green supply chain costing

GMI 33 Spring 2001 71

Green Supply Chain CostingJoint Cost Management in the

Polyester Linings Supply Chain

Stefan A. SeuringCarl-von-Ossietzky Universität Oldenburg, Germany

Due to required environmental criteria, green products cannot be purchased on ‘nor-mal’ markets. Therefore, it is necessary to manage the whole supply chain from rawmaterials to customer delivery and disposal. While these needs drive up costs, noconcept exists that allows cost management within the supply chain. Traditional costaccounting and cost management techniques look only at the internal costs of acompany.

Therefore, these systems have to be integrated with the concept of transactioncosts, yielding a supply chain costing framework on three levels: direct costs, activity-based costs and transaction costs. After describing the supply chain for apparel, thispaper outlines a framework for supply chain costing. In the second part, a supplychain for polyester linings will be used to discuss the environmental improvementsand their cost influences, including the measures taken in supply chain and costmanagement to optimise the cost situation and allow the market introduction of theenvironmentally improved products.

● Supply chainmanagement

● Costmanagement

● Textile industry

● Activity-basedcosting

● Transactioncosts

● Supply chaincosting

● Polyester

Dr Stefan Seuring studied business administration, chemistry andenvironmental management in Germany and the UK. From 1995 to 1998, heworked at the Department of Environmental Technology at the University of

Paderborn, Germany. Since 1998 he has been employed as lecturer, and since2001 as senior lecturer, at the Chair of Production and the Environment at theUniversity of Oldenburg, Germany. His research focuses on supply chain and

cost management.

u Chair of Production and theEnvironment, Institute for BusinessAdministration, Faculty of Business,Economics and Law, Carl-von-Ossietzky Universität Oldenburg,26111 Oldenburg, Germany

! [email protected]

< www.uni-oldenburg.de/produktion

* This paper presents work carried out in the research project EcoMTex: Ecological Mass Textiles(Project FKZ 07 OWI 14/0) carried out at the University of Oldenburg, other research institutions andcompanies (see www.uni-oldenburg.de/ecomtex). I am thankful to the German Ministry of Research(BMBF) for the funding and to the GSF for administrative support.

I would also like to express my thanks to an anonymous reviewer for his comments on an earlierversion of this paper.

*

ver the past few years, green products have been introduced intovarious fields of consumption. While customers would prefer green products if theirprices were equal to those of ‘normal’ ones, they are not willing to pay considerablymore for green products. This has led to a situation where green products have regu-larly remained within small niches mostly holding a market share below 5%. The

reasons for this are multiple, so various approaches are used to foster the furtherdevelopment of these market niches towards mass markets. One of the most importantapproaches centres on marketing activities that aim to find new ways to market theproducts.1 A second approach attempts to improve cost management along the supplychain; two issues are evident:

t The greening of products often drives up costs, as additional requirements have tobe met at each stage of the supply chain.

t No cost management is used in product design and manufacture.

Therefore, it is necessary to look at how the supply chain and, in particular, the coststherein are managed.2

First, the paper examines the supply chain for polyester linings. The need to improvethe product ecologically beyond measures implemented at single production facilitiesis emphasised. Even though the disposal of used textiles encounters enormous prob-lems, only the supply chain from raw materials production to distribution will be coveredsubsequently. This allows the design and production of the products to be addressed.The description of the supply chain then leads to a short look at the issues covered insupply chain management. The introduction of companies involved in the polyesterlinings supply chain shows the measures used to lower the costs along the supply chain.For this analysis, the framework of supply chain costing is used, where three costlevels—single costs, activity-based costs and transaction costs—are analysed. Only thethree cost levels combined explain how the activities of one company influence costs ofother companies along the supply chain and how these costs can be managed jointly.

