Greener and Cheaper

The conventional wisdom is that a company's costs rise as its environmental impact falls. Think again.


For years, it was the conventional wisdom: If you improved quality, costs would also rise. But then companies discovered the opposite was true. By redesigning processes -- reducing mistakes, doing things right the first time -- companies could provide better products and services and cut their costs.

Now it's time to learn this lesson all over again, as it applies to going green.

The Journal Report

Despite what many companies think -- that reducing their environmental impact is a nice idea, but impractical because of the cost -- businesses can go green and lower costs at the same time. No one disputes that it's expensive to cap smokestacks and process hazardous waste. But as the earlier lesson suggests, the focus shouldn't be on cleaning up and its costs -- the focus should be on creating less mess to begin with.

The experience of an auto plant in Indiana helps illustrate how re-engineering processes with green principles and greater efficiency in mind can not only improve a company's standing with nature, but increase its profits and give it competitive advantages as well.

WSJ's Jennifer Merritt speaks to University of Massachusetts professor Alan Robinson about how companies can integrate green efforts into their infrastructure.

Subaru of Indiana Automotive Inc., a factory of more than 3,000 workers who make roughly 800 automobiles a day, has pursued green initiatives since its launch 20 years ago in Lafayette, Ind., by Japan's Fuji Heavy Industries Ltd. With employees at every level of the plant looking for ways to save energy, reduce waste and generally make processes more efficient, one measure of its success is a 14% reduction in electricity consumption on a per-car basis since 2000. An even bigger achievement: It has not shipped any waste to a landfill since May 2004.

The authors, skeptical themselves at first, have confirmed the company's claims with their own detailed research. How did Subaru do it? By redesigning numerous plant processes, thus producing less waste and requiring less material as inputs. Since 2000, the company says, it has reduced the amount of waste it generates per vehicle by about 47%. Of the solid waste that the factory still generates, 99.9% is recycled or used by other companies as manufacturing inputs or as raw materials that they process to resell. The remaining 0.1% is hazardous waste that must by law be incinerated by a licensed facility.

Committing the plant to reducing its overall environmental impact has required a mix of solutions over the years, some simpler than others. Subaru's engineers continuously look for ways to improve the plant's green performance, increase efficiency and lower costs.

Here's what Subaru of Indiana has learned on its way to reducing its environmental impact, and how other organizations, too, can work on green initiatives -- and their bottom lines -- at the same time.

Levels of Commitment

Categorizing companies based on their environmental strategies

A Subaru of Indiana worker dumps plastic plugs into one of several bins for recyclables

LEVEL 1: Compliance
Management's focus is on compliance with environmental rules and regulations. Green is considered a cost.

LEVEL 2: Opportunistic and Ad Hoc
Some environmental awareness. Management opportunistically takes advantage of low-cost, money-saving green projects.

LEVEL 3: Analytical and Systematic
Environmental impact is systematically measured, and the information used by management to select improvement projects. The company is building its understanding of the relationships between environmental impact, cost and risk in its business.

LEVEL 4: Integrated Into Daily Operations
Everyone in the company is expected to be involved in improving the company's green performance, and most ideas come from the bottom up. Green becomes an integral part of what makes the company profitable.

LEVEL 5: Pioneering
The organization is developing approaches on the leading edge of current environmental practice and thinking.

Source: Alan G. Robinson and Dean M. Schroeder between environmental impact, cost and risk in its business.

1. Profits come by increasing efficiency and reducing waste -- but they don't always come immediately.

Many of the Subaru plant's early green initiatives delivered quick paybacks and required little effort: dimming assembly-line lights automatically when the workers took breaks, for example, or plugging leaks in compressed-air lines, or recycling more materials.

Redesigning whole processes, though, requires more effort. Recycling, for example, was expanded to include returning packaging materials to suppliers for reuse. This saves Subaru and its suppliers money, but it also requires significant changes in the way both parties handle the associated tasks.

Some green projects increase costs, at least initially. Having trash hauled away to a dump, for example, was less expensive than the plant's current practice of paying to have trash incinerated as fuel at a nearby energy plant. But Subaru officials say they constantly re-evaluate each process to meet green goals in the most cost-efficient way.

