Cleaner Production International LLC

COVER PAGE

General Secretariat

Liaison and Co-ordination Unit

ENVIRONMENT POLICY COMMITTEE

SG/DNME/EPOC(97)5

Policy Dialogue with the Dynamic Non-Member Economies

 

WORKSHOP ON ENVIRONMENT POLICY:

"GLOBALISATION AND THE ENVIRONMENT: NEW CHALLENGES FOR THE PUBLIC AND PRIVATE SECTORS"

(Paris, 13th and 14th November, 1997)

 

BACKGROUND PAPER No. 2

GREEN PURCHASING: A GLOBAL CHANNEL FOR IMPROVING THE ENVIRONMENTAL PERFORMANCE OF SMALL ENTERPRISES

This paper was prepared by Professor Burton Hamner and Ms. Teresita del Rosario

Asian Institute of Management, the Philipppines

 1.0 Introduction

Small and Medium-Sized Enterprises (SMEs) are a critical part of most economies, but they create a significant amount of environmental damage, particularly in developing countries. Globalization is increasing the amount of Western purchasing from SMEs in developing.and rapidly industrialising countries. Many Western companies and governments now use environmental criteria in their purchasing. Some kinds of environmental purchasing, particularly the use of environmental surveys and audits of suppliers, can strongly motivate the suppliers to improve their environmental performance. In the dynamic non-Member economies (DNMEs), this kind of pressure from buyers may be a particularly effective driver for improved environmental performance of SMEs. This paper considers SMEs in Asia as an analogue for SMEs in the DNMEs generally since their environmental problems seem to cluster around several common areas. Factors affecting their general economic performance are described. Green purchasing strategies and their affect on Asian SMEs are also described, and suggestions are made about the impact of various green purchasing strategies on the environmental performance of Asian SMEs. It is concluded that green purchasing criteria involving supplier surveys and auditing are critical for motivating better environmental performance of SMEs, and should be strongly promoted to OECD companies or governments that purchase goods and services from SMEs in Asia and in general. Recommendations for OECD and other international organizations follow.

 

2.0 Profile of SMEs in the Asian Region

Definition

There is no consensus on the definition of SMEs throughout the Asia-Pacific region due to the differences in the general economic development within each country and their prevailing social conditions. Various indices are used by member economies, among them:

• number of employees;
• invested capital;
• total amount of assets;
• sales volume; and
• production capability.

Other classifications exist, contributing to confusions in definitions. For example, in China, a distinction is made between SMEs and Township and Village Enterprises (TVEs). In Chinese Taipei, definitions vary with respect to those that expect to receive government assistance. Singapore classifies according to local and overseas SMEs.

 

Role and Importance of SMEs

There is a widespread acceptance that SME play a significant role in the economic development of their respective countries. The most important contribution lies in the area of providing employment opportunities to the general population. In China, Chinese Taipei, Japan and Thailand, SMEs contribute over 70% of employment. Data on other countries are shown in

Table 1.

SMEs constitute a large portion of their countries' economies. Examples are shown below:

• Thailand (1991):96.63%
• Indonesia (1993):97%
• Philippines (1988):98.7%.

SMEs also play a strong role in upgrading indigenous enterprises, and contribute significantly to the share of exports. In the case of Chinese Taipei, 55% of exports is contributed by SMEs, although there is very little data for other countries.

 

Difficulties Encountered by Asian SMEs

Different DNMEs encounter various difficulties, but the more common ones are the following:

Export-related:

• tariff and non-tariff measures in overseas markets (Hong Kong, Korea)
• limited labor pool (Singapore, Malaysia)
• lack of market access (Hong Kong, Philippines)
• small volume of goods (Malaysia)
• lack of market information (Indonesia, Philippines)

Investing abroad:

• passive investment attitude (Korea)
• lack of orientation and experience (Indonesia)
• limited capital and other resources (Hong Kong, Philippines)
• restrictive investment policy in other countries (Hong Kong)
• difficulty in managing workers abroad (Hong Kong, Korea)
• inadequate infrastructure in recipient countries (Hong Kong)
• keen competition in overseas markets (Hong Kong, Philippines)

Industrial upgrading:

• R & D risks (Hong Kong)
• low technology capabilities (Indonesia)
• financial constraints (Philippines, Malaysia)
• unavailability of skills (Philippines)

