designing ‘green’ vendor rating systems for the assessment of a supplier's environmental...

Pergamon European Journal of Purchasing & Supply Management, Vol. 3, No. 2, pp. 103-114, 1997

© 1997 Elsevier Science Ltd All rights reserved. Printed in Great Britain

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Designing 'green' vendor rating systems for the assessment of a supplier's environmental performance

Giuliano Noci Department of Economics and Production, Politecnico di Milano, Piazza L. Da Vinci 32, 20133 Milan, Italy

In the last few years 'green' movements, institutions and governments have forced many companies to improve their environmental performance. As a consequence of this growing interest in the environment, many firms established integrated relationships with their suppliers to design new 'green' products. Unfortunately, no model has been suggested to support the decision-maker in the selection of the most effective supplier from an environmental viewpoint. Hence, the objective of the paper is to design a conceptual approach that first identifies measures for assessing a supplier's environmental performance and, secondly, suggests effective techniques for developing the supplier selection procedure according to an environmental viewpoint. © 1997 Elsevier Sci- ence Ltd

Keywords: environmental perlbrmance, 'green strategy', vendor rating, supplier selection

Introduction

In the last few years 'green' movements, institutions and governments have forced many companies to improve their environmental performance (Azzone and Bertel6, 1994; Porter and van der Linde, 1995; Roome and Hinnells, 1993; Taylor and Welford, 1993; Walley and Whitehead, 1994; Welford and Gouldson, 1993). To respond to this growing concern for 'green' issues, firms have carried out--over the last decades--a great number of environmental programs. Such initiatives can be grouped into three main categories: at first, managers introduced end-of-pipe programs aimed at reducing air emissions, solid wastes, waste water and energy consumption of their plants (Azzone and Bertel6, 1994; Hunt and Auster, 1990). At the end of the 1980s, they introduced 'clean' technologies and implemented programs for reducing the company's impact on the state of natural resources in the leading steps of the production process (see, for instance, the 3P program developed by 3M) (Porter and van der Linde, 1995; Welford and Gouldson, 1993). At the beginning of the 1990s they changed operating procedures and introduced eco-auditing frameworks for modifying products and services (Franke, 1995; ICC, 1989).

Nowadays, we are facing a fourth phase according to which environmentally conscious firms--mainly multinational

corporations--are developing 'green' programs aimed at organizing their supply value chains according to an eco- efficiency perspective (Hass, 1996; Noci, 1995). In particular, pro-active companies are seeking to develop co-operative links with supply chain partners, particularly small and medium sized enterprises, in order to accelerate the diffusion of environmental management initiatives and to design new 'green' products (Gupta, 1995; Royal Swedish Academy of Engineering Sciences, 1995). The involvement of firms operating at different levels of thefiliOre and characterized by different managerial and technological competencies should allow firms to develop more effective 'green'- product design concepts and, hence, to respond to the growing social demand for more environmentally friendly products. Companies like FIAT and BMW in the automotive field and IBM in the electronic industry have, for instance, involved suppliers in their new product development (NPD) processes, by (i) establishing integrated relationships with them and (ii) implementing strategies based on single sourcing rather than multiple sourcing (Gupta, 1995): IBM UK, for example, has recently seen a considerable reduction in suppliers from 4000 to 2700 (Taylor and Weiford, 1993).

In spite of the growing importance of the supplier's role in the NPD process, neither state of the art literature nor

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experiences from companies suggest models for supplier selection that effectively take environmental performances into account. In particular, a recent survey (Birou and Fawcett, 1994) developed both in US firms and European companies indicates that almost all the firms interviewed select their suppliers according to a formal- ized system that considers a wide set of the supplier's performance (product quality, product cost, due date performance, flexibility, etc.), but few models include the supplier's environmental performance in their evaluation.

Hence, the objective of the paper is twofold:

• to define, according to the corporate 'green' strategy, the measures to be included within a vendor rating system which aims at taking into account a supplier's environmental performance; and

• to suggest how a vendor rating system can be structured in order to select the most effective supplier(s) from an environmental viewpoint.

The paper is divided into four major sections. "The role of the environmenal dimension in supply chain management" highlights why the adoption of co-operative customer- supplier relationships allows a firm to manage the environmental issues effectively. "State of the art models for supplier/s selection" critically analyzes state of the art models when they are implemented for assessing a supplier's environmental performance. "Designing models for selection 'green' supplier/s" suggests a supplier selection procedure that takes environmental performance into consideration. "Developing a 'green' vendor rating system in a firm operating in the automotive field: a sample study" describes the case study of a firm operating in the automotive field which aims at assessing its suppliers also from an environmental viewpoint. "Conclusions" presents some final remarks.

The role of the environmental dimension in supply chain management

Many researches indicate that suppliers are often involved in the NPD process because (i) they frequently possess design and technology expertise and (ii) the efficiency of their operating procedure has a relevant impact on the final product performance (Ellram, 1990). In this respect, we have to consider that 56% of each sales dollar is spent on the procurement of production materials (Ellram, 1990); hence, the definition of well-established relationships with suppliers represents a managerial tool to monitor a company's economic performance.