Indeed, some that started out increasing costs eventually led to savings or break-even status thanks to continual re-evaluation. For example, in its drive to achieve zero-landfill status, Subaru re-examined how it disposed of a toxic solvent used to flush painting systems between color changes. The used solvent was formerly shipped off site for specialized -- and costly -- disposal. Now an elaborate in-house distilling process removes impurities from the used solvent, making it reusable. Solvent consumption was slashed to one tanker-truckload every three months from four to six tankers per week. (Some solvent still has to be replaced due to evaporation.) Impurities that come out in the distillation, meanwhile, are sent to a company that uses the residue to make coating material for ladles in the steel industry. Subaru pays that company to take the impurities off its hands. But despite these additional costs, Subaru officials say they expect the solvent operation to break even -- including design and construction costs -- in about five years when balanced against its savings in solvent costs.

In another case, a series of process redesigns that first increased costs ultimately produced lower costs, less waste -- and better quality work. The plant used to weld its steel auto frames in a way that produced lots of sparks, which, in turn, left lots of a waste-metal byproduct known as slag on the floor. Subaru started looking for a company that might want the slag for the base metals it contained. It found a company in Spain that wanted to recover copper from the slag. So, Subaru started shipping the slag to Spain -- and paying the Spanish company to take the material. Thus, for a while, Subaru was reducing its environmental impact, but at increased cost.

This led it to consider a previously unrecognized waste: excess sparks. The plant devised a new welding process that produced fewer sparks and less slag, lowering electricity and materials costs. Its consumption of copper welding tips plunged 75%. Subaru still ships some slag to Spain, but not as much. The new welding process also shows how attention to the minutest environmental details can lead to savings that a purely cost-driven organization might miss.

2. Management's leadership is vital in setting goals and getting departments to cooperate.

Management must define goals for reducing environmental impact, and make clear to all departments that such goals are just as important as metrics on productivity, quality and safety.

Green Is Economical

A crucial step by the managers at Subaru of Indiana was a decision in the mid-1990s to adopt internationally recognized standards for measuring and managing environmental impact. These standards, created by the Geneva-based International Organization for Standardization, are designed to help companies see from top to bottom how much waste they are producing and where improvements can be made.

Collaboration among departments is essential -- another reason why top management must lead. Consider an idea that originated with a worker in engine assembly at the Subaru plant. The idea: to return packaging material to a supplier for reuse. Engine assembly couldn't do this on its own. Engineering needed to certify that the material could be reused. Purchasing had to renegotiate with the supplier. Transportation and logistics dealt with how the materials would be returned, and accounting looked at budget and control ramifications.

Without clear signals from above pushing for such cooperation, progress will quickly bog down.

3. The front lines have to be engaged.

Front-line workers are ideally positioned to spot ways to reduce, reuse and recycle -- a discipline commonly referred to as the three R's. Subaru has made the three R's part of worker training, along with a system of thinking known in environmental circles as the "waste hierarchy." This is a ranking of possible environmental actions in increasing order of environmental benefit:

1. To burn material for energy is better than sending it to a landfill.

2. To recycle it is better than burning it.

3. To reuse material is better than recycling it.

4. To reduce the amount needed is better than reusing it.

5. To eliminate the need for material is better than reducing it.

One way work teams spotted opportunities to do more with the three R's was by dumpster-diving. If nothing was to be thrown away, everything being put into the dumpsters had to be eliminated, reused or recycled. The dumpsters themselves had to go (though many are now used as recycling bins). Teams began by spilling the contents of bins in their own areas onto the floor, then sifting sorting and grouping the material by source and type. Then the teams came up with ideas to eliminate each type of waste -- either at the source, or by devising ways to capture and recycle it.

One of the biggest challenges and costs in recycling is the sorting of items into the various waste streams for further processing. If this can be done at the source, by the people who first touch it, costs are substantially reduced (or even eliminated). Even more three R's ideas emerge this way. Front-line input is also necessary to ensure that such sorting is smoothly incorporated into the work flow.

For Further Reading

See these related articles from MIT Sloan Management Review.

By Remi Trudel and June Cotte (Winter 2009)
In surveys, customers have long said they would pay more for ethically produced goods. But is that what happens when they actually buy things?

