Green and Frugal, Part II

Broadly frugal

In the last post (an embarrassing long time ago!) the discussion centered on "frugal engineering" or, as it is sometimes referred to as "frugal innovation."  It was noted that frugal engineering usually refers to reducing the complexity and cost of some good and the production of it so that, for example, it might be more accessible in developing economies. It can also include simpler (or fewer bells and whistles) products that are devoid of non-essential features. One market for this is the so-called developing economies where there is an emphasis on simple basic performance and durability and less on glitz. The theory is that selling such products, made cheaply (but well!) would couple volume with thin profit margins to address the growing markets in these countries for basic goods and services - cars, cell phones, appliances. 

The expectation is that result frugal engineering will not create products (or processes) with inferior quality. Hence production must be similarly efficient and, it would be assumed employ "frugal use of resources" as well.

An article in mid 2010 on "The importance of Frugal Engineering" published by Booz and Company reviewed some of the fundamentals of this new way of designing and producing products for the "bottom of the pyramid." These include elements we should already be doing - but focused laser sharp on a different segment of the consumer market: understanding the consumer, bottom up innovation, organizational agility including cross functional teams, nontraditional supply chain and top down support.

They give several great examples in the article and we'll summarize on here - that of the Nokia 1100 cell phone. With the first glimmer of economic prosperity in pretty much any country people buy a cell phone. Not a fancy one. A functional one. One that might work in agricultural conditions - dusty and dirty. One for field workers in humid environments. The describes the development of a phone for such circumstances.  Nokia engineers noticed that the humidity of the working environment made the phones slippery and hard to hold on to or dial. The result was a phone with a nonslip coating on the keypad and sides. To resist the damage from dust and other contaminants in some of the factory environs the handset was designed to minimize dust infusion. The phones are also very basic - send/receive calls and texts, monochrome screens, fewer features so power draw is lower and they can last longer between charges. The Nokia engineers added only one feature that might be an "extra" - a small, energy efficient flashlight that is a big hit in areas with frequent blackouts or poor lighting - meaning pretty much most of the markets this phone was designed for. It sells (in 2010 at least) for $15-20 and is apparently a best seller.

So, what can we learn from this for a broader market - one that is already enjoying the fruits of be "further up the development curve"? If you "google" the term frugal you get quite a screen full. The usual implication is getting more but spending less. Well, that works! It also starts with clothing - buy second hand, buy fewer, buy better quality (things that last), chose versatile over stylish (ok…let's see how that works!), repair/modify as needed, make your own. You can find more on this line at a number of websites - like frugal girl. 

Importantly, this does not mean buy cheap clothes if you want to include sustainability in your wardrobe. The trend to "throwaway fashion" based on cheap, rapidly changing styles made with inexpensive materials and low labor is anathema to sustainability. One only need to reflect on the recent tragedy in Bangladesh to drive that point home.

But, remember the first paragraph above and the discussion in the last posting - frugal does not mean low quality or, importantly, lower value (quality for the price).

That last one, quality for the price, is the one to watch. Recall our discussion in the past on the IPAT equation for estimating impact of technology? The acronym is defined as  IPAT: I = P x A x T or  Impact = Population x Affluence x Technology. The key term green manufactures and engineers need to keep in focus is "Impact/GDP" - that is, the environmental and social results or impact associated with the value of the product or technology. That's the one we can influence. Being able to increase the value of the product or technology while at the same time reducing the impact from using the product is green. If this is done sufficiently over a wide enough range of products (or manufacturing processes) we can become sustainable.

This should apply across all economic domains and the elements of frugal outlined in the Booz paper should equally apply. 

Understand the customer - let's assume the customer is interested in being truly green (and on the road to sustainable); certainly in the San Francisco Bay area this is appealing to the "developed" crowd. But we'll need to make sure we can address the customer needs straight off but include enough style to make the product acceptable. 

Bottom up innovation - rethink all aspects of the product or process; specially with efficiency of resource use, and recovery, in mind. 

Organizational ability - this is more than beating up the supplier for lower cost. This implies less obvious tradeoffs between similarly capable but less impactful solutions; Often suppliers can or will work with the designer to insure the specifications are met but not just by using something "off the shelf" or, perhaps, off a different shelf. An interesting article on frugal engineering (albeit in a slightly different context) in supply chains was in the Financial Times in May, 2011.

Top-down support - this is the Kennedy Moon Landing mission declaration - but for frugal engineered and manufactured products; "We will make a X for $Y." That might mean not adopting the same product platform that serves another market demographic. Or developing one that extends across a broader range of market.