 

Table 1: The Role of SMEs in Selected Asian Economies

ECONOMY	% SMEs	% EMPLOYED BY SMEs	% SALES VOLUME BY SMEs
Australia	95% (1991-1992 year) (Small business only)	50.6% (1991-1992 year) (Small business only)
Brunei	over 90%	69.4%
China		84.27%	69.49%
Hong Kong	97.95% (1993 year)	63% (1993 year)
Indonesia	97% (1993 year)
Japan	99.1% (1991 year)	79.2% (1991 year)
Korea	99.8% (1992 year)	78.5% (1991 year)	45.9% (mining & manufacturing only, 1992 year)
Malaysia
Philippines	98.7% (1988 year)	50% (1988 year)	26.3% (1988 year)
Singapore	91.42% (1991 year)	44% (1991 year)
Chinese Taipei	96.77% (1992 year)	68.63% (1992 year)	33.66% (1992 year)
Thailand	98.63% (1991 year)	73.80% (1991 year)

Source: APEC, 1994: The APEC Survey on Small and Medium Enterprises. APEC. Singapore.

 

  Some Successful Practices for Promoting SMEs

Governments in Asia have applied a range of strategies to promote SMEs. No single practice seems to be the best or fully adequate; rather, the use of multiple strategies is needed to help SMEs overcome the various obstacles they face. Examples of strategies that have been adopted include:

China: Encouraging policy framework through Industrial Policy; rationalized distribution among large, medium and small enterprises.

Japan: Special financial assistance to SMEs.

Philippines: Guarantee fund for SMEs; second level guarantee (reinsurance); lending institutions set aside a portion of total portfolio for SME lending.

Chinese Taipei: Comprehensive assistance system covering eight areas:

• financial system through credit guarantee fund;
• management system to raise operational efficiency and to develop human

resources;

• production technological system to guide and assist SMEs in new

technologies and training in standards;

• research and development system for creating new products and

technologies;

• information management guidance system to assist SMEs in effectively
• utilizing information and in implementing an industrial safety system;
• pollution prevention system for market information and expanding markets.

 

Summary

There are many definitions and classifications of SMEs throughout Asia but the most commonly used is number of employees: 10-500 is the average number. There is widespread consensus on the role and significance of SMEs in the economic development of particular countries, in terms of generating opportunities for growth and upgrading indigenous enterprises.

While this role has been accepted, there are a number of significant problems that prevent SMEs from realizing their full potential. Among them are lack of finance, human resource problems, low technology, and lack of market information and export market access. In general, very few SMEs have the capacity to engage in export, mostly because of their inability to compete with larger enterprises and also because of risks involved. Chinese Taipei is an exception, however; its export base in SMEs is 55%. To address these problems, all countries regard the general policy framework as an important component, together with financial assistance from governments and the private sector.

 

3.0 Globalization, SMEs and the Environment

While "analysis so far has concluded that trade liberalization will be generally beneficial for environmental quality," no firm conclusions can be drawn about the impact on environmental performance of any particular country, industry sector, or level of company size. The impact on SMEs in particular has not been widely addressed. Yet SMEs are of particular concern for environmental protection. Because they have less capital, investments in pollution control are less affordable for SMEs. Because they are large in number and low in individual visibility, governments have a difficult time monitoring them. Because they are often located in highly urbanized areas, the impact of their pollution on human health can be serious and immediate.

Despite the obstacles they face, however, SMEs in Asia and elsewhere can significantly reduce their pollution and increase their profits if they are given training and minor assistance in cleaner production methods. For example, from 1992 to 1996, the U.S. Agency for International Development sponsored a project in the Philippines called the Industrial Environmental Management Project (IEMP). This project included a component of cleaner production and waste minimization training that involved 140 SMEs in Pollution Management Appraisals. The objective of these appraisals was to help the companies identify low- and no-cost ways to reduce their pollution through process improvements with positive paybacks. As of March 1996, the project had achieved the following results:

Table 2: Results from 140 Philippine SMEs Participating in Pollution Management

Appraisals

Indicator	Target	Achieved
Investments by Firms	Not defined	$21,500,000
Annualized Net Benefits	$800,000	$31,400,000
Pollution Reduction (BOD)	5-10%	33%
Water Use Reduction	Not defined	33,000,000 m3/yr
Firms Adopting Waste Minimization	50%	98%

There are similar results from other cleaner production and pollution prevention programs in Asia. These clearly demonstrate that SMEs can improve their environmental performance if they are motivated to try, and are given basic training in cleaner production assessment methods.