Traditional supply chain management in the textile and fashion industry

In traditional market co-ordinated chains, the fashion industry does not usually takeinto account the single production stages of its suppliers. Apparel is bought on spotmarkets, where suppliers might change from part to part and even more from seasonto season. Usually, activities are only carried out between two companies, while theirrelationships can be characterised as arm’s length. Material and information flows areco-ordinated in stages, as is typical for mass markets, where commodity-type productsare traded (Horstmann 1998: 5). Within the textile and fashion industry, there is intenseglobal competition at all stages of the supply chain (Magretta 1998: 104). Furthermore,power concentrates in the companies selling and distributing the products to thecustomers, who demand customised products (Pine et al. 1993) within shortening life-cycles (Fisher et al. 1994: 83). Hence, within a time-span of six months or less the marketis mixed up completely.

stefan a. seuring

72 GMI 33 Spring 2001

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1 The marketing approaches taken are outside the scope of this paper (see e.g. Meyer and Hohmann2000).

2 The discussion within this paper centres on supply chain issues. It should be mentioned that manycompanies of the textile and clothing industry as well as their suppliers, which include diverse indus-trial branches, have been and continue to be very active in the implementation of environmentallyimproved production processes and products (see e.g. Myers and Stolton 1999).

The requirements outlined demand the introduction of supply chain managementideas to the textile and fashion supply chain and explain why these industries are fre-quently part of the existing supply chain literature.

Within this increasingly competitive environment, single companies are not able tosurvive on their own, but only as part of a supply or value chain, a concept that has gainedimportance since its introduction by Porter (1998). Together with recent developmentsin logistics and information technology, it forms the basis for the concept of supply chainmanagement (SCM). A definition of supply chain management is given by Handfieldand Nichols (1999: 2):

The supply chain encompasses all activities associated with the flow and transformationof goods from raw materials stage (extraction) through to the end user, as well as theassociated information flows. Material and information flow both up and down thesupply chain. Supply chain management (SCM) is the integration of these activitiesthrough improved supply chain relationships, to achieve a sustainable competitiveadvantage.

Therefore, all managerial and organisational aspects that evolve within the supply chainare included, such as searching for and partnering with suppliers or customers.

Greening the polyester linings supply chain

Among the set of conditions outlined, the number of green products sold is limited.‘Green’ fibres, both cotton and polyester, are not available on spot markets due to thelimited amount available worldwide (e.g. only about 0.05% of all cotton is producedunder organic standards; the proportion of environmentally friendly polyesters is evensmaller). Therefore, if a fashion company plans to offer products made of green fibres,it has to search for partners along each stage of the supply chain. After finding thepartners, the company has to train them to meet the additional requirements. Severalapparel companies have set up special programmes to work with their suppliers (seeHummel 1997; Myers and Stolton 1999).

These are only a few of the issues that highlight why green products are often moreexpensive, but these examples provide sufficient evidence that a smaller amount ofoutput is not the only reason for the higher prices. To address these multiple reasons,a cost management along the supply chain is needed. Such a concept has to take intoaccount all costs along the supply chain.

Below, a supply chain for polyester linings is used to explain the environmentalimprovements, their cost influences and the measures taken in supply chain and costmanagement to optimise the cost situation and allow the market introduction of theenvironmentally improved product. While both fabrics and lining can be made ofpolyester, the companies involved in the chain first turned to the lining. Polyester liningis used in a wide range of fashion products and accounts for about 70% of all liningused for apparel.

One important measure introduced was to shorten the supply chain, so that only threecompanies were involved, as displayed in Figure 1.3 This reduces the number of inter-faces involved to just two. Brief explanations for the activities carried out at each step ofthe textile supply chain, and the environmental problems associated with them, areprovided susequently, as are the improvements made (Schmidt 1999; Myers and Stolton1999).


green supply chain costing: joint cost management in the polyester linings supply chain

3 Due to confidentiality reasons, the single companies are not named. Furthermore, all informationon costs has been modified for this reason.

Filament and yarn production

Polyester is a human-made fibre, produced from limited natural stocks of crude oil. Theprocessing of the crude oil applies to all product groups, so it will not be taken intoaccount further.

