ERP Systems and Sustainability

In a business sense, there is a strong drive to create an economy based on sustainability.

Unlike many years ago, today, to be sustainable has many meanings. A sustainable business doesn’t only need to recycle more and use less paper and goes far beyond the green aspects usually associated with this term. Sheila Bonini and Stephan Görner, consultants at McKinsey & Company, explain that ‘more companies are managing sustainability to improve processes, pursue growth, and add value to their companies rather than focusing on reputation alone’. We now question business ethics in a way not done before. There is a focus on the triple bottom line, measuring a company’s degree of social responsibility, economic value and environmental impact.

According to the International Institute for Management Development (IMD) ‘sustainability is becoming more important for all companies, across all industries. 62% of executives consider a sustainability strategy necessary to be competitive today, and another 22% think it will be in the future’.

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, Senior Director of Industry Strategy for 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 which we explore in this post.

Organisational Structure

ERP, as the name implies, is an enterprise-wide approach to driving processes and delivering clear and concise information across an organisation. For overall success in this area, it is vital to involve key people from every department across the business. From the initial scope through the implementation project and into optimisation. 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

Furthermore, by keeping the software up to date and both utilising and maintaining hardware correctly, companies can optimise server capacity and processing power. This way, you will have access to critical company information quickly and at all times – providing you are an agile business.

Measurement Tools

The various management systems that you can use to execute a sustainability strategy are critical elements in any implementation. These systems are made to drive a sustainability focus throughout the business. Measurement is crucial 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.

Back in April 2010, new legislation compelled large organisations to measure their emissions and devise strategies to reduce them. The Carbon Reduction Commitment (CRC) Energy Efficiency Scheme required organisations that consumed more than 6,000 MWh of electricity a year to design a carbon reduction strategy. This scheme was retired in 2019.

Replacing the CRC Energy Efficiency Scheme is Streamlined Energy Carbon Reporting (SECR) and will require qualified organisations to disclose electricity, gas and transport usages while also any energy-efficient actions during the previous year in annual reports. However, companies using lower domestic levels of energy are not required to disclose their SECR information if it is confirmed (on a yearly basis) that they used 40,000 kWh or less during the 12 month period. So there are incentives now to use less energy. For those of you who need to declare, do you have a system that will support the collection and storage of this kind of data?

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. You can record the cost of acquiring material separately, rather than treating as an overhead, using Landed Cost Tracking elements. You can also create A Bill of Packaging to monitor these elements of costs.

Many ERP packages also provide links into specialist measurement packages to gather usage data within the core reporting system. The stricter regulations get, the more of a requirement there will be to improve data gathering tools. Vendors report that it is usually now a requirement in an Invitation to Tender (ITT) 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, President of IFS Industries:

“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

Innovative Modules:

Optimal Asset Management can significantly reduce utility and material consumption. In the same way that a well-maintained car saves on fuel, 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 examines the impact of products, processes, services and other tasks 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 help you to know 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 occurs when materials are sourced from a range of locations and converted into product efficiently. 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.”

Summary

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 be able to resonate with a brand or company about what they’re using and how.

ERP systems can support the sustainability strategy positively in many ways.

• By providing the right organisational environment in which to adopt a sustainability strategy
• Supply 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 or Supply Chain Optimisation modules, for example.

Product development is driving this way as ERP vendors see sustainability as a significant trend for organisations. There are schemes in place to help businesses be accountable for their carbon footprint – Carbon Trust or Enworks, for example. 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.

Get in touch with us today to devise your ERP sustainability strategy on +44 (0) 1282 463710.