Key words

Introduction

It is axiomatic that sustainable development requires responsiveness to the complex relationships between social, environmental and economic phenomena. This holds true across a range of organisational scales: from governments and international governance bodies negotiating, for example, climate change and biodiversity policies; to enterprise levels, as businesses and public institutions build sustainability considerations into their strategies, plans and operations. Yet there are no ‘one size fits all’ solutions. Consequently, the challenge for many is in moving from aphorisms to decisions: choosing directions that are believed to appropriately align the interests of stakeholders.

Organisations are moving rapidly beyond viewing the environmental consequences of their economic behaviours as issues of compliance and image management to more sophisticated integrative frameworks (Hart 2007). Carbon pricing and water restrictions emerge as two ‘clear and present dangers’ for business as usual, with repercussions for profitability. More broadly, there is growing evidence that those businesses minimising their environmental liabilities can be more successful in attracting and retaining talented employees, securing competitively priced insurance and investment capital, influencing public policy and building sustainable brand equity (Melnyk, Sroufe et al. 2003; Zadek 2007). Yet incorporating environmental criteria into rational decision making is often constrained by both empirical and organisational factors.

For most organisations, a large proportion of the environmental consequences of their activities are not ‘on-site’. They are indirect, ‘embedded’ in the products and services purchased. Therefore, any contingent liabilities are also largely embedded: most obviously, for example, as carbon emissions pricing is passed down supply chains. Consequently, enterprises that do not appreciate their full supply chain environmental impacts are increasingly ill-informed and vulnerable as various market agents value these liabilities.

The business imperative for greater focus on sustainable chain management (SCM) is therefore undeniable; the challenge is how to operationalise this focus. Current approaches, at product or business scale, tend to be process based: supplier questionnaires are issued and results received collated; more sophisticated approaches may seek information from second tier suppliers, or may build fuller LCA process models. These approaches can be relatively time intensive and require specialist interpretive skills, suppliers may report inconsistently and have incentives to under declare raising issues of data reliability, and the ‘system boundary’ is typically only limited to one of two supply chain tiers. Furthermore, outcomes are typically not well integrated with ongoing commercial functions. These are all barriers to SCM. This combination of time, cost, complexity and perception of uncertain value can particularly inhibit securing the necessary budget to initiate a shift from a reactive compliance position towards proactive stewardship and strategic innovation.

Approach

An alternative approach to SCM is proposed. This begins by considering information readily available to a company: the type and value of purchases made by an organisation, as detailed in its financial accounts. With little effort a purchase ledger can be converted into a detailed assessment of the embedded environmental aspects - such as carbon emissions, water consumption, land disturbance, etc – and disaggregated over multiple tiers of the upstream supply chain. This is achieved using an input-output analysis tool and integration of national economic and environmental databases, resulting in environmental aspects expressed per unit of final demand ($) across multiple sectors of the economy.

A software tool developed by the Centre for Integrated Sustainability Analysis (ISA) at the University of Sydney performs this analysis for the Australian economy at a resolution of 344 different business sectors. The framework and data resulting from this analysis can then be used to enhance supply chain initiatives - for example, prioritising those purchases/suppliers likely to have the greatest environmental impacts – and can be combined with appropriately measured on-site and supplier process data to provide greater resolution. This hybrid process is illustrated in Figure 1. Far greater insights into SCM result from this combination of bottom-up analysis based on processes and top-down input-output analysis based on purchases. Further explanation of the methodology and examples of its application are now provided.

Figure 1 – Simplified organisational supply chain. The organisation has collected environmental data from on-site process audits and from information provided by the shaded level 1 suppliers, and from 2 suppliers into its steel supplier. A supply chain analysis on this basis is clearly incomplete. The hybrid analysis combines any available process data with input-output analysis, which evaluates the likely environmental aspects of all the unavailable upstream data, across multiple supplier levels based on purchases from the level 1 suppliers.