The raw material is polymerised and cleaned, producing polyester chips. For theproduction of polyester chips heavy metal catalysts (mainly antimony trioxide) are used,which cause problems in treating reaction residues and waste-water. An improvedcatalyst, which contains non-toxic substances and yields a higher output rate, is available,but rarely used so far. The smaller production batches and additional cleaning of theproduction facilities during the polymerisation of eco-polyester result in higher prices,which are pushed up the chain. Hence, the current costs exceed the process level targetcosts set by ‘conventional’ polyester lining, which almost prohibit their further use(Thier-Grebe and Rabe 2000). In the next step, filaments (one-dimensional) areproduced by melting the polyester chips and forcing them through spinneret holes. Theextruded filaments are collected into thread forms. Next, they are stretched and drawnto yield polyester yarns.

Fabric production, dyeing and finishing

Weaving or knitting the yarn (one-dimensional) leads to the creation of fabrics (two-dimensional). During these manufacturing steps, a number of often environmentallyharmful additives are used to allow for easier production. Furthermore, organic solventsand/or polluted waste-water as well as dust and noise are side-effects of yarn and textileproduction.

Textile finishing includes processes that improve the wearing properties of the fabricor modify its look or feel. The environmental problems of these steps are similar to thosein yarn and fabric production. More expensive colours and additives are used to avoidthese problems during production, dyeing and finishing of the yarn and the fabric.Additional storage and handling processes are required to separate the polyester fibres,yarn or fabric from the ‘regular’ material.

Clothing production, selling and distribution

The next step is the manufacture of the apparel itself. The finished fabrics and liningare combined with other materials, such as zippers or buttons. While this step createsonly a limited environmental burden, the work is regularly carried out in second or thirdworld countries where the workers, mainly women, work under enormous pressure andhumiliating labour conditions.

stefan a. seuring


Filamentand yarn

production

Fabricweaving,

dyeing andfinishing

Clothingproductionand selling

Material flows

Information flows

Figure 1 the polyester linings supply chain

Selling and distribution are of great importance as they are carried out by the compa-nies in the chain that decide which fashion is produced in which style and quality. Hence,this step has a major influence on all previous steps since product variety and qualityare defined at this level. Apart from transport, only limited environmental problemsoccur. Selling and distribution can be carried out by a single company or within a tiersupplier system of varying depth.

As the direct costs of eco-polyester production are higher during polymerisation andfilament production, measures have to be found to reduce the total costs along the supplychain. This will improve products still offered at the same price.

Supply chain costing

Various SCM techniques and measures have been developed to help companies tooptimise their supply chain activities. As costs are considered an important factor, linksto cost management techniques have recently gained importance (see e.g. LaLonde andPohlen 1996; Cooper and Slagmulder 1999; Seuring and Schneidewind 2000).

Traditional cost accounting is not prepared to actively manage costs, which has led tothe development of cost management techniques that are used to support specificdecisions and the overall management of organisations (Hilton et al. 2000: 6). Still,most cost management techniques look at the internal cost of companies, especiallydirect and indirect costs. Activity-based costing (Kaplan and Cooper 1997: 79) providesan alternative approach to the allocation of indirect costs among products. Strategic costmanagement (Shank and Govindarajan 1993) has emphasised the importance of costswithin the value chain, but the discussion of cost drivers stays on a general level.Therefore, a concept is needed to allow for the classification of costs within the supplychain, one that combines the flows of material and information and the partnershipswithin the supply chain. So far, no concepts have been developed to deal with this issue.

Such a supply chain costing has to take into account both production and transactioncosts.4 Building on the traditional separation of direct costs and indirect or activity-basedcosts, this leads to a differentiation of three cost levels—direct costs, activity-based costsand transaction costs—as Figure 2 shows.

The three terms are defined as follows:

t Direct costs are caused by the production of each single entity of a product andinclude such costs as materials, labour and machine costs. Mainly, these costs arecontrolled by prices for material and labour.

t Activity-based costs are caused by activities that cannot be directly related toproducts, but are caused by administrative activities performed in order to deliverproducts to customers. These costs arise from the organisational framework insidethe company.

t Transaction costs encompass all activities dealing with information and communi-cation with suppliers and customers. Therefore, these costs arise from interactionswith other companies in the supply chain.



4 This terminology is taken from the concept of transaction costs, which plays an important part withinnew institutional economics (Williamson 1988). Without referring to this concept in detail, the term‘transaction costs’ within the concept of supply chain costing is applied in a simplistic way thatdisregards the variables and explanations given by Williamson’s theoretical concept.