Most Asian economies have well-developed environmental regulatory regimes. However the enforcement of environmental regulations remains a challenge for most of them. In Asia, only Singapore and Japan are known for consistent and effective enforcement. Chinese Taipei, Malaysia and Hong Kong have "medium" effective enforcement, and in most other countries enforcement is generally weak. Companies that violate pollution standards can often continue doing so even after the government has ordered them to stop, because the legal system and national environmental authorities do not have sufficient power to command the company’s deference. Large companies generally comply relatively well because of their visibility, high individual pollution discharges, and resources for pollution control. SMEs, however, are generally not compliant. Even when they have pollution control equipment it is often not used because of the high operating expense. Pressure from government can usually be ignored, and local communities often do not demand controls because they fear the potential loss of jobs (which the companies invariably threaten).

Given these realities, what factors in globalization might motivate SMEs to try to improve their environmental performance?

4.0 Green Purchasing and SMEs: A Vital Channel for Promoting Environmental Sustainability

Green purchasing is the practice of applying environmental criteria to the selection of products or services. It takes a number of forms, from relatively simple to relatively complex (see below). Green purchasing is now relatively common among larger companies and appears to be increasingly used as a corporate practice. For example, a 1995 survey of 1000 buyers of office equipment and supplies showed that 80% of respondents were taking part in environmental initiatives within their organizations. In 1993, just 40% of respondents responded this way. Most readers will themselves know of organizations that are using environmental criteria of some sort in purchasing.

Green purchasing practices are being increasingly documented in the academic literature as well as in numerous case studies and books on environmental management.,,,, The U.K. organization, Business in the Environment, has published a training kit for promoting environmental management to suppliers. The U.S. National Association of Purchasing Managers has a committee on environmental purchasing, and the topic is a regular feature of their conferences. A survey of 256 U.S. manufacturing firms, which asked the firms to identify the key players in their pollution prevention strategies, revealed that nearly half identified suppliers as key players.

Some of the leading Multi-National Corporations (MNCs) whose international supplier environmental management efforts are described in the literature include Motorola, IBM, S.C. Johnson, TRW, Nokia, Sony, Ford, Ray-O-Vac, Northern Telecom, Apple Computer, Sun Microsystems, and the Body Shop. Many more companies with domestic supplier environmental programs are also described.

What effect is this having? The impact on international suppliers, especially in developing countries, is not well documented yet but there is increasing evidence that the impact on suppliers is significant:

"Denim producer Arvind Mills Ltd., based in Ahmedabad, is plowing $16 million into new pollution control devices – in part to satisfy customer Marks and Spencer. And after New Delhi-based pharmaceutical Ranbaxy Laboratories was queried on environmental standards by Hoechst, it decided to upgrade all its manufacturing sites to make them "zero discharge" sites. Says Ranbaxy health and environment adviser Prafull Sheth: "If you are not manufacturing your products taking care of the environment, your products may not be acceptable."

One of us has worked closely with two international apparel companies, Nike Inc. and Gap, Inc., to help them teach their Asian suppliers about pollution prevention and cleaner production. The two companies ordered their suppliers to participate in these workshops as a condition of continuing relationships. Although the suppliers who attended expressed strong concerns about the costs required to meet environmental standards imposed by their buyers, all indicated that they would do so. They were also very interested in the approach of cleaner production as an alternative to pollution control in order to meet the standards.

The only company in the Philippines that is certified to the ISO 14001 Environmental Management Systems standard (as of August 1997), is Texas Instruments, Inc. in the city of Bagio. The company’s environmental manager informed the authors that the major reason they decided to achieve certification is that one of their major Japanese customers told them it would be required eventually of all their suppliers. The customer also conducted an environmental audit of the facility. Another Asian manufacturer, Lucent Technologies (formerly part of AT&T) has made a commitment to ISO 14001 certification partly in order to satisfy major Japanese electronics companies that it supplies.

