Volume 18, Number 4
Stephan Vachon shows that sustainable development in operations leads to financial success, but in ways that are surprising.
As governments and consumers become more concerned about the environment, firms are being proactive in lowering emissions and reducing waste. The challenge, though, is choosing what kinds of green projects to undertake. Should a firm run the risk of making changes to its core products, or is it better to focus on peripheral activities?
Ivey professor Stephan Vachon studies sustainable development in operations. In a recent study to be published in the International Journal of Production Economics, he looked at environmental projects and their impact on financial performance. "Our goal was to isolate project characteristics that led to better returns - to see what gets a bigger bang for the buck," he says.
While many studies have looked at green investments at the plant or multi-plant level, Vachon's study was one of the first to focus on individual projects. He took his data from 79 environmental projects in Canadian manufacturing organizations, all of which were generating a profit. These projects were split between projects categorized as "core" and "non-core."
A core project is one that involves the actual product, or its underlying production process. An example is a printing company that switches from oil to water-based ink in order to reduce VOC emissions.
A non-core project is one that relates to peripheral activities that don't add value to the customer, such as ventilation, waste management, or transportation. For example, the same printing company might choose to reduce VOC emissions by installing an oxidizer, which removes contaminants after production.
Vachon found that core environmental projects provided a significantly higher return than projects related to non-core activities. This was a surprising finding. "We thought that disruption would occur when you changed the core product, and more training and effort would be required to keep the product within specs," he says. "Managers tend to shy away from core projects, but our research shows that these give you a bigger return for your green dollar."
Vachon's study holds another important lesson for managers. Most non-core aspects of production are developed and sold by external parties. Core projects, on the other hand tend to be internally driven. "In addition to better returns, there's an even bigger benefit - the development of greater capabilities and knowledge within the firm," he says. "These new skills can be transferred to other aspects of the organization, such as quality or lean management."
The study also looked at both project size and organization size. Vachon found that larger firms, with their greater experience and capabilities, get more financial benefits from green projects. The size of a green project is important too. The bigger it gets, the more it becomes prone to risk and diminishing returns.
Vachon is just completing another study, which looks at the impact of safety on financial performance. Vachon divides safety into two dimensions: culture and practice. Culture represents the attitudes and beliefs of both managers and employees towards safety. Practice represents the actual rules and procedures in place.
To conduct the study Vachon gathered data from 250 plants in Quebec and Ontario. As in the previous study, the results came as a surprise. Culture had a greater impact on financial performance than practice. "One might think that safety practices would be the key variable," he says, "and culture would be helpful in implementing safety practices properly."
Vachon found a positive link between safety culture and both cost performance and financial performance. On the other hand, safety practices had a smaller positive impact on financial performance, and no impact on cost performance.
Vachon gives an example. "Lock out and tag out" is a procedure that prevents a machine being turned on when someone is working on it. It's a common safety practice that prevents serious injuries and down time. Some firms even impose stiff penalties on employees that ignore or bypass the procedure.
But Vachon says that safety procedures like "lock out and tag out" are not enough if you want to get the biggest bang for the buck. "Firms really need the employees to be proactive about safety, to make it an everyday part of their lives," he says. "This will lead to better productivity, because employees won't just be following procedure. They will feel more involved in their work - and safer."