However, our thesis is that the effective management of environmental issues has, furthermore, emphasized the need for integrated customer-supplier relationships. Indeed, the introduction of co-operative relationships--aimed at developing 'green' products jointly with suppliers-- allows a company to:

(1) Reduce the quantity of supplied components with low environmental performance and, hence, to avoid negative managerial implications on the customer's value chain. It should be noted that the purchase of

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(2)

(3)

(4)

such components could both cause design constraints that are even more important than in other cases and limit the number of environmental initiatives a company can implement. A meaningful example in this sense is related to products made up from a great number of different materials, owing to limited efforts by suppliers to reduce the complexity of their components. Indeed, in this case a company cannot develop recycling based programs since it is almost impossible to recycle even a few parts of end-of-life products if they are made up from different materials (Noci, 1995). Control the cost of their 'green' products effectively. To this end we have to consider that, owing to greater production costs and costs of raw materials, environmentally friendly products have a higher price than goods designed without any care over environmental issues and, for this reason, customers often buy products with lower environmental performance and at a lower price. In this perspective, the introduction of co-operative relationships with suppliers allows companies to limit the costs of the purchased components and, at the same time, to achieve important market share as regards 'green' products. Reduce the company's response time to the market and, hence, to favor frequent modifications of the key product environmental performance. Specifically, the achievement of this objective is extremely important as a consequence of the high market turbulence resulting from the continuous change of 'green' customers' requirements and of regulators' environmental prescriptions. Avoid problems associated with the company's 'green' image that also depends on a supplier's environmental efficiency (Noci, 1995). Indeed, in the case of suppliers that do not take environmental issues into account and whose behavior is well known among the public, the corporate 'green' image is negatively affected even if the company produces environmentally friendly goods and has introduced 'clean' technologies. In this sense, the introduction of co-operative relationships with suppliers allows a firm to improve its knowledge on a supplier's environmental efficiency and, hence, to avoid lost sales owing to poor image.

Consideration of these issues clearly demonstrates the growing importance played by the environmental dimension in the overall supply chain and highlights that companies need to change their relationships with suppliers, shifting from competitive to a co-operative behavior aimed at integrating the vendors in the 'green' NPD process. Hence, purchasing managers, who are frequently facing ethical and social responsibility issues, must now incorporate another trade-off variable: whether to buy from low-cost vendors or from more expensive but environmentally responsible vendors, all other things being equal. Of course, in this respect they need a supplier selection procedure that explicitly takes environment- related items into account.

State of the art models for supplier/s selection

State of the art literature suggests many approaches for assessing a supplier's performance (Min, 1993; Mohanty and Deshmukh, 1993; Soukup, 1987; Thompson, 1990; Tim- merman, 1986; Weber et al, 1991). In particular, models for supplier selection--such as the categorical method, the weighted-point method, the matrix approach, Vendor Profile Analysis (VPA), and the Analytic Hierarchy Process (AHP)-- allow managers to develop systematic analyses based on a wide set of performances, like quality, cost of purchased components, and delivery and flexibility, but they do not explicitly consider a supplier's environmental performance.

Starting from these premises and in light of the significant role played by suppliers in determining a company's environmental performance (see "The role of the environmenal dimension in supply chain management"), it is critical to analyze how such models perform when they are used for supplier selection according to a 'green' perspective.

In this regard it should be noted that the evaluation of a supplier's environmental performance is peculiar with respect to the other competitive priorities (quality, cost, delivery, etc.), for at least two main reasons. First, the impact of a company's plants on the state of natural resources must be identified according to very different perspectives. Indeed, air emissions, solid wastes, energy consumption and waste water resulting from a company's plants express the whole impact of the factory on the environment; but their definition requires the introduction of indices with distinct measurements units, thus forcing managers to define a tool for integrating this wide set of measures and formulating a synthetic judgment on the supplier's overall environmental performance. Secondly, to assess the effect of a certain supplier's environmental performance on the company's economical results, the purchasing team has to take many qualitative items into consideration. Specifically, the supplier's environmental effectiveness can be defined according to (i) the available 'clean' technologies and (ii) the environmental efficiency of its operating procedures--factors of almost a qualitative nature that can be included in the supplier selection only through the introduction of non-conventional metrics.

Accordingly, three criteria must be introduced to identify the effectiveness of state of the art models when they are used to assess a supplier's environmental performance:

(1) The type of the information that can be included in the selection procedure; in this perspective it is important to analyze which are the models that allow the purchasing team to take both quantitative and qualitative data into consideration.

(2) The completeness of the assessment procedure, i.e. the model capacity to take into account as many environment-related dimensions as possible.

(3) The objectivity of the assessment procedure, which is a key requirement for each model aimed at supporting managers in their decision-making.