In the Booz article one of the bolded text box statements is "In mature industries, companies are optimized for their main customers. For emerging markets, a different approach is required." True. But, let's consider the "sustainable-minded consumer" (including the manufacturing engineer or factory manager) as an "emerging market" too. How would we design and build our products for that growing market? As we are able to deliver products with equivalent capability/functionality/value but with lower impact those consumers leaning in this direction will go for it. 

Companies are already on board. There are already so many examples on the web and in the media about companies being more productive and profitable using fewer resources, less energy and water and, more and more, with lower social impact throughout the supply chain. This is the solution to greenwashing - deliver real measurable green value in a product that meets the consumer's needs - whether in a field in India or a start up in San Francisco. How about we focus "laser sharp" on that?

Green and Frugal, Part I

Frugal Innovation and Green

The last posting centered on innovation and sustainability - or creating "new" value  - and the role of green innovation in product design and manufacturing. Recently I've been reading about, and hearing about, "frugal engineering." Or, it is sometimes referred to as "frugal innovation." As an engineer I'm happy to have the terms innovation and engineering used interchangeably!

Frugal engineering usually refers to reducing the complexity and cost of some good and the production of it so that, for example, it might be more accessible in developing economies. Wikipedia defines frugal engineering in this way and states that the term "refers to removing nonessential features from a durable good, such as a car or phone, in order to sell it in developing countries. Designing products for such countries may also call for an increase in durability and selling them, reliance on unconventional distributions channels. Sold to so-called "overlooked consumers", firms hope volume will offset razor-thin profit margins. Globalization and rising incomes in developing countries may also drive frugal innovation."  

Importantly, the result of frugal engineering is not products (or processes) with inferior quality. But there is an emphasis on low cost of product. So, to insure reasonable margin, production must be similarly efficient.

There is always a tension between "built to last" and "built to last long enough!" This becomes a major issue in closed loop systems such as those illustrated with the Ricoh Comet Circle and other closed loop scenarios. We covered the comet circle some time ago. (And from Ricoh). The comet circle, shown below from Ricoh,

shows both the forward and reverse logistics path we've discussed before - material flowing via the product to the consumer and then material flowing to other uses after product use by the consumer. The "most sustainable" here is the loop that goes back to the consumer with the same product providing the same function. The challenge of "built to last" vs "built to last long enough" plays an important role here. Products with long lives will be more reasonably returned to similar use at a similar functional level. Products which fail, or the obnoxious subset of failure, being overcome by new technology, will have longer loops and, by definition, be less sustainable.

So, how do we decide where is the "sweet spot" between designing products (made of components) that last a long time vs those that fail earlier. One critical question is "should we design (and make) all the components to fail at the same time and incur the extra cost and, likely, over design, or should we let one or more components fail earlier and then reuse the remaining components as with remanufacturing?

Engineers have been dealing with the tradeoff between product design, quality and failure for a long time. This is usually discussed as part of product reliability. Dennis Wilkins (retired from HP) explains that reliability engineers characterize the lifetime of a population of products using a graphical representation called the "bathtub curve." The bathtub curve is characterized by three periods in a product life: an infant mortality period (early failure) 

with a decreasing failure rate, then a normal life period (also known as "useful life") with a low, relatively constant failure rate, and ending up with a wear-out period of accreted failure exhibiting an increasing failure rate. Engineers try to reduce failures at each stage of product life by efforts such as "burn-in" or running the product for some time to catch early failures or other tests to attempt to screen out infant mortality failures. Design and manufacturing choices can reduce (or increase!) failures at any stage - depending on quality of components and design and production.

Professor Sami Kara and colleagues at the University of New South Wales in Australia have studied this problem, as applied to appliances, for some time. The studies explore the useful life of components with the thought to identifying those that have significant use in a second life versus those that fail with the appliance. This can drive the economic models for re-manufacturing but is dependent on simple ways to estimate which components have life left and, importantly, how to assess this easily and reliably. Challenges include the cost of testing procedures that might increase labor costs for remanufacturing or re-use, necessity for disassembly of an appliance to access the component to assess its condition, inaccurate test data with respect to condition, degradation or remaining life and questions about number of samples that need to be tested to get reliable data.(see "Reliability assessment of components in consumer products - a statistical and condition monitoring data analysis strategy" by Mazhar, Kara and Kaehernick, 2005). 

Kara describes some of their studies showing that some very inexpensive components of large appliances fail early and render the appliance unusable - and often it would be very inexpensive to improve these components for a dramatically longer product life. One that comes to mind is the door seal on a residential refrigerator. But when is "good enough" for a product component good enough?!

So, that's one consideration in design, production and life of the product.

Another consideration is product efficiency improvements resulting from new technologies. If product technology (in tens of operating energy or resource consumption) changes rapidly it might be advantageous to upgrade products (meaning change and replace) more often. Alternately, if product technology evolves slowly, there may be little advantage, from a consumption angle, to upgrading. The tipping point is with respect to embodied energy in the product.