Methodology development

Input-output analysis is a well established, Nobel prize-winning macroeconomic technique that has been applied in a variety of applications for over 70 years (Rose and Miernyk 1989). Traditionally it has been employed to construct matrices for inter-industry financial transactions derived from trade data, such as national statistics. More recently, the technique has been developed to reveal physical and social impacts closely associated with the value of financial transactions, in the form of an inter-sectoral transaction matrix. Foran, Lenzen et. al. (2005: 145) summarises a range of published research on this ‘proxy’ technique, covering a range of applications including energy intensity, water use, ecological footprinting and employment. Action research by ISA has extended this technique by developing analytical tools for Australia and the UK.

The integration of input-output analysis into environmental management tools has occurred over a period of 10 years, incorporated a variety of peer reviewed processes and in conjunction with businesses and the Australian Government. The Sustainability Reporting Pilot Program first integrated national accounts data from the Australian Bureau of Statistics with environmental data from the National Pollution Inventory, National Greenhouse Gas Inventory and research on land use. Whilst the analytical methodology itself comprises myriad algorithms, matrices and audit approaches to report the dollar figure per impact caused by the full supply-chain (Lenzen 2001) it was recognised that an intuitive interface was required: working with a steering committee from businesses the analytical engine was then developed into a desktop software application (‘BL^3’) for convenient data input and output of results. Figure 2 illustrates two of the outputs of the application following input of on-site data and purchases: a structural path analysis and a depiction of the enterprise’s greenhouse gas emissions, benchmarked against the average performance for all entities in the same industrial sector.

Fig 2 two of the outputs of the application following input of on-site data and purchases: (i) a structural path analysis providing a ranked breakdown of an enterprise’s largest contributions to greenhouse gas emissions, shown by supply chain tier, (ii) a multidimensional depiction of the enterprise’s on-site and upstream greenhouse gas emissions, standardised on a log scale and benchmarked against the average performance for all entities in the same industrial sector.

The techniques developed were applied to produce Balancing Act: a triple bottom line analysis of the Australian economy (Foran, Lenzen et al. 2004; Foran, Lenzen et al. 2005) which used ten indicators to indicate the economic, environmental and social impact of doing business in Australia across each of 135 benchmark industries. This Federal Government commissioned report was the first publication to implement and detail the framework behind this approach to sustainability reporting. Subsequently the analytical tool was extended to cover 344 sectors of Australian business and the number of indicators generated has increased from 10 to 1000. Working with Sydney Water and UNSW the approach was developed further to produce a new extended ecological footprinting technique, incorporating both unbounded upstream supply chain impacts and downstream impacts using a combination of input-output analysis and fate modelling. Most recently, detailed census and household expenditure has been combined with the extended economy-wide model to evaluate direct and indirect environmental impacts from household consumption behaviour at a resolution of 1300 Australian statistical local areas. This latter work has been integrated into a web-based tool, the Consumption Atlas, in partnership with the Australian Conservation Foundation.

Case Studies

The techniques and tools described have already been applied in a variety of case studies in Australia and internationally. Four examples summarised here highlight how the full supply chain perspective provides vital insight for decision makers.

The methodology has been used to calculate the environmental impacts of average Australian households by statistical local area (ACF 2007). This highlights that the greenhouse gas emissions embedded in household food consumption and goods purchased are typically three times greater than emissions from direct electricity and fuel use. Similar results were found for water consumption. Remarkably, the total ecological footprint of the average household was nine times greater than direct household and transport contributions would suggest. By implication, whilst changes to direct consumption of electricity and water are indisputably important environmental considerations, changes in patterns of household consumption of food and clothing and purchasing preferences aligned to more environmentally sympathetic production methods can yield significantly larger environmental improvements.

Foran, Lenzen et. al. (2005) provide several examples of sectoral and institutional analyses that us the input-output method to incorporate both direct and indirect effects of diffuse supply chains. For example, significant differences between the profile of direct and indirect greenhouse gas emissions are evident between the cotton and pulp, paper and paperboard sectors. Indirect emissions in cotton growing are approximately half of total emissions, yet represent approximately 80% of total supply chain emissions in the pulp, paper and paperboard sector. Lenzen and Treloar (2002) highlight how comparison of wood and concrete framed buildings differs between a process and full input-output analysis. In comparison to a process-based LCA approach, input-output analysis broadly trebled embodied energy levels in wood framed building and doubled embodied energy in concrete frames. This is explained by the truncated nature of process based LCAs, which only consider a limited number of the thousands of input paths typically found in a multi-tier supply chain. Large truncation errors have been found in several studies, resulting in significant underestimates of impacts (Lenzen 2001). In each of these cases, assessment of the commercial impact of carbon pricing based either on direct emissions or on process-based LCAs would be significantly flawed.

