Assessing the Sustainability Performance Lecturer Radim Lenort David

Assessing the Sustainability Performance Lecturer: Radim Lenort, David Holman, David Staš, Pavel Wicher Winter School 2017 ŠKODA AUTO University Mladá Boleslav Czech Republic 1

Lecture Content Supply Chain Management Sustainable Solution Beer Game Sustainable Supply Chain Management Sustainable KPIs 2

Introduction There is a difference between doing things right and doing the right things. Peter F. Drucker 3

Introduction + Logistics Value Added + Doing things right 4 = 1. Logistics Value Added 2. Production Value Added Doing things right Doing the right things rightly = The Role of Interactions and Purposes in Sustainable Competitiveness

System Thinking, Definitions, Examples System is the whole. System couldn’t be divided in to the independent parts. Properties of the system are these, which none of it’s parts have. These properties are derived from superior system, which is an examined system a part of. Properties of the system are derived from cooperation of the particular parts, not by performance of isolated parts. 5

System Thinking – The Significant Part of Logistics Theory System thinking is based on holistic philosophical principle, which says that the whole is more than just sum of its parts. The holistic principle replaces the previous reductionism principle, which says that the whole is only the sum of its parts. 6

System Thinking in SCM Doing the right things… Doing things right … 7

Lean – Practical Example of System Thinking Success Reductionism 8 Reductionism Holism 4 LEAN Principles

SCM Principles as Sustainable Solution in Actual Market Conditions Integration Process management Value Added Push and Pull Principle Decoupling point Bullwhip effect (Forrester effect) 9

SCM Principles as Sustainable Solution in Actual Market Conditions Integration From the supplier to customers From the purchasing, supplying, production, distribution and retail including after sales services and recycling With the help of transportation, informative and communication technologies 10

SCM Principles as Sustainable Solution in Actual Market Conditions Process management 11

SCM Principles as Sustainable Solution in Actual Market Conditions Value Added in Supply Chain Supplier PVA 12 LVA Supplier PVA Production VA processes - PVA Transformation of physical and nonphysical production resources into final product or service, which is customer willing to pay for Logistics VA processes - LVA Optimal availability of physical and nonphysical resources in the whole supply chain from withdrawing of raw material to delivery to final customer LVA EDI, RFID, ECR, Bar codes Transport, manipulation, packaging, warehousing, crossdocking, forecasting, etc Final Producer LVA PVA

SCM Principles as Sustainable Solution in Actual Market Conditions PUSH vs PULL principle PUSH – production is managed and optimised based on the production efficiency without any consideration for the customer demand or ultimately the follow-on supply chain. PULL – production is managed and optimised by real customer demands 13

SCM Principles as Sustainable Solution in Actual Market Conditions Decoupling Point 14

SCM Principles as Sustainable Solution in Actual Market Conditions Bullwhip (Forrester) effect Cause – long period of time as a reaction to changes in demand (demand bullwhip effect) Effect – unplanned, chaotic activity starts to displace the planned activity Traditional solution – improving the accuracy of the demand including, earlier start of the realisation of prediction – more time for reaction Ideal solution – reducing lead time – time for satisfying the order 15

Beer Distribution Game – Simulation of Bullwhip Effect Make the Negative Sustainable Impact Naked SUSTAINABILITY ECONOMIC Higher warehouse level (space), transportation costs, higher costs for flow of containers ENVIRONMENTAL Production of CO 2 – Unutilised trucks, waiting SOCIAL Stress of the employees, safety conditions 16

Sustainable Beer Distribution - Consumption Doing the right things… Doing things right … Happy Customer 17

Sustainability is an ability of a company or supply chain to balance its economic, social and environmental performance: Environment Responsible Sustainable Bearable Equitable Economic 18 Social

Sustainability - The Economic Dimension Direct economic value generated: revenues = typical topic An example of another important topic is: Economic value distributed - this topic include: Employee wages and benefits Payments to providers of capital Payments to government Community investments 19

Sustainability - The Economic Dimension Employee wages and benefits Total benefits can include: Regular contributions, such as to pensions, insurance, company vehicles and private health Other employee support, such as housing, interest-free loans, public transport assistance, educational grants and redundancy payments Payments to providers of capital Interest payments made to providers of loans can include: Interest on all forms of debt and borrowings (not only long-term debt) Arrears of dividends due to preferred shareholders 20