Julian Allwood, who's been mentioned before in this blog, covers the tradeoff in his book Allwood and Cullen, Sustainable Materials with Both Eyes Open, UIT, Cambridge, 2012. There are two distinct strategies depending on whether or not the product has "high embodied energy" or "low embodied energy". Recall that embodied energy is the energy (and resources with their energy footprints) required to manufacture the product. Products with high embodied energy and low energy in use are candidates for replacement less often with technology enhancements while product with low embodied energy and high energy in use with improving efficiency are candidates for replacement more often as seen below. The strategy can have a big impact on the cumulative emissions (as from the energy) over the life

cycle of the product. This was the issue we discussed some time ago with respect to the "cash for clunkers" program as part of the recovery - it would be advantageous, from an environmental angle,  to replace an old car with a newer car only if the newer car had sufficiently better fuel economy to offset over its life the embedded energy of the vehicle it was replacing plus save fuel.

Enough to consider for the moment! We'll pursue this more with respect to frugal engineering and green in the next posting.

And, follow us on Facebook for more current items and observations - Facebook.com/GreenManufacturingBerkeley!

Innovation and Sustainability

(Or creating "new" value)

In one of my previous posts the subject of externalized costs was dealt with in some detail (see the posting of December 29th, 2012 to be specific.) The idea that we are not really paying for the true expenses associated with the products we consume. The discussion went on to muse about how we might address that.

You might also recall a posting in this blog a long time ago (July 2009) speaking about the "next leap forward" in manufacturing. The evolution of manufacturing in terms of productivity, flexibility, response time, work philosophy or business model, and market responsiveness/customer “pull” shows the evidence of tremendous changes from the earliest organized industry or manufacturing in the 1800s up to today. These changes correspond to distinct periods of production. These periods can be characterized as the craft period, mass production period, flexible production period and lean manufacturing period. The point was that, over the years in the progress of manufacturing, different individuals observed ways to increase the value of the operation by, for example, increasing machine availability, reducing errors/increasing yield, organizational improvements, etc. and then adjusted/modified the processes or systems or business models to capture that value. 

On a recent trip to Europe for a conference I spent some time catching up on magazines I never get to spend enough time with. The Economist issue of January 12th  had an article titled "Has the ideas machine broken down" on the loss (or apparent loss of) innovation in the world - specially the US. It showed a number of types of data purporting to show the decline in growth of GDP per capita (specifically the decline in "percent increase on previous year") in the US starting in about 1950 after several hundred years of steady increase year over year. Don't worry - the GDP/person is still increasing in the US as it is in the world, but the rate of increase is declining. The article quotes Peter Thiel, one of the founders of PayPal, an internet payment company, and the first outside investor in Facebook, a social network, who says that "innovation in America is 'somewhere between dire straits and dead'. Engineers in all sorts of areas share similar feelings of disappointment. And a small but growing group of economists reckon the economic impact of the innovations of today may pale in comparison with those of the past."

Wow. Could it be we don't need any more gadgets or apps?! Maybe we need something that generates real new wealth!

Could sustainable, or at least green, manufacturing be a way to both enhance value and real growth (meaning insure that the resources created by successful businesses and their employees go to growth and not to fix problems created by non- sustainable practices)? That is, if we are not taxed with the costs of healthcare required to "fix" the impacts on humans of pollution (air, water or land), work related problems (hearing loss, injury, etc.), disposal of waste from production and consumption, wouldn't we be able to put some of that revenue towards growing our economy and,at the same time, improve the standard of living of a lot off people?

This semester Dr. Margot Hutchins and I are teaching the Sustainable Manufacturing graduate course in Mechanical Engineering at Berkeley. We have a great group of students who are engaged in the issues, challenges and opportunities. So, a week ago I was starting a lecture on linking manufacturing to sustainability and made the statement to the effect that "there are only three means to create new value in the economy - mining, agriculture and manufacture." Everything else is just redistributing that money in some way (Wall Street/banking money changers, healthcare and education sectors, various other services -- insurance, haircuts, making frapuccinos, etc).

The reaction of the class was strong and immediate. Howls of concern were raised ranging from the inappropriateness of using GDP as a measure of value created (referring to an earlier discussion of the IPAT equation in the class) to comments that this does not value the work or contributions of service sector, psychologists, hairdressers, etc. I tried to explain that this does not create anything "new" and, in some cases, is questionable as to any value. But, the class was not convinced.

So, I resolved to prepare some more background information to prepare the discussion better and try to offer a more reasoned argument.