By Peter M. Senge, Benyamin B. Lichtenstein, Katrin Kaeufer, Hilary Bradbury and John S. Carroll
Meeting the sustainability challenge will require the kind of cross-sector collaboration for which there is still no real precedent.

By Karina Funk (Winter 2003)
Companies that actively manage a wide range of sustainability indicators are better able to create long-term value for all stakeholders.

By Sandra Rothenberg (Winter 2007)
In an environmentally conscious and cost-conscious world, suppliers can make their business both more sustainable and more profitable by focusing on services that extend the efficiency and value of their products.

By Stuart L. Hart and Mark B. Milstein (Fall 1999)
Managers should consider three economies -- consumer, emerging, and survival -- when evaluating new business opportunities.

4. Green initiatives achieve lots more when companies involve their suppliers.

Subaru of Indiana has made willingness to work on green initiatives a major criterion for selecting suppliers. Its steel suppliers, for example, agreed to provide rolls of steel in exactly the needed widths and lengths for each part being stamped, allowing the plant to reduce steel scrap by more than 100 pounds per vehicle since 2000.

A Japanese supplier sends the plant engine parts in seagoing containers packed tightly in specially contoured Styrofoam blocks. Formerly, most of the Styrofoam stayed in Indiana and went to recycling. But since the containers go back to the supplier, now the Styrofoam does as well. In all, some 80 kinds of plastic caps, metal clips, cardboard spacers and other packing materials are returned to Japan in this way. The suppliers assess whether the materials are reusable; if they aren't, the suppliers recycle them for making new packaging materials.

5. All wastes are potential products.

As Henry Ford once observed, everything coming out of a manufacturing process, including waste, is a potential raw material for another process.

Subaru located companies that could use its solvent residue and slag. Its cafeteria waste, too, currently goes to an outside party: a waste-to-energy power plant near Indianapolis that burns the material. In each case, Subaru pays these companies to take the materials off its hands. But just as it eventually found ways to improve its industrial processes that lowered costs and yielded other gains, it is now considering how to turn its food waste into a cost-effective product.

Industrial-scale composting is one possibility, using a circular track and a special breed of worm. The idea is to dump the food waste each day next to the previous day's waste, leading the worms to eat their way continuously around the track, leaving behind high-grade fertilized soil. Research by Allegiant Global, an Indianapolis waste-logistics company that has worked closely with Subaru on its environmental goals, identified the Canadian red wriggler as the "thoroughbred champion" of composting worms because of its voracious appetite. Subaru could also use the fertilized soil on the factory's grounds, give it to employees for home use, and sell it to local garden shops and plant nurseries. As for the plates and utensils, the company is looking into items made of materials digestible to the worms, like starch.

Another kind of waste with profit potential: unharnessed energy. In the factory's second-floor spray-painting operation, paint that misses an auto body is captured in water that falls in a torrent into tanks below ground. There the paint is skimmed off and the water is pumped back upstairs for reuse. The plant is considering installing a small hydroelectric generator to tap the enormous energy in the 10,000 gallons per minute of falling water.

6. Green leadership creates competitive advantages.

Drives to reduce environmental impact force companies to study their operations and material flows from a fresh perspective and in great detail. Innovations that result can give them competitive advantages.

Subaru says it has saved millions of dollars by combining green thinking with in-depth studies of its processes, suppliers and equipment. Where the biggest savings have been achieved, in descending order: reducing waste by revising processes; conserving energy; and working with suppliers.

In the future, should government and the marketplace put increasing pressure on companies to improve their environmental performance, Subaru of Indiana should be well-positioned compared with its rivals. While its competitors may be caught in reactive modes, forced to divert cash and resources in a scramble to comply with new rules and customer demands, Subaru will be able to focus on creating its next competitive advantage.

Pity the competitor who is forced to do in 18 months what Subaru of Indiana took two decades to get right.

—Dr. Robinson is a professor at the Isenberg School of Management, University of Massachusetts, Amherst. Dr. Schroeder is the Herbert and Agnes Schulz professor of management at the College of Business Administration, Valparaiso University, Valparaiso, Ind.

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