Turning Sustainability into a Strategic Advantage via Your ERP System

SUstainability reporting

It’s only a matter of time before mid-tier manufacturers will need to make sustainability another core element of their business. That is because most large organizations, including many tier-one manufacturers, have published goals to be carbon neutral by 2050—some even sooner. Meeting those goals means reducing the carbon footprint not only of their own operations but also of the products and services they obtain from suppliers.

The good news is that mid-tier manufacturers who implement a formal sustainability management program are better positioned to become the preferred vendors for larger manufacturers and end customers—while significantly reducing costs related to materials, energy, and labor. Moreover, the enterprise resource planning (ERP) software already managing their operations can be used as an effective tool for calculating the carbon footprint of the products they use.

Calculating Carbon Footprint with Your ERP

Carbon dioxide emissions (CO2e), which form the basis of sustainability measurements, are denoted as having an equal weight to greenhouse gases in their global warming potential. For most manufacturers, these include purchases of energy, raw materials, supplies, and logistics.

Within a manufacturing environment, each production element of a finished good carries some inventory of carbon footprint, which ERP systems are well suited to track as they would other items in inventory. Ideally, the ERP system will be able to track raw materials, machine time, and labor. Here are five key steps for using an ERP system to track the carbon footprint of finished products on a per-unit basis and effectively treat the carbon inventory of production operations like any other business expense.

  1. Carbon inventory items are created in the ERP system’s inventory item master, with each item’s cost representing the carbon emission for that item per unit of measure.  For example, one pound of steel can create 1.8 pounds of CO2e. The average US cost for one kilowatt of electricity is 0.85 pounds of CO2e, and ground shipping costs 0.36 pounds of carbon per ton-mile.
  2. Bills of manufacture (BOM) for items are augmented with the carbon inventory items and their respective consumption per finished good unit. Raw material carbon impacts are easy to determine since the BOMs already contain the quantities required to calculate carbon content.
  3. The energy content (impact) for an item can be estimated in three ways:
    • The simplest is to take the operation’s entire energy cost (in CO2e ) and divide that total footprint by the total number of work center operating hours to derive an average CO2e per operating hour. Ascribing energy costs to production hours also takes into account the costs of lighting, heating, air conditioning, auxiliary equipment, etc.
    • A more nuanced method is to perform the same calculation as above but then split the average value into high, medium, and low work center CO2e factors. For instance, high-consumption equipment is assigned 150% of the average energy consumption, while more efficient work centers are assigned 75%. This enables variations in work center energy efficiencies to be recognized and rewarded.
    • The most accurate, but least practical method is to calculate the exact energy operating cost of each work center.
  4. Shipping often represents an immaterial amount of a business’ overall carbon footprint. A quick test of materiality is to use the business’ overall shipping expense; then convert those dollars to CO2e using a conversion value of 0.5 lbs. CO2e per dollar of shipment cost. If shipping cost is material, a manufacturer can obtain accurate estimates from its carriers when adding the item to the ERP system.
  5. Using these methods, carbon cost per item can be automatically calculated by the ERP system’s costing and inventory control systems. These costs can even be printed directly on shipping labels and documentation. And, dashboards can be created to make daily carbon output and progress toward goals readily visible to everyone in the company.

Beyond reporting, manufacturers that take these steps in using their ERP systems to calculate carbon footprint can also gain actionable insights to reduce costs and improve quality. For instance, production monitoring can be used to quickly identify operations that produce excess scrap or use excessive machine time, while frequent forecasts can be used to plan efficient production and avoid extra costs and energy consumption.

By using their ERP systems to measure the impact and progress of their sustainability initiatives, mid-tier manufacturers can more effectively reduce emissions, costs, and waste while increasing productivity and efficiency and strategically positioning themselves as preferred providers—turning sustainability into a win–win.