Although I've seen it referred to in other documents, Bob Lutz, former Chrysler executive and auto industry driver, summed it up like this in a New York Times opinion piece (“Coming Back Home,” New York Times, August 4, 2011):

“From the earliest days of economic activity, it's always been recognized that there are only three ways to add value. The first is to "get it out of the ground" by mining (or drilling), thus creating a commercial commodity where none existed before. The second, of course, is "grow it": prepare the soil, fertilize, seed and harvest; again producing, through agriculture, an economically desirable product. The third, and most important, is "making it": using ingenuity, labor and capital to transform the products of mining and growing into hard tangible consumer goods. Other activities, like services, are helpful, but they do not create new wealth the way mining, agriculture and manufacturing do.”

This is bolstered by data from the Bureau of Economic Analysis in their input-output tables (available at link). That data shows the economic activity generated per unit of output of a sector. Manufacturing and agriculture are the only two sectors for which one dollar of activity generates more than one dollar of broader economic activity - $1.35 and 1.20, respectively. All others generate less and sometimes significantly less, for example, transportation $0.95 and retail $0.55. Mining is not included in the data.

There is an interesting discussion on this topic on the "as green as it gets.org" website. First, they distinguish between creating wealth and getting rich. They list a few examples - I can inherit a million dollars, and I’d be rich, but I didn’t  create any wealth.  I can convince my government that I’m a good candidate for a research fellowship, and I can get wealthy regardless of what I create.  I can steal from my neighbor and make myself wealthy without making wealth.   I can exploit natural resources and pull trees out of the  jungle and generate  income, though most of the wealth  was actually generated by Mother Nature.

Turns out, economists identify four different economies: 

- Primary economies -  the production or extraction of raw materials such as agriculture, forestry, 

mining, fishing.

- Secondary economies -  manufacturing and processing.

- Tertiary economies - retail, distribution, and service. 

- Quaternary economies - research and development, creating ideas and inventions that can later be used by folks in other sections to make a new or better product.

So, continuing to draw on the "asgreenasitgets.org" discussion, wealth is principally generated in manufacturing. In Primary economies, we utilize wealth from Mother Nature. In Secondary economies, we manufacture wealth.  In Tertiary economies, we move wealth around.  In Quaternary economies, we prepare the manufacturing sector to make more wealth.  If you are going to create wealth (which should not be confused with making someone wealthy) you must manufacture.  And, the more value added in manufacturing, the more wealth you create.

So, back to innovation and green manufacturing. I used what I thought would be my killer closing argument with the class by again referring to the IPAT equation. In that equation, you'll recall, one term that engineers can influence is "impact/GDP." Meaning, if we wish to offset or blunt the drive for improved standards of living by people around the world (hence consuming more of everything) and the continuous growth of population, then we need to develop manufacturing technologies that reduce the impact (environmental, social, etc.) associated with production and GDP growth. 

That's where innovation needs to come in. Processes and systems in the secondary economy that convert materials into new products with substantially reduced impact.

We've actually discussed a number of these kinds of "innovative manufacturing" technologies in other postings here. And we will keep introducing them from time to time as examples of what can be accomplished. As a member of the fourth economy - this is my small contribution to creating wealth.

Insourcing and green manufacturing

Or how to win friends and influence people

My dad, as I mentioned in a blog some time ago, was a tool room supervisor for a large John Deere factory in Wisconsin. In his role, which he went into after becoming a journeyman machinist and toolmaker himself (the kind of skills manufacturing is looking for these days and can't find enough of!) was to supervise a large department of similarly talented machinists and tool makers who were tasked with building the tooling and other hardware needed in the factory to make the components of the products Deere built there.

As he took on more and more management he was encouraged by his supervisor to take a class in management and leadership. In those days a very popular course was fashioned by a man named Dale Carnegie and accompanied by a book by Mr. Carnegie titled "How to win friends and influence people."  According to Wikipedia How to Win Friends and Influence People  is one of the first best-selling self-help books ever published.  First published in 1936, it has sold 15 million copies world-wide. The first of twelve things the book promised to do for the reader was "Get you out of a mental rut, give you new thoughts, new visions, new ambitions." Other deliverables included making you a better speaker and leader.

The book, and the course I presume, offered guidelines and tips about communication, working with people and getting the most of interactions with your co-workers or direct reports as well a how to turn challenges into opportunity. Or, perhaps, how to turn opportunity into bigger opportunity!

I thought of this the other day when reading an article in The Economist (January 19th, 2013) talking about the move to insourcing jobs by many US companies (talk about getting out of a mental rut!). The article covered the expected reasons for this ranging from increasing labor costs in many formerly low- wage countries, quality issues, increased advanced manufacturing technology in the US, long delivery times due to shipping from overseas, supply chain interruptions, disconnect between design and manufacturing and the inherent confusion that creates etc. Also, as the labor content of manufactured products decreases, the incentive to move to lower wage locations decreases since the potential savings is reduced. We'll talk more about automation and sustainability in a future posting.