Designing 'green' vendor rating systems

In light of this framework, it emerges that the implementation of state of the art models to assess a supplier's environmental performance presents some problems. More precisely,

• The categorical method (Timmerman, 1986), by includ- ing environment-related items, fails because it rates suppliers on a number of equally weighted environmental factors, whereas the relative importance of different factors is closely related to (i) the market structure and (ii) the type of 'green' strategy implemented by a company. Perhaps a more important disadvantage is that decisions made using this system tend to be fairly subjective.

• The weighted-point method (Birou and Fawcett, 1994), which quantifies the factors with relevant weights and then rates potential suppliers according to these weighted factors, is not effective in the evaluation of a supplier's environmental performance since it does not take qualitative factors into consideration. Moreover, the subjectiv- ity of the decision-maker in the identification of weights could be very high.

• The matrix approach (Gregory, 1986), by evaluating suppliers based on weighted scores obtained from a set of pre-determined benchmarks, is unable to develop a complete analysis; indeed, it does not support the decision-maker in structuring complex problems with a large number of criteria, like the assessment of a supplier's environmental performance. As well as the weighted-point method, it does not take qualitative items into account.

• The VPA method (Thompson, 1990), though present- ing the advantage of incorporating in the assessment procedure uncertainty (it rates suppliers on a number of weighted factors by employing a Monte Carlo simula- tion), does not perform well with respect to the above enlightened criteria. Indeed, it cannot systematically measure qualitative and quantitative environment- related factors. It does not allow the purchasing team to develop a complete analysis, since it does not structure complex problems, like the assessment of a supplier's eco-efficiency, which require a large number of criteria and attributes. As well as the other tools, it cannot measure the degree to which a purchasing manager's judgments are consistent in evaluating suppliers and, hence, it presents a low objectivity.

• The adoption of AHP-based approaches (Mohanty and Deshmukh, 1993; Nydick and Hill, 1992) represents a more effective solution than the implementation of other state of the art models, since such methods allow managers to incorporate tangible as well as intangible factors related, for instance, to the assessment of a supplier's 'green' core competencies. In particular, they present two main advantages with respect to the other approaches: (i) they enable the decision-maker to represent the interaction of multiple environmental factors in complex and unstructured situations, and (ii) they provide a ranking order indicating the overall

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preference for each of the decision alternatives (Saaty, 1994; Weber, 1993). In spite of this higher efficiency, the implementation of AHP-based approaches presents other problems associated with the low completeness of the analysis. Specifically, such methods do not effectively support decision-makers in the definition of the main environment-related factors to include in the supplier selection procedure.

Table 1 shows that (i) all models are unable to develop a complete analysis and (ii) only the AHP method can be used to include both quantitative and qualitative information in the supplier selection. Precisely as a consequence of the main limits of these models, in the next section we identify the most important measures for assessing a supplier's environmental efficiency and how they can be included in an effective vendor rating system that is consistent with the corporate 'green' strategy.

Designing models for selecting 'green' supplier/s The growing concern of public opinion and regulators for the environment has led executives to consider a supplier's environmental performance as the primary item to be assessed in the supplier selection process (Azzone and Noci, forthcoming). In this perspective, some managers consider the environment as a constraint and, hence, they first identify those suppliers that achieve environmental performance consistent with standards set by regulations. At a secondary level, they compare suppliers according to the other competitive priorities (quality, delivery, service, flexibility, etc.). In contrast, other executives deal with the environment as the most important competitive priority; hence, they select the supplier with the lowest impact on the state of natural resources, apart from the other criteria that are included in the evaluation only when the company compares suppliers achieving almost the same environmental results.

In both cases the first step in the supplier selection decision deals with identifying suppliers that conform with the company's environmental requirements; hence, we design a model that takes a supplier's environmental performance into consideration apart from the other evaluation criteria and, for this reason, represents the leading analysis in the supplier selection procedure (see Figure 1).

The high complexity associated to the measurement of a supplier's environmental performance (see "State of the art models for supplier/s selection") requires us to identify the company's 'green' objective/s, in order to understand the most important items and measures that the decision- maker should consider in the evaluation.

Starting from these premisses, we suggest an approach divided into three phases. The first phase deals with identifying the feasible 'green' strategies a company can implement: this classification allows us to define the most important environmental factors to be included in a model aimed at selecting the most effective 'green' suppliers. The second phase is related to the definition of operating measures for assessing a supplier's environmental performance. The final phase deals with designing techniques for the supplier selection decision that are consistent with the company's environmental strategy (see Figure 2).

Phase 1." identifying the corporate 'green' strategies

State of the art literature suggests many frameworks that identify the feasible environmental strategies a company can implement; Table 2 shows the most well-known conceptual models (Hunt and Auster, 1990; Mfiller and Koechlin, 1992; Roome, 1992; Rubenstein, 1994; United Nations, 1993; Welford, 1995).

The above enlightened approaches use very similar frameworks to classify the corporate 'green' strategies; consideration of such models would suggest a taxonomy that distinguishes between four possible types of generic strategies: 'indifferent', 'defensive', 'offensive' and 'innovative' behaviors.