Sustainability - The Economic Dimension Payments to government Organisation taxes can include: Corporate Income Property Payments to government exclude deferred taxes because they may not be paid. If operating in more than one country, the organisation can report taxes paid by country, including the definition of segmentation used. 21

Sustainability - The Economic Dimension Community investments Total community investments refers to actual expenditures in the reporting period, not commitments. Voluntary donations and investment of funds in the broader community where the target beneficiaries are external to the organisation can include: Contributions to charities, NGOs and research institutes (unrelated to the organisation’s commercial research and development), Funds to support community infrastructure, such as recreational facilities, Direct costs of social programs, including arts and educational events. 22

Sustainability - The Social Dimension In the social dimension usually include topics: Employee Governance Local Community (Region, Institutions, Universities, Regional authorities). 23

Sustainability - The Social Dimension Employee Topics of Employee can include: Occupational Health and Safety Training and Education Diversity and Equal Opportunity Security Practices Labour / Management Relations. 24

Sustainability - The Social Dimension Governance Topics of Governance can include: Compliance with government laws and regulations Freedom of Association and Collective Bargaining Forced or Compulsory Labour Rights of Indigenous Peoples Human Rights Assessment Marketing and Labelling Customer Privacy Child Labour. 25

Sustainability - The Social Dimension Local Community impact for: Region, Institutions, Universities, Regional Authorities Topics for the Local Community can include: Local Communities Supporting Universities Social Assessment Supplier Public Policy Customer Health and Safety Socioeconomic Compliance 26

Sustainability - The Environmental Dimension This dimension usually includes topics: Recycling Product design Change in raw materials Increase manufacturing effectiveness Reduce energy consumption Environmental initiatives Renewable energy Reduction of waste Use of environmentally friendly products. 27

Sustainability - The Environmental Dimension One of the possible and typical effort: The alignment of sourcing, manufacturing, distribution, transportation and remanufacturing / recycling processes with the goal of reducing a company’s carbon footprint. Used in many business sectors Manufacturing Services Government Education 28

Sustainability - The Environmental Dimension Benefits: Reducing the consumption of toxic chemicals Lowering amount of waste Sustainability of natural resources Cost reduction Increase of efficiency Brand reputation Reducing risk Employee morale Ethics 29

Sustainability - The Environmental Dimension Barriers: Customer preference Suppliers adapting to change Cost of implementing processes No concrete way to measure return on investment 30

Example of Sustainable Strategy Volkswagen sustainability strategy: Strategic goal: By 2018, we aim to be the world’s most successful, fascinating and sustainable automotive manufacturer Key action areas: Economy, People, Environment 31

Example of Sustainable Strategy Strategic goals of the key action areas by 2018: Economy: Leader in customer satisfaction Group return on sails before tax higher then 8 % Annual sales of more then 10 million vehicles People: Top employer in the automotive sector Environment: Reduce energy and water consumption, waste and emissions per unit produced across the Group by 25 % 32

Example of Sustainable Strategy New sustainable VW strategy 2025 We will inspire our customers. This includes offering them products with above-average carbon efficiency. Our earnings power will be as strong as that of our top competitors. We will be a model of environmental compatibility, safety and integrity. Important steps in this direction include a continuous reduction of our carbon footprint and a decrease in the emissions of our vehicle fleet. We will continue to be an outstanding employer. 33

Example of Sustainable Strategy And Sustainability in TOYOTA? Areas of focus: Economy Social responsibility Environment In the economy part, there is a focus on efficiency. 34

Example of Sustainable Strategy Toyota Social responsibility 6 programs of Toyota social responsibility Initiatives for Improving Traffic Safety Customer First and Quality First Measures Collaboration with Business Partners Stakeholder Engagement Respect for Human Rights Employees 35

Example of Sustainable Strategy Toyota Environmental Challenge 2050 In the environmental part, there is now new 2050 challenge. 36

KPIs – Key Performance Indicators Set of quantifiable measures that a company uses to gauge its performance over time. KPIs evaluate the success of an organisation or of a particular activity in which it engages. 37