You can add to that the challenges of supply chains, linking innovation to manufacturing when R&D are separated by an ocean and, specially for energy intensive products, the cost and availability of energy.

It did not, surprisingly, mention any of the concerns raised here about environmental issues with offshore production, carbon footprint, or the social impacts of complex supply chains.

My first reaction was - what a great opportunity insourcing offers (and the assumed re-industrialization that implies) to use our engineering skills to insure these are greener processes and systems at the same time. Now, I fully realize that we are not talking of the re-invention of industry in the US but a "rolling renovation" of processes, systems and facilities to address this insourcing. Shouldn't this rolling renovation include green manufacturing?

What kind of innovation are we talking about?
 - enhanced productivity (remember our goal of reducing impact/GDP from the IPAT equation!?)
 - green technology wedges for
     - reducing waste in processes (increasing material yield)
     - increasing energy efficiency
      - more renewable energy supplies or energy recovery in manufacturing
      - improved material selection (less hazardous/toxic and more recyclable
            or renewable materials)
      - new process technologies and/ or hybrid processes
      - enhanced efficient factory operation
      - leveraging
     - and so on (dig back through the the older blogs for more specifics!)

Insourcing means business decision making - considering the return on investment or the old "bang for the buck". That decision making needs to include the results of green manufacturing innovation.

Interestingly, a recent report on manufacturing from McKinsey (Manufacturing the future: the next era of global growth and innovation published in November, 2012 addresses some of this. We'll delve more into this report in a later posting - it is ripe with information and justification for greening manufacturing as part of a savvy business strategy and, additionally, as the right thing to do.

As part of a discussion on "innovation in production" it includes green manufacturing as one of the trends worldwide - even in China. Energy productivity and reduction of greenhouse gases are drivers of manufacturing innovation.

The report lists many of the items we've covered in this blog in the past - reduced carbon emissions by adjusting the source of energy, process energy, energy recovery from processing for re-use, facility heating and ventilating, etc. The report claims that energy costs can make up to 20% of the "land costs" for energy intensive products. Here energy intensive products are referring to chemicals, cement and aluminum but the reference covers a wide range of products with lower, but significant, energy costs. So, from embedded energy in materials in products to process energy, to system and facility resource consumption - innovation and green manufacturing go hand in hand.

With increased energy supplies in the US, much of it natural gas or "clean" energy, the insourcing of manufacturing if it materializes as predicted will spur substantial manufacturing activity including the refurbishment or building of new manufacturing facilities, the restructuring of supply chains, and so on.

This is an opportunity to include environmental metrics into the economics of  insourcing decisions. There is a lot of evidence in the business press, this blog or other  blogs (like Green-biz or Environmental Leader) to substantiate the business case for this. Even more, as we are able to quantify them, add the social impact aspect as well.

This is an opportunity we cannot afford to take lose And wouldn't our actions on this win friends and influence people?  Dale Carnegie would be proud!

The "S" word, Part V

Who should share the responsibility for all this?

Almost two years ago exactly, December 2010, this blog addressed the different changes in our collective thinking that might usher in a sustainable world. It was argued that this depended to a great extent on folks "getting it" with respect to how people view sustainability and their responsibility (personal and corporate - although I understand some believe corporations are individuals!). 

I quoted Lester Brown and his observations on this. He compared the change in thinking needed relative to sustainability (and sustainable development, industry, products, etc.) as the realization of the notion that the earth revolves around the sun and not the other way around. Mr. Brown noted that we used to consider the environment as part of the economy but it is really that the economy is part of the environment. Wikipedia quotes his speech in 2008 stating " 'indirect costs are shaping our future,' and by ignoring these, "we're doing exactly the same thing as Enron- leaving costs off the books. Consuming today with no concern for tomorrow is not a winning philosophy.' "

So, it boils down to, first, accepting the idea that there are indirect costs associated with the environment, second, identifying these indirect costs in a comprehensive way, third, assessing the "ownership" of these costs to the appropriate stakeholders (the "term du jour" for those involved in the process or benefitting/suffering from the outcome; or, according to Merriam-Webster - "one that has a stake in an enterprise or one who is involved in or affected by a course of action") and, fourth (the tricky bit), getting the stakeholders to accept responsibility, or pay in some cases, for their part of the indirect costs.

In the older blog posting referenced above, I also cited Hawken and Lovins, in "Natural Capitalism" (Little Brown, 1999), commenting that “The best solutions are based not on tradeoffs or “balance” between these objectives [economic, environmental and social policy] but on design integration achieving all of them together - at every level, from technical devices to production systems to companies to economic sectors to entire cities and societies.”

Achieving the economic, environmental and social policy objectives all together across all sectors from producers to consumers.

Great concept. How can we do this?! 