An analysis of the cost changes on the single steps of the supply chain is presentedbelow.

Cost driver analysis and cost management in the supply chain

Some details of the production processes at the single steps of the supply chain havebeen given already. These are now supplemented by explanations of why costs are higherat the single production stages and which drivers for the additional cost can be found.To analyse all three cost levels, the production costs at the single stages of the supplychain as well as the interfaces between the single companies have to be taken intoaccount. Therefore, the analysis is carried out in two steps: first, by looking at the produc-tion of the polyester and the interface to the weaver, dyer and finisher; and second byassessing cost during weaving, dyeing and finishing and the related costs of dealing withthe clothing producer. The second interface will be explained in greater detail.

The production processes during clothing production, selling and distribution arenot influenced by the use of eco-polyester. Still, the introduction of environmentallyimproved polyester to the market is limited by its use. So far, less than 1% of the worldpolyester production is produced with the new catalyst, which leads to another importantissue that can only be analysed by taking all stages of the supply chain into account. Thesupplier that runs the production facilities for polyester produces about 100,000 tonnesper year, while the company selling the final products uses about 4 million metres ofpolyester linings per year, which is equal to about 400 tonnes. The capacity of the fabricproducer lies in between these two limits. Hence, the capacity of only about one week’sproduction at the polyester polymerisation facility supplies the polyester needed all yearlong at the clothing company. The problems addressed pinpoint why a joint supply chaincosting between the three companies was implemented as explained below.

Interface 1: polyester and yarn production to fabric weaving, dyeing and finishing

Polyester can be produced either in batch or in continuous production lines. Continuousflow production dominates the world market; it is cheaper because of the use of highlyspecialised machinery, which can only be used for this single kind of production. Asvery limited quantities of eco-polyester are needed so far, these are produced in batch

stefan a. seuring


Company A

Activity-based costs Activity-based costs

Direct costsDirect costs

Production unit

Supply chainTransaction costs

Company B

Figure 2 cost levels in supply chain costing

facilities, where the production conditions can be altered almost from batch to batch.The change in the production line between the conventional and the ecologicallyimproved catalyst creates additional direct costs, as the machinery has to be cleaned toavoid spillages of antimony at the start of a new production run that is made up of variousbatches. This switch between production modes increases costs. Furthermore, the eco-polyester has to be stored in separate tanks. Hence, the major cost driver found is thebatch size for a single production run, which is a typical measure for cost allocation inactivity-based costing (Kaplan and Cooper 1997: 89). Still, the need for running thebatches to produce eco-polyester depends on the orders placed by the customers and theamount of such polyester stored. If the orders placed can be controlled, the transactioncosts of dealing with customers might be reduced as well as the activity-based and directcosts generated on-site. As a result, the company that runs the polymerisation has toco-operate with the weaver to optimise the order quantities to allow the production ofcost-minimal batches. However, the eco-polyester yarn remains slightly more expensivethan conventional yarn.

Interface 2: fabric weaving, dyeing, finishing to clothing production, selling and distribution

The filament production and the finishing processes mainly stay the same. The majorcost increases are derived from the dyeing of the fabrics, as the catalyst has someinfluence on the chemical process that occurs during the dyeing. The eco-polyesterlinings pick up the colour faster, but, to yield an even dyeing across all of the fabric, theprocess takes more time. The temperature control of the whole process has to beadjusted to assure high-quality coloured fabrics. Therefore, direct costs of the machineryused rise.

An important cost driver found was the number of colours ordered by the clothingcompany. For each colour, a set-up process is necessary, in which colour metrics aredefined, so that the colour is mixed correctly. Each colour introduced to the productioncauses a cost of about 4 350 for the preparatory activities carried out. Before a projectwas implemented between the companies that aimed to reduce the number of coloursused, the clothing company ordered about 300 different colours from just one producerof polyester linings, besides further linings from other suppliers. These costs mainlydrive the production costs up during the dyeing, while they have only a limited influenceon the costs of the clothing production. This is limited to storage costs of the differentcolours and the danger of having obsolete quantities in stock at the end of the season.Compared with the rising costs at dyeing these costs are rather marginal. But the costsof the company carrying out the dyeing would be reduced if their customer agreed toco-operate. Hence, the shared aim of being willing to introduce eco-polyester linings ledto an initiative that helped to reduce costs for the supplier.