However, for our purpose we simply distinguish between a re-active environmental strategy, according to which the company only aims at aligning its environmental performance with regulators' prescriptions and apro-active 'green' strategy aimed at anticipating competitors, by product or process innovation, in order to achieve a competitive advantage. Such a classification has two main advantages with respect to the other state of the art models:

(1) It introduces a clear distinction between the two basic 'green' strategies a firms can implement, e.g. compliance and anticipation of future evolution of the external context; in contrast, by using the above models, it is very hard to identify how the real pattern of environmental behavior adopted by a firm can be classified with respect to the suggested environmental strategies.

(2) It identifies the two basic aspects that the purchasing team should analyze in order to manage the environmental dimension effectively. Specifically, it is critical to check the supplier'scompliance to regulations, which is a key requirement for the development of a reactive strategy. However, it is very important to analyze whether the supplier is able to support the

Table 1 Performances of state of the art models

Model Categorical method Weighted-point method Matrix approach Vendor Profile Analysis Analytic Hierarchy Process

Criteria

Type of information completeness Objectivity Quantitative Low Very low Quantitative Low Low Quantitative Low Very low Quantitative Low Low Quantitative and qualitative Low High

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Figure 1

~ ~ u t i v e s ' strategic a t ~

® 1 I ® The environmental dimension is a significant competitive priority

to the company's environmental requirements

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . : .

:: The measuremen t o f suppliers ' : i! envi ronmenta l per formance is the , 7

:i . . . . . . . .r.,r ..t.p.has ..o.f.the.se!ect!onproce ur.e.'.

The degree of priority attributed to environmental issues in the overall supplier selection procedure

The environmental dimension is a constraint

firm in developing further 'green'-product and/or process innovations, thus facilitating it in the deployment of a pro-active 'green' strategy.

In operating terms, according to a reactive strategy, the company has to identify the environmental standards of

regulations and to assess a supplier's environmental performance simply in relation to them. Hence, within a compliance-based environmental attitude, the company aims at evaluating the impact on the state of natural resources resulting from a supplier's production process

Supplier selection procedure

Identification of the corporate "green" strategies

Definition of the key suppliers' environmental performance

Selection of the most effective technique I

Figure 2 The three phase approach

Model implementation

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Table 2 State of the art taxonomies of feasible patterns of environmental behavior

Author(s) Hunt and Auster (1992)

Miiller and Koechlin (1992)

Roome (1992)

United Nations (1993)

Rubenstein (1994)

Welford (1995)

Stages of environmental management practices or taxonomy categories (i) The beginner (ii) The fire fighter (iii) The concerned citizen (iv) The pragmatist (v) The proactivist (i) Passive (ii) Reactive (iii) Proactive (iv) Hperactive (i) Non-compliance (ii) Compliance (iii) Compliance plus (iv) Commercial and environmental excellence (v) Leading edge (i) Compliance-oriented management (ii) Preventive management (iii) Strategic environmental management (iv) Sustainable development management (i) The 'business as usual' option (ii) The comprehensive environmental management option (iii) The 'managing for sustainable development' option (i) Resistance (ii) Observation and compliance (iii) Accommodation (iv) Seize and pre-empt (v) Trascendental behavior

and at verifying whether it is consistent with prescriptions set by regulators.

The effective implementation of a pro-active 'green' strategy needs suppliers able:

(1) to support the company in the introduction of new 'green' products by designing components that improve the end-product environmental performance and make product recycling easier; and

(2) to respond in time to each company's environmental requirement.

In light of these issues, firms implementing a pro-active 'green' strategy must take into consideration the determinants of a supplier's environmental performance. Specifically, by considering the main causes of a supplier's environmental results, companies may verify whether the supplier will be able in the future to carry out new 'green' product development programs jointly with them (see Figure 3).

Phase 2." indicators for measuring a supplier's environmental performance

At this level we suggest operating measures according to the type of environmental strategy developed by the company.

Measures for supplier selection within companies that develop a re-active strategy. The consistency of the supplier selection decision with the development of a compliance- based strategy requires the company to monitor:

(1) the current environmental performance of a supplier's production process, and

(2) the life cycle cost associated with the component supplied.

Indeed, the assessment of a supplier's impact on the state of natural resources allows the company to verify how it performs with respect to standards set by regulations; whilst the identification of the life cycle cost of each component allows executives to define the economic effort the company has to bear during the whole life cycle of the supplied component. In this perspective, similar to supplier certification in Total Quality Management programs, a vendor needs to pass an environmental assessment of its processes to be eligible to supply the firm.

To operationalize the items highlighting a supplier's environmental efficiency and the life cycle cost associated with the supplied component, we refer to conventional metrics, since all the factors to include in the evaluation

Figure 3

. . . . . . . . . , . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . ,

'~i Environmental s t r a t e g ~

Re-active strategy Pro-active strategy

1) Identification of the environmental standards

2) Assessment of the consistency of the suppliers' environmental perlbrmance with respect to the identified standards

Identifying the influence of the corporate "green" strategy on the supplier selection procedure

Analysis of the supplier's capacity to:

i) support product innovation,

ii) respond in time to any requirement

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can be expressed in quantitative terms. In particular, to define the environmental performance of a supplier's production processes, we introduce four types of indicators, each expressing a different kind of impact on the state of natural resources:

• waste water: these indices consist of total water consumption, some specific critical water wastes (COD, total nitrogen, phosphorous, dissolved salts) due to the supplier's plants;

• air emissions: these are related to a supplier's emissions of critical substances, such as SO 2, NH 3, CO, NH x, HCI and organic gas;

• solid wastes: these express the total volume of solid wastes achieved by the supplier each year;

• energy consumption: such an indicator points out the supplier's total amount of energy consumption within the year.