In Berkeley, I pay for the removal of my waste each week - divided into three containers - compostable waste (i.e. lawn waste and food products), trash (nothing recyclable left - at least recyclable as defined by the City of Berkeley) and recyclable waste - glass, plastic and metal recyclables. Regardless of where the contents of these three containers was generated (at the farm, as packaging for a product I purchased or had sent to me from an on-line retailer, end of life items,etc.) I pay to have them removed from my household. If the producer creates a product with a larger or smaller carbon footprint (or environmental damage) I see no difference in my waste bill. I do pay, probably, more in property taxes, etc. to cover the cost of environmental impacts on my fellow citizens who need special treatment due to air, water or soil problems associated with production, use and disposal of products. On a national level I am sure I am covering this cost for many who rely on the resources of their governments to help them if they are not able to, or don't have, coverage for such problems. And, to the extent that the manufacturer (if located in the US) or the distributor or local retailer pay fees and taxes and to the extent some of those go to support such services, they are paying something as well. 

If I want to impact what I pay for waste/recycling removal my recourse is to consume less, chose manufacturers who package efficiently, use less. And I do. But this is hardly enough.

These costs are not seen on the bottom line of the business as clearly linked to their product or service and its "sustainability."

In the earlier blog I had referred to California's introduction of "cap and trade" as one possible approach to accommodating these indirect costs. This might be one way to "rethink the structure and reward system of commerce" to bring the external costs firmly into play. 

I was thinking about this over this holiday period as part of the preparation for this posting. I am an avid reader of the New Yorker (ok, first the cartoons, then the articles). In the comment section under "The Talk of the Town" (sort of an opinion piece at the beginning of the magazine) in the December 10th issue was a column written by Elizabeth Kolbert, a staff writer for the magazine titled "Paying for it" and dealing with, this issue. If you are not a New Yorker reader bear with me a bit ... it is worth it!

Ms. Kolbert's piece begins with a short review of a work by Arthur Pigou, a British economist, titled "The Economics of Welfare" first published in 1920. In this work, Pigou develops the concept of externalities in some detail and uses their existence as a justification for government intervention. The article starts out relating an example from Pigou about a man in a bar. After ordering a couple of drinks he staggers out drunk. Pigou describes this scenario as follows: the man gets plastered, the bar owner gets the man's money, and the public will be on the hook for any expenses related to the police finding this drunk in the bushes somewhere and escorting him home or, worse, to an emergency room for treatment. The government may attempt to tax this product (alcohol here) and use some of the money to offset the public cost of such scenarios. In the words of Ms. Kolbert "The idea is to incorporate into the cost of what might seem to be a purely personal choice the expenses it foists on the rest of society."

In the rest of the article, she reasons that one way to think about global warming (where in general the results of one set of actions of producers, etc., driven to a great extent by another group disconnected from the first set, the consumers, but for which the full costs resulting from the extraction of resources, conversion of resource, distribution of products manufactured from these resources, and consumption of the resources including the "end of life" disposal, is not covered by the consumer but, ultimately the public at large) is like our friend at the bar. She replaces "bar" with "gas station", "downing a few rounds" with "filling up" our vehicle, and "staggering out" with "driving off." The gas station and oil company got its money for its product, the consumer got "his tank full" and the public at large got stuck with the carbon it took to refine and distribute the petroleum now in the atmosphere and is now spewing out of the tailpipe of the car when combusted. If this carbon builds up to sufficient levels (and adds to that from other sources of course) the atmosphere warms, sea levels rise and storms get more disastrous and "once again, it's the public at large that gets left with the bill." 

Ms. Kolbert observes that the "logical, which is to say fair, way to make the driver absorb the cost of his slice of the damage … could be achieved by a new … tax on carbon." The rest of the article goes on to comment about various political initiatives in DC and elsewhere to address the idea of putting a cost on carbon.

Obviously, the other element here is that, to keep competitive, the companies making and selling the automobiles will try to make them as fuel efficient as possible to offset the additional cost of the carbon from the auto operation. Hmmmm, like hybrids? Or the high efficiency diesels in Europe?

Now, lest you all think I am some sort of closet socialist (my Berkeley connection notwithstanding!), I want to assure you that I consider this healthy thinking and the prominence of such discussions about externalized costs is heartening and, in fact, is more broadly considered than one might think - even by the business community.

Some of it is pure competitiveness. A blog back in August of 2010 addressed some of the issues associated with carbon trading. An article in the New York Times about the recent auction of CO2 allowances and the "new cost of CO2 in California" describes the recent auction of carbon credits in California and another Times article mentions how the basis for a company's carbon footprint is determined. The article states that, with respect to those worried that this will make the companies less competitive if this additional cost is factored in,  " … such a cost-centric analysis ignores the jobs and economic activity that the law could generate. Emission and efficiency standards for cars, buildings and appliances in California over the last four decades have succeeded in cleaning the air, making residents’ per-capita energy use rate among the lowest in the country and spurring innovations and new industries, like the one that arose around catalytic converters."