Across all purchasing departments of the clothing company, a joint project was setup to define the minimum number of colours possible. This led to a basic set of about50 colours in three categories, which were equivalent to an ABC classification.

In category A, only black was listed as it accounts for about half of the polyester liningsordered in each year. About 20 further colours were classified as B, as they were orderedin higher quantities for several seasons. Various grey and blue fabrics belong to thiscategory. The remaining colours ordered were dependent on the seasonal variations incolours and style; they were placed in category C. The project can be seen as an invest-ment in transaction costs by the clothing producer that limits the activity-based costsoccurring during the dyeing process. The project took about six months and about4 50,000 was spent to complete it (Table 1).



This ABC classification and the total amount of about 4 million metres ordered peryear formed the basis for a new contract between the two companies: namely, the weaver,dyer and finisher and the clothing producer.

Some important issues in the contract are:

t All polyester linings in the eco-quality are ordered by the clothing producer fromone supplier only.

t For A and B colours, the supplier guarantees a delivery time of two days. This wasmade possible by reviewing and forecasting the amounts needed each season (a six-month period), which allows the supplier to produce the polyester linings in advanceand hold them in stock. Applying a ‘push’ approach in production scheduling andknowing that the clothing company will buy the linings, these agreed amounts formthe basis of smoothing the production capacity used.

t The C colours are produced after an order is placed and stay at the typical deliverytime of about two weeks. This is comparable to the usual ‘pull’ production in theindustry. As a result, the target price of conventional polyester linings was almostmet for the eco-polyester linings.

Table 2 provides an overview of the cost savings at the different cost levels. The figuresin Table 1 are only representative due to the confidentiality requirements of the compa-nies, but provide evidence of the effects of joint cost optimisation across partners in a

stefan a. seuring


Table 1 example of costs increases and savings

before number of after number ofcolours was reduced colours was reduced

Number of colours 300 50

Costs per colour (4) 350 350

Total costs for colours (4) 105,000 17,500

Cost savings for dyer (4) 87,500

Project cost clothing (4) 50,000

Cost of contracting (4) 2,500

Cost savings of joint project (3) 35,000

Table 2 cost savings at the three cost levels of supply chain costing

Direct costs Reduced number of coloursneeded; reduced number ofproduction batches with highersingle quantities

Reduced price for eco-polyester

Activity-based costs Higher usage of capacity; lowerstocks; reduced set-ups for colours;lower number of batches run

Lower stocks; fewer deliveries;shortened delivery times; reducedrisk of stock obsolescence

Transaction costs No search costs for new customer;reduced contracting costs

No search costs for new supplier;reduced contracting costs

cost effects atcost level cost effect at step of the supply chain

supply chain. However, this addresses only part of the costs; for example, the costs ofdealing with a certain number of suppliers or the risks of being dependent on just onesupplier are not included. Further investigations are necessary to incorporate thesecosts.

Conclusion

SCM strives for a new method of co-operation for joint benefit along the supply chain.The definition of SCM addresses this by taking into account both the management ofmaterial and information flows and the management of the partnerships along thesupply chain. These definitions question traditional cost management techniques thatfocus on only one company. Hence, the framework of supply chain costing introducesa third cost level— namely, transaction costs—which allows the assessment of costdrivers that can only be influenced within the supply chain.

The example of a new eco-polyester is used to explain how costs can be influencedacross a supply chain. The analysis of both the cost drivers at the production facilitiesfor polyester polymerisation and the cost of co-operation with suppliers and customersprovides the chance to look at cost savings beyond the influence of a single company.The co-operation between the company that weaves, dyes and finishes the linings madefrom the eco-polyester and the clothing producer that uses the eco-polyester linings inits fashion products shows that measures at one company (i.e. the reduction of liningcolour ordered) can lead to reduced production (direct and activity-based) costs for thesupplier. These joint measures provided the basis to be able to introduce an ecologicallyoptimised product to the market.

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green supply chain costing

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