 

5.0 Green Purchasing Strategies and Impact on Suppliers

There is a range of green purchasing strategies available to MNCs. Different strategies have different effects on the environmental behavior of suppliers. The strategies can be grouped into three major categories: product standards, behavior standards, and collaboration (see Table 3).

The effect of the various strategies on supplier environmental performance tends to follow a continuum from low (product standards) to high (collaboration). For example, specifying product standards is not likely to change a supplier’s behavior since the supplier only has to change ingredients. At the other end of the continuum, collaborating with suppliers on environmental issues is almost certain to change the supplier’s behavior. This also requires much more effort by the buyers. In general, more effort by buyers is needed to increase the environmental performance of suppliers. Thus buyers must make a cost-benefit analysis regarding how much they want their suppliers to improve.

 

 

Table 3: Green Purchasing Strategies

Product Standards

• Purchase products that have environmentally-friendly attributes (recycled materials, non-toxic ingredients
• Purchase products that disclose their environmental attributes (eco-labeling)

Behavior Standards

• Require suppliers to disclose information about their environmental practices,

pollution discharges, etc.

• Audit suppliers to evaluate their environmental performance
• Require suppliers to implement and maintain an Environmental Management System
• Require suppliers to have an EMS that meets recognized standards (such as EMAS, ISO 14001, Responsible Care, etc.).
• Require suppliers to obtain formal certification of their EMS.

Collaboration

• Work with suppliers to help them reduce environmental impacts through changes in product design and materials use.
• Product stewardship: Active management of all aspects of the product from raw

materials to final disposal

 

It is very important to note that the use of environmental management standards is not necessarily going to significantly improve supplier environmental performance. This depends on the standard being applied. ISO 14001 does not require improvements in environmental performance, whereas the EMAS standard does. Thus buyers who choose the "low cost" strategy of simply requiring suppliers to meet some external standard for behavior or management need to consider which standard they want to impose.

There is some evidence that simply asking a supplier about its environmental performance is enough to mobilize the supplier to action, as noted in the Business Week quote above. However, this is likely to be an uncommon response given the absence of pressure for improvement from the buyer.

Lamming and Hampson studied four large U.K. companies that applied environmental criteria and demands to their suppliers. They note:

"In general, the response of suppliers to initial customer proposals to make improvements in environmental soundness was reported to be cool… Broadly, suppliers responded to [environmental] problems only in so far as the customer companies required them to do so, indicating that the area is very market-driven"

 

This general response should be considered in relation to the range of green purchasing strategies available. The evidence indicates that it takes direct communication from buyers for suppliers to take environmental issues seriously. Yet most organizations that include environmental criteria in purchasing limit themselves to product standards. They may assume that such standards promote environmental improvement up the supply chain but this is not likely to be the case. Active involvement is needed to ensure true improvements.

Active involvement, however, costs time and money. Is there a bottom-line justification for active involvement with suppliers on environmental issues? The majority of companies that collaborate with suppliers on environmental improvement state that their rationale is better business, not a better environment per se. The U.K. retailer B&Q provides one example:

We decided to work with the supplier to provide health and safety expertise at a new factory the supplier was building. The supplier was not only able to manufacture products in far safer conditions but by reducing the level of dust, for example, product quality was of a higher standard. Production efficiencies also enabled B&Q to negotiate better prices from the supplier, so all parties were winners – employees, the supplier and B&Q.

Apple Computer was faced with the need to eliminate CFCs from its products. It worked closely with suppliers to develop a new process for circuit board production that eliminated the need for cleaning completely. This not only reduced pollution at suppliers’ factories, but also eliminated a production bottleneck and increased productivity.

The business benefits of working closely with suppliers as strategic partners are extensively documented. Companies that collaborate with suppliers on solving environmental problems will benefit in general from improved communications, systems integration, planning and research. Specific environmental benefits include reduction of environmental risks to supply

reliability and less pollution control cost (which is passed on eventually to buyers). In summary, the effort and cost to buyers of collaborating with suppliers on environmental improvement will generally be offset by the general and specific business advantages from better business partnerships.

