the generation of unwanted waste and atmospheric outputs of production (e.g., http://ec.europa.eu/environment/enveco/waste/pdf/waste_management_employment.pdf, Kovács, 2008).² Reductions in the waste produced, as opposed to pollution abatement of produced wastes, is, of course, the only sort of pollution control that can also yield longer run cost savings for businesses. We present empirical and other evidence that taking account of supply chain interrelationships might help encourage this sort of pollution control.

Large manufacturing corporations (e.g., 3M, Cisco, 2010; NEC Corporation, 2004; Sony, 2010; Toshiba Corporation, 2006) are publicly promoting green procurement policies and proclaiming their use of environmentally friendly suppliers.³ What, though, are the outcomes? (Ernst & Young, 2010: cover page and p. 6) and Cetinkaya et al. (2011), among others, stress the importance of having concrete numerical indicators for the sustainability performance of firms within supply chains as well as for whole supply chains.⁴ Yet, as of 2010 Mollenkopf et al. (2010) found little published research quantifying supply chain environmental performance. We believe that is still a fairly accurate assessment. The fundamental reason for this state of affairs is that inter-firm transactions data are unavailable in general even to the managers of dominant businesses in manufacturing supply chains. Usually a firm has data only for its own transactions. Thus, as Vachon and Klassen (2008) point out, the available empirical studies virtually never use actual inter-firm transactions data.

We present an input–output (I–O) methodology that allows us to back out estimates of the production of waste along manufacturing supply chains using data available for Japan as a whole at a detailed industry classification level. Using this new empirical approach, we study the generation of waste and GHG along manufacturing supply chains in Japan.⁵ One key finding is that assemblers with suppliers that produce less waste and GHG also, on average, have better economic performance. Governments have enacted regulations for toxic waste that apply at the level of individual manufacturing establishments or firms.⁶ However, in a world where firms are interconnected in supply chains, these regulations might usefully be supplemented by measures that take account of supply chain relationships.⁷

The industry results can be related to theories and other evidence concerning other observable aspects of the supply chains in specific industries. This is feasible because the industry classification of a manufacturing establishment by the Japanese official statistics system depends on the main products produced by the establishment. These classifications are then used in constructing the official I–O tables for the nation.

Our industry results also demonstrate what data would be needed to produce key performance indicators (KPIs) for a specific supply chain using our methodology. If supply-chain-wide transactional data were available to the dominant assembler in a supply chain, then our methodology could be used to produce supply chain specific KPIs.⁸ Those supply chain level KPIs could then be compared with the industry benchmarks that can be produced using detailed input–output data of the sort we have for Japan.

There are two basic approaches to reducing waste products so a business or supply chain can become greener. One is to capture and manage the waste: the abatement approach. Abatement operations are a pure cost addition for a business, and one that is often very substantial for manufacturers (e.g., General Motors Corporation, 1997). The other approach is to redesign the products or the processes for producing the products so less waste is produced. This more fundamental approach usually requires insight and large upfront expenditures.

Large, vertically integrated firms can undertake high cost redesign exercises because they are in a position to recoup their expenditures via overall profit margin gains on the final product sales. In contrast, an independent supply chain firm making an intermediate component of some final product may lack both needed resources and the security of knowing they will continue to be used by the final assembler. Moreover, the sort of knowledge exchanges needed for successful product and process redesign work can be greater than what independent companies in a supply chain are willing to undertake.⁹

However, close supplier–manufacturer relationships of the sort observed in Japan׳s auto industry are believed to enable adoption of the second approach (Bozdogan et al., 1998, Clark and Fujimoto, 1991, Dyer and Ouchi, 1993, Pagell et al., 2007, Flynn and Belzowski, 1996). A variety of management and organizational economics theories have addressed the issue of how certain sorts of supply chains and supply chain management approaches allow a supply chain to recapture the benefits that large vertically integrated firms have had in terms of enabling returns to scale for product and process research and development while still retaining the sorts of flexibility that have led to supply chains increasingly being a preferred form of business organization. In Section 2, we briefly review some of these theories.

In Section 3 we present our input–output (I–O) approach. We explain why I–O analysis, which has been widely used in studies of inter-industry economic flows and for economic development and planning, can also be used for statistically mapping out the average flows of wanted and unwanted outputs along the supply chains for industry-specific categories of final demand products. In Section 4 we discuss our data and empirical findings. Section 5 concludes.

Appendix A gives the list of 37 waste materials used in our analysis and descriptive statistics for the variables used in our regression equations. Appendix B provides an extended numerical application of our empirical approach for the Japanese auto industry, with estimates of the amounts of waste and GHG emissions generated in the production of a passenger car with a 2000 cm³ engine. This example is provided as an aid for those interested in the specifics of our methodology, and further specifics are available as well from the authors (Appendix C).