ERP Systems and Sustainability
As the world edges out of recession, there is a strong drive to create an economy based on sustainability. This drive goes far beyond the green aspects usually associated with this term. It’s about ensuring that businesses work in partnership with their people, customers and suppliers to secure both its and the planet’s future. We now question business ethics in a way that’s not been done before. There is a focus on the triple bottom line. A triple bottom line measures a company’s degree of social responsibility, economic value and environmental impact.
According to The ROI of Sustainability, a 2009 report from Aberdeen Group, ‘top performing organisations view sustainability as a “must have” strategy for long term business viability and success.’
Discussions with some ERP vendors suggest there is a hierarchy of drivers for businesses considering adopting a sustainability strategy. The starting point is customers and brand. They are followed by cost and revenue imperatives, meeting regulatory requirements, a concern for community relations, and finally social and moral obligations. Surveys consistently reveal that customer pressure and brand improvement are the leading motivations for sustainability strategy adoption.
According to Andrew Kinder of Infor:
“Customer pressure trumps government legislation in the urgency with which we adopt sustainability measures. If the government tells you to do something you will comply, eventually. If your leading customer tells you to do something, you will do it tomorrow.”
We feel that ERP systems and sustainability agendas can work hand in hand. ERP has a dominant role to play in three key areas – organisational structure, measurement tools, and approaches that can make a positive impact on both the business and its sustainability.
ERP, as the name implies, is an enterprise-wide approach to driving processes and delivering data. It’s vital for overall success to involve key people from every department across the business. From the initial definition of requirements through the implementation project and into optimisation. This general aspect is also essential for delivering a sustainability strategy which requires a whole-system change.
An organisational structure for delivering ERP also supports sustainability in three ways:
- Helps people through a significant period of change and encourages skills of challenging the status quo, learning and project-based working
- Results in a single version of the truth with shared data across the business
- Occurs in simplified and documented processes reducing the number of variants
Further, by keeping the software on the latest versions and utilising and maintaining hardware correctly, companies can optimise server capacity and processing power.
The various management systems that can be used to execute a sustainability strategy are critical elements in any successful implementation. These systems are made to drive a sustainability focus through the business. Measurement is critically important because it links performance to the principles of sustainability and facilitates continuous improvement.
The Aberdeen Group report makes two specific recommendations to achieve best-in-class performance:
- Implement role-based dashboards to enable the streamlining and user-friendly delivery of action items and consolidated views
- Incorporate sustainability metrics into corporate objectives and measure to prove that the initiatives produce real business results
The traditional reliance on standard costing can mask the actual costs involved in the production and distribution of goods and services. Recovery of overheads is a percentage of labour with consumption given limited consideration. Rents generally include such sustainability challenges as transport costs, packaging, utilities, and marketing expenditure.
From April 2010, new legislation compels large organisations to measure their emissions and devise strategies to reduce them. The Carbon Reduction Commitment (CRC) Energy Efficiency Scheme requires organisations that consume more than 6,000 MWh of electricity a year to design a carbon reduction strategy. Also, Annual Reports produced, indeed by larger businesses, have to include a report on Corporate Social Responsibility. The report needs to include relevant monitoring data but is collected and collated manually.
What tools can ERP systems offer?
Typical measurement tools, standard in most ERP systems, include product costing, capital budgeting, performance evaluation, and dashboard reporting. ERP packages allow for the allocation of different resources so that businesses can genuinely establish what the cost drivers are. The cost of acquiring material can be recorded separately, rather than treated as an overhead, using Landed Cost Tracking elements. A Bill of Packaging can also be created to monitor these elements of costs.
Many ERP packages also provide linkages into specialist measurement packages to gather usage data within the core reporting system. There will be a need to enhance data gathering tools as regulations get tighter. Vendors report that it is usually now a requirement in ITTs that the system supports resource consumption information. Such devices are user-definable so that they measure areas that are specific to the sector in which the organisation works.
According to Antony Bourne from IFS:
“Whether companies are complying with government mandates to reduce their environmental impact. Or, are executing on a proactive sustainability initiative, the IFS Eco-Footprint module is precisely the kind of tool they will need. This tool will help companies manage board-level risk, position themselves in the market and comply with those more stringent regulations.”
Positive Impact Tools
Once a robust measurement system is in place, attention needs to turn towards delivering a positive sustainability impact utilising a range of ERP-based tools. Marc Epstein, in “Making Sustainability Work” identifies some areas where organisations must assess the impact their activities are having on the sustainability programme:
- Procurement – seeking sustainable sources of material, reducing packaging and working with suppliers to reduce the harmful effects of their products
- R & D – identifying processes that use resources more efficiently
- Marketing – investigating how marketing, distribution and selling methods can mitigate adverse impacts
- Production – devising processes that are more efficient and less costly in terms of energy and resource consumption
- Management Accounting – providing information to support decisions on product costing, pricing and product/process design
- Asset Management – optimal asset maintenance can significantly reduce utility and material consumption. In the same way that a well-maintained car saves on fuel consumption, well-maintained plant and equipment save on energy usage. Going further, the latest innovations in asset management monitor real-time energy consumption of valuable material. It sends alerts when that use increases – an indication that the machine requires maintenance.
- Product Lifecycle Management – examine the impact of products, processes, services and other activities over the complete life-cycle of a product. Activities can improve sustainability and financial performance. The aim of this is accommodating the specific regulations and compliance needed to achieve an optimal balance between product creation, life-cycle and distribution management.
- Forecasting Tools – knowing accurately where, when, and how much customer demand affects your business. Knowing will ensure optimum delivery and consumption of materials, and reduce expedited shipments that cause unnecessary emissions and add cost to the company.
- Supply Chain Optimisation – materials are sourced from a range of locations and converted into product. They are then shipped out to customers by a further variety of transport options. Tools now exist for optimising this entire supply chain by modelling and optimising the network not just based on cost and capacity, but also, on overall carbon footprint reduction.
Andrew Kinder from Infor has reported:
“We see asset management and supply chain optimisation as the applications that are delivering the most tangible reduction in emissions. Asset management with real-time energy tracking is reducing energy bills for our customers by between 8-20%. Whilst re-designing supply chain networks can make significant reductions in carbon and reduce total supply chain cost.”
Customer and regulatory requirements often steer sustainability initiatives. There is an increasing number of companies noticing that they frequently result in decreased operating costs and increased revenues. Also, the ethical aspect is becoming more critical, as the end customer wants to feel better about what they’re using.
ERP systems can support the sustainability strategy positively in many ways.
- Providing the right organisational environment in which to adopt a sustainability strategy
- Providing measuring and monitoring tools to capture consumption data. Also, exploding material and overhead costs and dashboards to publish and share this data for all to use
- Giving specific sustainability-focused tools to reduce adverse impact. Asset Management, Product Lifecycle Management, Supply Chain Optimisation modules, for example.
Product development is driving this way as ERP vendors see sustainability as a significant trend for organisations into the future. Although only currently evident at the top end of the ERP market, this is moving through to smaller systems. It will result in being a business imperative throughout its lifetime.
There schemes in place to help businesses be accountable for their carbon footprint – Carbon Trust, Enworks, ISO 14001 etc. However, these tend to ignore the role of ERP systems in both supporting and measuring reductions & ROIs achieved.
At Gradient Consulting, we actively question vendors on how their system will enhance our clients’ sustainability agenda.
If you would like to find out more, contact us today for an initial, no obligation discussion on how we can help you and your business deliver your vision for the future on +44 (0) 1282 463710.
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