To define the life cycle cost of the supplied component, managers have to consider purchase costs and all the other costs that the company must bear during the product life cycle. These are related to (i) costs for component disposal when it has been used to achieve the final product, but has been detected as defective within the company's plants; and (ii) costs for the disposal and/or the recovery of the end-of-life components.

Measures for supplier selection within companies that develop a pro-active strategy. The development of a pro-active 'green' strategy forces managers to assess a supplier's environmental performance by introducing long-term- oriented measures. In this perspective, managers need to analyze whether the supplier will be able in the future (i) to follow the corporate environmental programs and (ii) to develop continuous innovations. With regard to this issue, we believe that the achievement of eco-auditing certification does not represent a relevant item to include in the evaluation of a supplier's environmental efficiency. Indeed, the achievement of such certification does not reassure the purchasing team that the supplier's activities have a low impact on the state of natural resources, or that the supplier's component/s present environmental performance consistent with the company's requirements, but simply that the vendor's operating procedures are consistent with prescriptions set by institutions responsible for the certification. In contrast, within a pro-active 'green' strategy, the main objective of the supplier selection procedure is to analyze the vendor's capacity to carry out new environmental programs in the future.

As regards indicators supporting managers in the assessment of a supplier's overall environmental efficiency, the supplier selection procedure must include both quantitative measures and qualitative information. In particular, four factors must be considered in the evaluation.

First, to formulate a complete judgment of the supplier's capacity to introduce product and/or process modifications, managers have to analyze the "engine' of the supplier's environmental innovation. Hence, they need


to introduce (i) measures pointing out the current supplier's environmental efficiency and (ii) indicators describing the supplier's 'green' competencies. Moreover, they have to take into consideration the supplier's 'green' image, since the achievement of a competitive advantage related, for instance, to the introduction of a new 'green' product could be greatly bounded by a poor 'green' image by suppliers (Azzone and N oci, forthcoming). Finally, managers have to consider how a supplier performs from an economical viewpoint: hence, they have to define the net life cycle cost associated with each purchased component.

Starting from the above four items, we introduce operating indices that operationalize each factor and, hence, make the supplier selection procedure easier. To this end, taking into account that many factors to include in the evaluation present an intangible nature, we have to refer to both conventional and non conventional metrics, according to which some items of the supplier's environmental efficiency are expressed in qualitative terms, i.e. through a verbal judgment describing to which extent the vendor achieves the examined performance criteria.

Accordingly, a supplier's 'green' competencies are operationally characterized by introducing qualitative factors expressing the supplier's capacity to reduce pollution continuously and to design components that have a low impact on the state of natural resources and are consistent with the company's requirements. Specifically, a supplier's 'green' competencies can be described in terms of the availability of clean technologies, the type of materials making up the supplied component (or the product complexity as regards the bill of materials), and the capacity to respond in time to product or process modifications when aimed at reducing a supplier's environmental impact.

As regards the current supplier's environmental efficiency, we need to analyze how the supplier's production process performs from an environmental viewpoint. In particular, managers are not interested in defining in quantitative terms the precise level of pollution resulting from the supplier's plants, but in formulating a qualitative judgment of the suppliers' current environmental efficiency with respect to achievable performance with the present technologies. Hence, we express the current pollution efficiency by referring to managers' judgments on the supplier's overall (i) air emissions, (ii) waste water, (iii) solid wastes and (iv) energy consumption. By introducing such qualitative indicators, we aim at gathering information that should identify potential improvements in terms of environmental performance achievable by the supplier with the current plants and, hence, at defining the prob- ability that the vendor will follow the more binding environment-related requirements of the company. Indeed, when the supplier can improve its environmental performance without further investment, it is more likely that it will conform to the customer's 'green' requirements.

In relation to the supplier's 'green' image, we introduce both quantitative and qualitative items. Quantitative information refers to the share of 'green' customers who

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purchase components from the supplier. Qualitative indicators should highlight (i) the type of relationships between the examined supplier and its stakeholders and (ii) the level of a customer's purchase retention. Such qualitative information provides indirect evidence of the supplier's 'green' image; nevertheless, it is the author's opinion that this is the only solution to draw some conclusions on the supplier's image perceived by the market. Indeed, the adoption of a quantitative indicator, related, for instance, to the number of complaints, does not fit our aim, since--as widely reported in the marketing and service management literatures--it does not provide a useful measure of customer satisfaction (Bowen et al, 1990; Farnell, 1992; Heskett et al, 1990; La Londe and Zinszer, 1976). Furthermore, it should be noted that it is difficult for the purchasing team to collect information about customer complaints which the supplier has to manage, unless the purchasing team decides to conduct periodic surveys aimed at analyzing the supplier's 'green' image as perceived by the market (Farnell, 1992). However, this is a much too expensive task, especially if the company has a large number of suppliers. For this reason, the use of such an indicator does not represent a feasible solution to operationally characterize a supplier's 'green' image.