More to be said about this for sure. But, to me at least, including all the costs of a product into the price the consumer pays insures that everyone pays their "fair share" and encourages innovation. 

And that's what engineers do - innovate. What better task than to innovate to create greener manufacturing?!

Final note - Our book "Green Manufacturing: Fundamentals and Applications"  written by the researchers in the Laboratory for Manufacturing and Sustainability (LMAS) at UC Berkeley is now available. It can be found on Amazon. The book introduces the basic definitions and issues surrounding green manufacturing at the process,machine and system (including supply chain) levels. It also shows, by way of several examples from different industry sectors, the potential for substantial improvement and the paths to achieve the improvement. Additionally, this book discusses regulatory and government motivations for green manufacturing and outlines the path for making manufacturing more green as well as making production more sustainable. You can preview the book online at Amazon and see the table of contents. This also makes a perfect new year's gift! 

Don't forget to follow us on Facebook Green Manufacturing - Berkeley for more frequent comments and insights.

Happy New Year!

The "S" word, Part IV

Sustainable capitalism

As part of the discussions on the interrelationship between sustainability and economics referred to in the last posting an interesting report, titled "sustainable capitalism" popped up. The report was prepared in early 1012 by Generation Investment Management, LLP, a UK firm and can be accessed free at their corporate link. One must always read such reports prepared by folks with a particular view toward industry, capitalism and investment, carefully. But, it is interesting and, for sure, we all have "our views!"

To quote directly from the executive summary of the report:

"The challenges facing the planet today are unprecedented and extraordinary; climate change, water scarcity, poverty, disease, growing inequality of income and wealth, demographic shifts, trans-border and internal migration, urbanisation and a global economy in a state of constant dramatic volatility and flux, to name but a few. While governments and civil society will need to be part of the solution to these massive challenges, ultimately it will be companies and investors that will mobilise the capital needed to overcome them.

To address these sustainability challenges, we advocate for a paradigm shift to Sustainable Capitalism; a framework that seeks to maximise long-term economic value creation by reforming markets to address real needs while considering all costs and stakeholders.

The objective of this paper is twofold. First, we make the economic case for mainstreaming Sustainable Capitalism by highlighting the fact that it does not represent a trade-off with profit maximisation but instead actually fosters superior long-term value creation."

They go on to recommend five specific actions that they suggest will accelerate the "mainstreaming of Sustainable Capitalism" by the end of this decade.

These are (summarized from the report):

1. IDENTIFY AND INCORPORATE RISKS FROM STRANDED ASSETS - they define "stranded assets" as "those with a value that would change dramatically, either positively or negatively, under certain scenarios such as a reasonable price on carbon or water, or improved regulation of labour standards in emerging economies."

2. MANDATE INTEGRATED REPORTING - this is intended to allow more comprehensive insight into companies which is now lacking in spite of increases in the volume of information made available by companies and the frequency with which it is produced.

3. END THE DEFAULT PRACTICE OF ISSUING QUARTERLY EARNINGS GUIDANCE - it has long been argued that relying on quarterly earnings statements creates incentives for short term management at the expense of the longer-term, more meaningful measure of sustainable value creation.

4. ALIGN COMPENSATION STRUCTURES WITH LONG-TERM SUSTAINABLE PERFORMANCE - since most current compensation schemes reward  short-term actions disproportionately they fail to hold corporations accountable for the ramifications of their decisions over the long term. Financial rewards should instead be paid out over the period during which these results are realized, and

5. ENCOURAGE LONG-TERM INVESTING WITH LOYALTY-DRIVEN SECURITIES - This practice encourage long-term investment horizons among investors and facilitate stability in financial markets, therefore playing an important role in mainstreaming Sustainable Capitalism.

Wow.

These actions would substantially change they business climate around the world if carried out. What the likelihood of this happening is not known. But to start, the report goes on to describe these ideas in greater detail and includes additional "broader ideas" among which are "integrating sustainability into business education at all levels."

Of course, if one accomplishes that, it will be up to the product designers and manufacturers to execute the business functions at the production level to make this work.

That is, of course, if the company actually "makes something."

The service industry or other non-manufacturing sectors generate less than one dollar of economic activity for every dollar of sector output - unlike manufacturing and agriculture which return more in economic activity than the sector output alone - see the US Government's Bureau of Economic Analysis for more data. Manufacturing and agriculture return $1.35 and $1.20, respectively, in economic activity for every $1 of sector output. Construction, transportation, info tech, finance, etc are less than $1 and as low as $.55 for the retail trade sector.