6.0 Globalization and Greening the Supply Chain

Globalization increases the opportunities for buyers to source from SMEs in an increasing number of countries. As buyers increase their focus on environmental improvement, the issue of supplier environmental performance will increase in importance. This is particularly true for organizations that regard environmental improvement as a social goal, not just an issue of cost, risk and public image.

Companies

Companies (and any organization which conducts purchasing activities, including governments) should decide what are their real environmental goals regarding extra-organizational environmental improvement. Even though an organization may have a policy to promote environmental sustainability, in practice environmental improvement is often focused on internal risk reduction. For example, a recent study of the green purchasing practices of members of the National Association of Purchasing Managers shows that "current green purchasing strategies seem to be ‘reactive’ in that they try to avoid violations of environmental statutes rather than embedding environmental goals within the long-term corporate strategy."

If companies really want to promote environmental sustainability through purchasing, they will need to recognize that simple strategies such as focusing on product ingredients is not likely to have a significant external effect. They will need to reinforce to suppliers that good environmental performance is integral to their business operation and that the level of performance will be considered in selecting suppliers.

Globalization means that suppliers will increasingly be located in other countries. Buyers will need to educate themselves about the environmental conditions, regulations and other factors in those countries. If the supplier is in a country with well-enforced environmental regulations, the buyer may have some confidence that at least the supplier is not a serious polluter. But if the country’s environmental regulations are lax or poorly enforced, the buyer should begin with the assumption that the supplier may be a serious polluter and potentially a risky source due to environmental concerns. This assumption is particularly applicable when the suppliers are SMEs. In these situations buyers should ask suppliers to provide documentation regarding pollution discharges, controls in place, etc. When possible, suppliers should be visited to inspect their operations.

Governments

Governments are the largest buyers of products and services. Thus government purchasing policies focused on environmental performance can have more direct effect than any other type of environmental pressure. Governments may be constrained in the selection of suppliers by rules regarding low bid selection; nonetheless, suppliers can be questioned regarding their environmental performance.

It is not clear if government policies can influence the purchasing behavior of other organizations, or whether this is even desirable. However, government can act as an advocate for improved buyer-supplier relationships and can document successes for promotion.

Trade and Business Associations

Trade and business associations have a particularly significant role to play in greening the supply chain. Since these groups are very familiar with the environmental issues in their industries they are in an excellent position to help members to identify the key issues and share strategies about how to work with suppliers. For example, the American Electronics Association has a number of work groups and conferences focused on environmental management, and supplier management is a regular topic.

A major obstacle in greening of suppliers is the bargaining power of individual buyers. If a buyer is not very important to a supplier, requests for environmental improvement will not likely receive a positive response. But in trade and business associations, groups of buyers can band together to put pressure on suppliers. This strategy is being used by American apparel companies which have developed a set of wastewater discharge standards that they are applying to their suppliers worldwide. Companies such as Levi-Strauss and Gap may individually only constitute a small proportion of a textile manufacturer’s sales. But since the two companies agree on the same pollution standards they have the leverage to demand that the supplier meet the standards, or lose the business of both companies.

7.0 Recommendations

International organizations which promote sustainability, such as OECD, have a number of options to promote greening of the supply chain. However, it is critical that promotion of this concept emphasize the business reasons for green purchasing and supply chain management. Since improvements in supplier environmental performance are generally only achieved after buyers make a substantial effort to work with them, the buyers must be convinced that there is an

economic as well as environmental incentive.

Develop Expertise in Strategic Supply Chain Management

Purchasing is evolving from a line to a strategic function in leading companies. There is ample documentation regarding the business benefits to companies that have implemented collaborative supply chain management systems. Greening the supply chain needs to be considered and presented within the framework of buyer-supplier alliances for improved competitiveness. Economic benefits must be emphasized as much or even more than environmental benefits. OECD should develop expertise in supply chain management as a base from which green purchasing practices and policies can be developed.

Document Win-Win Examples of Green Purchasing

Many companies are using some form of green purchasing strategy. This paper has provided a small number of examples in which green purchasing has resulted in improvements for both buyers and suppliers. More examples are available and should be compiled into a case collection to be used in promoting collaborative green purchasing.