Sustainable KPIs – Case Study The aim of the case study was to identify and categorise the most often used sustainable KPIs in the metallurgical industry: 1. Identification of the top 15 steel-producing companies and selection of sustainability reports with a comprehensive system of sustainable KPIs, 2. Determination of sustainable KPIs used by World Steel Association, 3. Assessing and categorising KPIs from the selected sustainability reports according to GRI sustainability reporting standards, 4. Discussion of obtained results and drawing conclusions. 38

Sustainability Reports of Metallurgical Companies A comprehensive system of sustainable KPIs was found only in sustainable reports of three companies: 39 Rank Company Country Tonnage GRI KPIs 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Arcelor. Mittal Hesteel Group NSSMC POSCO Baosteel Group Shagang Group Ansteel Group JFE Steel Corporation Shougang Group Tata Steel Group Wuhan Steel Group Shandong Steel Group Hyundai Steel Nucor Corporation Maanshan Steel Luxembourg China Japan South Korea China Japan China India China South Korea USA China 97. 14 47. 75 46. 37 41. 97 34. 94 34. 21 32. 50 29. 83 28. 55 26. 31 25. 78 21. 69 20. 48 19. 62 18. 82 x x x x x x

Sustainability Report of World Steel Association uses Sustainable Development Policy with seven principles and eight sustainable KPIs. 40

GRI Sustainability Reporting Standards Global Reporting Initiative (GRI) is an international independent organisation that helps businesses understand communicate the impact of business on critical sustainability issues. The GRI standards enable organisations to measure and understand their most critical impacts on the environment, society and the economy: The economic dimension of sustainability concerns an organisation’s impacts on the economic conditions of its stakeholders, and on economic systems at local, national, and global levels. The environmental dimension of sustainability concerns an organisation’s impacts on living and non-living natural systems, including land, air, water and ecosystems. The social dimension of sustainability concerns an organisation’s impacts on the social systems within which it operates. 41

GRI Sustainability Reporting Standards GRI defines topic-specific standards for each sustainability dimension: GRI 200: Economic GRI 300: Environmental GRI 400: Social 42

GRI Sustainability Reporting Standards GRI defines topic-specific standards for each sustainability dimension: Economic Topics Economic Performance Market Presence Indirect Economic Impacts Procurement Practices Anti-corruption Anti-competitive Behaviour Environmental Topics Social Topics Employment Labour/Management Relations Occupational Health and Safety Training and Education Diversity and Equal Opportunity Non-discrimination Freedom of Association and Collective Bargaining Child Labour Forced or Compulsory Labour Security Practices 43 Materials Energy Water Biodiversity Emissions Effluents and Waste Environmental Compliance Supplier Environmental Assessment Rights of Indigenous Peoples Human Rights Assessment Local Communities Supplier Social Assessment Public Policy Customer Health and Safety Marketing and Labelling Customer Privacy Socioeconomic Compliance

KPIs Categorisation 62 sustainable KPIs were identified in total: 15 economic KPIs in 2 GRI economic topics out of 6: economic performance and anti-corruption, 19 environmental KPIs in 6 topics out of 8: materials, energy, water, emissions, effluents and waste, and environmental compliance, 28 social KPIs in 9 topics out of 19: employment, labour/management relations, occupational health and safety, training and education, diversity and equal opportunity, freedom of association and collective bargaining, human rights assessment, local communities, and supplier social assessment. 44

The Most Common KPIs Economic KPIs: GRI topic Economic Performance KPI Investments in new processes and R&D Economic Value Distributed (EVD) Direct economic value generated (standard financial KPIs) Environmental investments WS x x AM x x PO x HS x x x x WS x x AM x x x x PO x x x HS x x x x Environmental KPIs: GRI topic Energy Water Emissions 45 KPI Energy intensity Energy consumption Water intake Greenhouse Gas (GHG) emissions Dust emissions NOx emissions SOx emissions

The Most Common KPIs Social KPIs: GRI topic KPI Number of employees Number of contractors Employment Employee turnover rate Occupational Lost time injury frequency rate Health and Safety Accidents Training and Training hours/days Education 46 WS x AM x x x PO x x x HS x x x x

Conclusions The environmental dimension is very crucial for the metallurgical industry due to very serious negative impacts on environment. The most important topics are: Economic dimension: economic performance, Environmental dimension: energy, water, and emissions, Social dimension: employment, occupational health and safety, and training and education. 47