Finally, net life cycle costs can be expressed as the sum of three terms: the cost of the purchase of the supplied component, the cost of component disposal or recovery at the end of its life, and depreciation associated with investments aimed at improving the supplier's environmental efficiency or at modifying its attitude versus environment- related issues (see Figure 4).

Phase 3." implementing the supplier selection decision

In this final phase, our aim deals with designing the overall process of supplier selection and with defining under which competitive and managerial conditions such a procedure must be carried out. As regards this latter issue, we provide evidence that managers do not have to implement a vendor rating system for all types of suppliers, but only in relation to some categories that depend upon a company's intended

'green' strategy. From a general viewpoint, the assessment of a supplier's environmental performance is not significant for vendors that have occasional relationships with the company and/or achieve components of the end product with a secondary importance both in relation to their functionality and their environmental impact: this is the case, for instance, in suppliers producing screws to be used for assembling different parts of a computer.

The supplier selection procedure in companies that develop a re-active 'green' strategy. Companies that have adopted a compliance-based environmental strategy usually assess the environmental efficiency of only suppliers that use toxic materials for achieving their component and, hence, have hazardous production processes.

Within a reactive 'green' strategy, the supplier selection procedure has two main objectives:

(1) the identification of suppliers that achieve environmental performance consistent with regulators' prescriptions; and

(2) the selection of vendors with suitable economic performance, too. According to these issues, decision- making can be articulated into three steps.

At the first level, having identified the regulators' environment-related prescriptions, managers have to eliminate suppliers whose environmental performance is not consistent with prescriptions set by regulators.

At the second level, managers need to identify the expected contribution to each objective of different suppliers. More precisely, we identify (i) the term LCC(i), which expresses the whole life cycle cost of the supplied component, and (ii) the index Er(i), which synthesizes the overall environmental performance of supplier i with respect to regulations. We define it as

Ep(i) = o/iS+ o/2W+ o/3 A + O/4 E, (1)

where S, W, A and E denote the amount of solid wastes, the volume of waste water, the quantity of air emissions and the energy consumption achieved by the supplier,

Figure 4

!"Green "' competeneieg.. ~ur;en'i ~nvi;onmenia2

efficiency i .......................................... 's "green" image I: i~ Net Life Cycle Cost

Avai labi l i ty o f

- - clean technologies

Type of materials

- used in the supplied

component

_ Capaci ty to respond

in t ime

Air emiss ions m

Solid wastes

- - Waste water

Customers '

- purchase retention

_ Type of relationships

with stakeholders

Market share related - - t o"g reen" customers

Cost o f the

- - supplied component

Cost for component

disposal

__ Energy consumption Depreciat ion for investments aimed

at improving the suppl ier ' s env.

performance

Qualitative evaluation criteria and operating measures for supplier selection within a pro-active "green" strategy.

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respectively. S, W and A can be defined as the weighted average of the quantity emitted of each substance: weights are the reverse of the maximum concentration of each substance allowed by local legislation, whilst E expresses the supplier's volume of energy consumption per year. The terms a t indicate the relative importance of each category of environmental performance attributed by the decision-maker according to the characteristics of the local market and of the technological context.

The third step deals with the final supplier selection. More precisely, by means of a scoring method, we first introduce weights expressing the relative importance of the environmental and economic objective according to the decision-maker's priorities. Secondly, we calculate the total weighted score permitting us to define the procurement- related solution that best conforms with the company's priorities. To this end, the above identified terms--LCC(i) and El,(i)--must be converted into a numerical score ranging in a pre-defined scale.

The supplier selection procedure in companies that develop a pro-active 'green' strategy. Companies which aim to anticipate competitors to achieve an environment-based competitive advantage should develop a formal supplier selection procedure in case of components that have a basic importance for the final product, apart from the type of material used and the level of environmental risk associated with the supplier's operations.

To support the development of pro-active 'green' strategies effectively, we have to introduce a decisional tool that is designed to incorporate tangible as well as intangible

Designing 'green" vendor rating systems

factors. Indeed, only by implementing such a model are we able to include, for instance, the decision-makers' subjective judgments on the supplier's 'green' competencies or its current environmental efficiency. In this respect, we aim at introducing a modified version of the AHP-based method (Saaty, 1980), where criteria and sub-criteria are defined according to the above framework. Indeed, the conceptual model introduced in the second phase to identify a critical supplier's environmental performances within pro-active 'green' strategies allows the decision-maker to develop a complete vendor rating procedure and, hence, to exceed one of the most important limits of the AHP- based approaches when applied to the assessment of the vendor's environmental efficiency.