So, if you want to "leverage" the economy to drive sustainable capitalism - start with manufacturing and agriculture!

Now, if you'd like another perspective including a view of the past and and how we got where we are today and how to become sustainable, I suggest you check out this link to a UK company called RSA Animations. In this animation, titled "300 Years of FOSSIL FUELS in 300 Seconds" a lecture with some very clever animation outlines some ideas for a sustainable world (in spite of capitalism!) I recently came across a number of very interesting animated lectures by RSA while visiting a friend and attending a conference in Brazil. The one I first saw was on capitalism and you can see it by googling RSA Animation and capitalism.

Finally, the Green Manufacturing Facebook page associated with this blog is constantly updated with tidbits on the topic of green manufacturing, anecdotes, examples and stories of interest - check it out too!

The "S" word, Part III

The economic angle.


We've been discussing aspects of social impacts and sustainability in the last few blog postings. I've recently come across some excellent discussions on the interrelationship between sustainability and economics. The gist of the discussions is that there is not a trade-off between a sustainable business model or sustainable manufacturing and profit - one can minimize the impact to the environment and maximize profit at the same time.

Now, I am not an economist and I am cannot attest to the validity of all the arguments. But, the ones we will review here are logically put forward and seem, to me, reasonable. You can be the judge!

Back in September of 2009 in a posting I referred to a MIT Sloan School- Boston Consulting Group Study on "business cases for sustainability." 

In that report the results of a survey of corporate executives was presented listing, in order of importance, the "sustainability-related issues" that companies believe will impact their business organization. These included:

- government legislation

- consumer concern

- employee concern

- concern over environmental pollution

- depletion of resources (non-renewable and renewable, like water)

- societal pressures

- global political security

- population growth

- climate change

In fact, in the figure below, from the report, it is clear that economic/business issues are the main drivers for sustainable business plans, starting with improved brand image reputation and increased competitiveness. 

A second graphic from the report, below, shows which sectors in which employing sustainability related strategies are seen to be most essential to be competitive. Not surprisingly, the "core industries" like automobiles and commodities are leading with services lagging.

So, companies are paying attention to this! 

I recently read an interesting whitepaper by some folks at Enviance. This was forwarded to me by some folks at Enviance I ran into at a meeting on campus. And, one of my former PhD students (Dr. Corinne Reich-Weiser) works with them. Her work for her PhD was featured in a blog posting some time ago as part of a discussion including a "map" of spatial and temporal levels of design to manufacturing to distribution/enterprise effects - this was part of the "low hanging fruit series."

The folks at Enviance sent me a paper entitled "Bridging the Gap: A financial approach to sustainability (http://www.enviance.com/resources/wp-bridging-the-gap.aspx). The paper  "explores the gap between sustainability and business goals and how to bridge this gap by leveraging financially oriented analytics to make environmental issues relevant to finance and sales professionals." This seems like a great idea to me. Putting some numbers on the link between sustainability and business. The paper begin with a description of the problem which they state as - why is sustainability "still so often dissociated from core business goals relevant to a CFO, a Head of Procurement, or a VP of Sales -- addressing common roadblocks faced by sustainability professionals." The paper then proposes a stratify to bridge the "gap" with a financial approach to sustainability. They present an example of a leading aerospace & defense manufacturer.

I am not going to summarize the whole paper here - download it and read it! 

But, there are a few key items worth repeating here.  They review a set of "common roadblocks"
that prevent most companies from managing sustainability without having a clear picture of the things that matter environmentally and financially. These include: 

1. Lack of Analytic Capabilities - challenges with having "visibility into ... true environmental impacts, costs, and risks." 
2. Knowledge creates liability - thinking one is better off not knowing what their impacts are "in case it might create an obligation to act." (wow!) 
3. Too Busy to Think - understaffing and "drowning in hundreds of existing initiatives" and
4. We Already Know 

If any of these sound familiar, I encourage you to read the paper!

The example, which I will not discuss here, offers some illustrations on how to address, with careful collection and analysis of pertinent data, a view of what's important and what is not and who is responsible for it. The image below is from Figure 1 of the whitepaper.

The environmental impacts on the vertical axis of the figure displays the organizational impact on the environment expressed here in monetary terms based on an emission of some number of tons of CO2 equivalent and the price that environmental economists might assign to that on a per ton basis (for example, from a cap and trade program). The paper describes this in detail as well as environmental costs and environmental risk assessments. The categories of impacts range from CO2 through particulates, toxic metals  and to carbon monoxide.

Overall a very comprehensive discussion of linking environmental performance to business costs and value - an important step in sustainable manufacturing.

Next time we'll discuss an equally interesting topic related to this "sustainable capitalism."

And, a reminder to check out our Facebook page for Green Manufacturing!