Peters et. al. (2008) describe how the technique has been further developed and present a case study of Sydney Water. This evaluated the potential upgrade of a major ocean sewage treatment plant. The methodology was developed to incorporate a fate model, which accounted for downstream benefits of the treatment plant alongside increased on-site and upstream impacts resulting from the proposed upgrade. The operating and annualised capital costs of the upgrade were interpreted using input-output analysis, this information was integrated with treatment process-related information and fate modelling. The result indicated that whilst the upgraded treatment plant reduced the ecological footprint of toxic emissions to water by over 90%, the fully supply chain impact of the proposed upgrade was a 280% increase in ecological footprint compared to the current process, primarily related to greenhouse gas emissions in the construction and operation of the plant. This finding, of net negative environmental outcomes of increased water treatment, may appear counter-intuitive. It certainly highlights the importance of a full supply chain perspective, as a process review of the ‘end of pipe’ benefits alone may have led to a different conclusion.

Conclusions

Company accounts can be use to generate a quantified assessment of all upstream supply chain environmental aspects, providing insights into their magnitude and sources. This offers a consistent, comparative analytical framework for organisations to prioritise supply chain management and seek more detailed data from process audits which alone can miss significant aspects. Disaggregation of analysis across multiple supplier tiers can reveal supply chain environmental risks not readily visible from supply chain audits of tier 1 suppliers. Case studies highlight supply chain environmental aspects ranging from double to nine times greater than circumscribed by on-site activities. Benchmarking individual company performance against a comparable industrial sector can also highlight areas for further investigation. This proposed hybrid approach can provide significantly enhanced sustainable chain management and offers organisations seeking to embark on this process rapid, low cost, detailed insights and potentially quick ‘wins’.

Three key learnings:

• Input-output analysis can be used to support a rapid, detailed assessment of extended supply chain environmental impacts from an organisation’s financial accounts.
• Environmental decision making can be significantly improved by a hybrid analysis approach that combines process and input-output analyses to profile full supply chain environmental aspects.
• Practical applications of the technique reveal that incomplete supply chain profiles based on process analysis alone can lead to inferior decision making.

References

ACF. (2007). "Consuming Australia." from http://www.acfonline.org.au/consumptionatlas/.

Foran, B., M. Lenzen and C. Dey (2004). "Balancing Act: A Triple Bottom Line Analysis of the Australian Economy." Canberra: Department of Environment and Heritage, Australian Government.

Foran, B., M. Lenzen, C. Dey and M. Bilek (2005). "Integrating sustainable chain management with triple bottom line accounting." Ecological Economics 52(2): 143-157.

Hart, S. L. (2007). Capitalism at the crossroads : aligning business, earth, and humanity. Upper Saddle River, NJ, Wharton School Publishing.

Lenzen, M. (2001). "Errors in Conventional and Input-Output-based Life-Cycle Inventories." Journal of Industrial Ecology 4(4): 127-148.

Lenzen, M. (2001). "A Generalized Input-Output Multiplier Calculus for Australia." Economic Systems Research 13(1): 65-92.

Lenzen, M. and G. Treloar (2002). "Embodied energy in buildings: wood versus concrete—reply to Börjesson and Gustavsson." Energy Policy 30(3): 249-255.

Melnyk, S. A., R. P. Sroufe and R. Calantone (2003). "Assessing the impact of environmental management systems on corporate and environmental performance." Journal of Operations Management 21(3): 329-351.

Peters, G. M., F. Sack, M. Lenzen, S. Lundie and B. Gallego (2008). "Towards a deeper and broader ecological footprint." Engineering Sustainability 161(1): 31-37.

Rose, A. and W. Miernyk (1989). "Input–Output Analysis: The First Fifty Years." Economic Systems Research 1(2): 229-272.

Zadek, S. (2007). The civil corporation. London ; Sterling, VA, Earthscan.