From an operating viewpoint, we suggest an AHP-based procedure that is articulated into five steps; for more details on the AHP approaches, see the wide literature on Multi Attribute Decision-Making methods like Golden et ai(1989), Narasimhan (1983), Nydick and Hill (1992), Saaty (1980); Saaty (1994), and Weber (1993) (see bTgure 5),

The first step deals with designing the hierarchicalstructure of the decisional problem: it is structured into four levels. At the first level we have the overall objective related to the selection of the best supplier from an environmental viewpoint. At the second level we have the primary criteria for the assessment of a supplier's environmental performance, i.e. the current supplier's environmental efficiency, its environmental core competencies, its 'green' image, and the net life cycle cost associated with each supplied component. At the third level we have the sub-criteria that operationalize the primary criteria to be considered in the

Selecting the best supplier from an environmental viewpoint I

D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -

.. Current environmental "Green" eompetencies efficiency

/ \ / \ Indicator 1" Indicator i Indicator 1 Indicator i

: image ..

/ \ Indicator 1

Net life cycle cost I. . . . . . . . . . . . . . . . . . . . . . . . . . .

/ \ Indicator i Indicator 1 Indicator i

~ SupplierN~

*: indicators can be expressed in quantitative or qualitative terms according to the above sections

Figure 5 The suggested hierarchical structure for comparing different procurement solutions

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comparison of potential suppliers. Finally, there are the decisional alternatives, e.g. feasible procurement solutions, that must be assessed in detail according to the above framework.

Secondly, we need to guide managerial judgments by introducing pairwise comparisons aimed at determining the relative importance of the criteria and sub-criteria. The introduction of judgments formulated according to a pairwise basis allows the decision-maker to express the relative importance of an item (for instance, a sub- criterion) versus another in meeting the goal or a criterion of a higher level (Saaty, 1980). Managerial judgments are quantified on a numerical scale that includes integer and non-integer scores ranging from 1 to 3 expressing the degree of preference of an item versus another with respect to the element of a higher level. We made the choice of partially modifying the original method suggested by Saaty (Saaty, 1980) for defining pairwise comparisons--where verbal judgments are expressed on an integer scale ranging from 1 to 9--to avoid violation of the critical principle of proportionality. Indeed, for instance, the original scale proposed by Saaty calls for value 3 to indicate 'weak importance' and 'slight' preference of an alternative A over B; but, by calculating the eigenvalue of the resulting matrix, we compute this comparison into weights of 0.75 for A and 0.25 for B, thus leading managers to attribute to weakly more important alternative A, a score three times as large as that of B (Weber, 1993).

The third step concerns the identification of quantitative measures or qualitative evaluations that describe the extent to which each supplier achieves the sub-criteria. Specifically, when managers deal with qualitative sub- criteria, e.g. the assessment of the available supplier's 'green' competencies, they have to refer to the pairwise comparison process (Golden et al, 1989; Saaty, 1994; Weber, 1993). With respect to quantitative sub-criteria--as the definition of the net life cycle cost associated with the purchase of raw materials/components from the examined supplier-- executives need to refer to the corresponding performance measures, since their values should be used directly to calculate the absolute ratings, without resorting to the pairwise comparison judgments.

Using information introduced in the second and third steps, the fourth step deals with (i) computing the priorities of the criteria and sub-criteria and (ii) calculating the priorities of different suppliers with respect to each criteria and sub-criteria by solving a matrix equation that translates the pairwise comparison into weights (Saaty, 1980).

The final step is related to the calculation of the overall ratings which represent the priority of each supplier in achieving the goal of high environmental performance; the supplier or suppliers that achieve the highest score must be selected.

Developing a 'green' vendor rating system in a firm operating in the automotive field: a sample study

The above suggested approach has been implemented in a company operating in the automotive field that has planned

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to change the type of bumpers making up its most important model of car. The company aims at developing such an initiative precisely as a consequence of the high environmental awareness of top management and in order to anticipate its European competitors in the design of an environmentally friendly car; in particular, the executives' objective is to achieve a new model of car that can be recycled in all its parts.

With respect to the framework developed in the previ- ous sections, it emerges that the company decided to adopt a pro-active 'green' strategy mainly aimed at anticipating both new regulators' prescriptions and new initiatives by competitors.

The available procurement solutions

The above-mentioned executives' objectives have led the company to take into consideration the possibility of designing a new type of car bumper which, at the end of its life, can be recycled. The R&D department plans to recycle bumpers to achieve plastic materials for the canalization of air in the dashboard of the car.

The effective implementation of such a program requires the company to establish integrated relationships with suppliers aimed at (i) defining an effective bumper design concept which allows recycling and (ii) designing feasible solutions for the takeback of bumpers.

Hence, owing to this managerial requirement and the need to develop a deep understanding of a supplier's performances, the purchasing manager's objective was to introduce new supplier selection procedures aimed at identifying vendors with environmental performances that are consistent with the company's 'green' strategy. In particular, two procurement alternatives were available, respectively related to:

• a supplier that produces cheap bumpers--whose cost equals $150--made up from two materials: polyurethane and polypropylene; and

• a supplier that is able to produce bumpers made from a single material (polypropylene and sintered polypropylene), but at a higher price: $200.