Promote Green Buying and Supplier Evaluation as Government Purchasing Policy

A number of Western governments now use environmental criteria in their purchasing. The primary focus of such practices is to increase the use of recycled materials and reduce the use of environmentally harmful materials. However, as discussed earlier, these practices are not likely to push suppliers towards improved environmental performance. The U.K. government provides environmental guidelines for suppliers but does not require them to be followed, although the suppliers’ environmental performance may be considered in supplier selection. The common requirement that contracts go to the lowest bidder may be an obstacle to effective use of environmental criteria in supplier selection, however.

The use of environmental management standards such as ISO 14001, EMAS, BS 7750, etc. as a criteria for government purchasing is a matter of much debate. No government to date is requiring that suppliers demonstrate compliance with these standards. Further, whether environmental performance of suppliers is improved through adherence to a standard depends on which standard is followed. It is not likely that the use of EMS certifications will be required in government purchasing because of the cost that development and certification of an EMS imposes on suppliers.

Governments could promote improved supplier environmental performance by asking suppliers to respond to a detailed questionnaire about their environmental practices and performance. This raises the environment issue to the executive level among suppliers and indicates that it is something that must be addressed strategically in order to remain competitive. The results of such a survey would also provide valuable data in examining progress in implementing policies promoting "green" government purchasing of products and services.

Promote Cleaner Production as a Specific Requirement of Environmental Management Systems

Cleaner production is not specifically required in the most international of the environmental management standards, ISO 14001. In fact, ISO 14001 does not even require that organizations even make pollution prevention a priority; it simply requires a policy commitment to "prevention of pollution", and defines "prevention of pollution" to include treatment and control as an alternative to true prevention.

Nonetheless, environmental management standards (EMS) such as ISO 14001 are likely to become increasingly used by buyers to obtain assurance about supplier environmental performance. Governments therefore should make a specific effort to educate the public and companies about the limitations of EMS standards as guarantees of improved environmental performance. Specifically, cleaner production and true pollution prevention should be promoted as elements of EMS standards, although modification of the standards themselves is not feasible

Study and Disseminate "Best Practices" to Help Suppliers Improve Their Environmental Performance

There are numerous examples of suppliers and buyers working together for environmental improvement. However, there have been no systematic studies regarding the impact of various green purchasing strategies on suppliers. Such studies could identify which strategies have the greatest effect at achieving improved environmental performance while increasing economic benefits to both buyers and suppliers. These "best practices" could then be widely promoted to, and disseminated among, industry.

  Develop an Environmental Training Program for Corporate Purchasing Departments

There is already at least one environmental training package for suppliers that is published by the U.K. organization, Business in the Environment. However, this package does not provide training for purchasing managers themselves. It is vital to remember that the person who will implement green purchasing is not the environmental manager, but the purchasing manager. These individuals often need environmental education themselves before they can begin discussing the issues with suppliers. Once environmental issues are understood, they need to be placed within a strategic purchasing context. Purchasing managers will seldom pursue green strategies if they are not perceived as economically beneficial to the organization. A training program for purchasing managers can be conducted using product life cycle analysis as a framework and supply chain management strategies as the functional elements. Environmental concerns can be overlaid on this structure so the concerns are recognized and managed as business issues.

Target Trade and Business Associations

The most effective channel to promote green purchasing strategies is through trade and business associations. Purchasing managers are most receptive to best practices information that comes from within their own industry. Additionally, buyers can form groups to increase their leverage with suppliers on environmental issues.

Industry associations are now becoming strongly focused on global trade issues. Concerns of their members about doing business with suppliers, who may be creating severe environmental problems, can be placed within a context of general globalization strategy and management practice. In particular, the risk to supplier reliability of poor environmental performance is becoming a serious consideration in globalization of supply.

8.0 Conclusion

The most uniformly successful way to promote improved environmental performance to SMEs is through the supply chain. No supplier will ignore a justified request from an important buyer who wants to know about the supplier’s environmental performance, and such requests demonstrate to suppliers that there is a serious market reason to achieve improved environmental performance. There is a small but growing number of companies that have demonstrated that buyer-supplier collaboration on environmental issues results in better economic as well as environmental performance for both parties. Lessons from these experiences should be examined and disseminated widely to business as a means for improving environmental management practices. Multinational and large companies, and governments have a number of opportunities to promote green purchasing and to take advantage of the trends in globalization to improve the environmental performance of SMEs in the DNMEs.