The supplier selection procedure

The comparison of the two procurement options according to an economic perspective leads us to select the former procurement alternative. Indeed, such a supplier, being equal to the other dimensions of its vendor service, i.e. product quality, delivery, flexibility, etc., achieves cheaper bumpers and, in this sense, represents --in the short term-- the most profitable solution for the company.

However, to analyze the supplier's environmental efficiency and, above all, its capacity to introduce in the future further environmental innovations, managers need to develop a 'green' vendor rating system. In particular, starting from the consideration that the company develops a pro-active 'green' strategy, the adoption of the modified AHP-based procedure appears the most suitable solution.

As regards the definition of the pairwise comparisons, we developed some sample interviews for purchasing and top managers of the company.

Starting from the analysis of data gathered from these meetings, we defined the matrix of pairwise comparisons-- reported in Table 3--pointing out the relevant criteria of the evaluation. In particular, having obtained the measures-- describing the extent to which each supplier achieves the identified criteria--we conclude that the best selection is represented by the procurement from the supplier that achieves bumpers made from a single material.

As we pointed out when we presented the theoretical framework (see "State of the art models for supplier/s selection" and "Designing models for selection 'green' supplier/s'), a contrasting conclusion emerges with respect to the adoption of a vendor rating system which explicitly considers only economic items. This is due to the capacity of the suggested model to include tangible as well as intangible items highlighting (i) the supplier's environment- related innovative capability and (ii) its 'green' image, which represent, in our opinion, the most important factors to consider for a pro-active company which aims at comparing different procurement solutions.

Conclusions

The above discussion highlighted that there is a large literature that deals with the assessment of a supplier's performance, i.e. vendor rating systems (Gregory, 1986; Min, 1993; Soukup, 1987; Thompson, 1990). Unfortunately, the findings of some empirical investigations (Azzone et aL forthcoming) indicate that no state of the art approach includes the environmental dimension as a key assessment factor.

This paper tries to rectify this situation by suggesting 'green' vendor rating systems. In particular, the design tools include in the supplier selection procedure both quantitative and qualitative environment-related factors. These are rather complex models which need to be implemented effectively in high environment-related techni- cal competencies and good managerial capabilities of the purchasing team. Nevertheless, they have a strategic importance and present significant advantages with respect to state of the art vendor rating systems; in particular, they can help managers in:

(1) Facilitating the interactive flow of inputs from managers at all levels to evaluate suppliers according to a strategic perspective. This is a crucial point, since environmental issues have a multidimensional nature


(Azzone and Noci, forthcoming; Weber, 1993) and hence require the involvement of actors with different cultural, technological and managerial backgrounds.

(2) Making the supplier selection procedure a collective learning for all the decision-makers, thus permitting them to improve their know-how on a complex issue like environmental management.

According to the above analysis, it is expected that the designed 'green' vendor rating systems will be widely adopted in the future by multinational firms. Indeed, many empirical investigations (Azzone et al, forthcoming; Hutchin- son, 1996) highlight that multinational corporations are developing pro-active 'green' strategies; in this sense, it becomes a priority for such firms to assess carefully a supplier's environmental performance and, furthermore, to verify whether the vendors are able to support them in developing new 'green' product development programs.

As regards firms operating in fields characterized by high environmental risk (automobiles, chemicals and plastics, metals and mining, etc.), it is clear that their concern for 'green' issues is not recent; nevertheless, their attention has been always focused internally, i.e. on production processes. But, over the last few years, the continuous introduction of ever more binding environmental regulations has forced them to establish integrated relationships with their suppliers in order to facilitate compliance with regulators' environmental prescriptions (Welford and Gouldson, 1993). In this perspective, the introduction of effective 'green' vendor rating systems has a primary importance, since it allows the purchasing team to identify suppliers characterized by good environmental performance and competencies which can support such firms in the continuous improvement of their environmental performance.

Finally, in relation to firms that are not expected to adopt 'green' vendor rating systems in the short term, i.e. mainly small firms with a limited availability of financial resources and 'green' competencies, we believe that the wider diffusion of environmental certification schemes (ISO 14000, EMAS, BSI 7750) wilt be an important trig- ger for the introduction of systems aimed at supplier selection according to an environmentally conscious perspective. Specifically, in the author's view, the need to continuously improve the corporate environmental performance (as requested by all the above certification schemes) will force firms to involve also suppliers in their environmental programs, thus emphasizing the importance of methodolo- gies which allow the purchasing team to select only eco- efficient suppliers.

Table 3 The calculated matrix highlighting the decision-maker's preference degrees of evaluation criteria

Current environmental 'Green' competencies efficiency Supplier's 'green' image Net life cycle cost

'Green' competencies l 3 1.5 2.7 Current environmental efficiency 0.333 l 0.7 0.8 Supplier's 'green ' image 0.667 1.429 1 1.5 Net life cycle cost 0.370 1.250 0.667 1

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