Gaining understanding of the use of sustainability KPIs in practice

Transcription

1 Ganng understandng of the use of sustanablty KPIs n practce Dr. Nancy Bocken Unversty of Cambrdge Department of Engneerng, Insttute for Manufacturng 17 Charles Babbage Road Cambrdge CB3 0FS U.K. Prof. Steve Evans Unversty of Cambrdge Department of Engneerng, Insttute for Manufacturng 17 Charles Babbage Road Cambrdge CB3 0FS U.K. Dr. Da Morgan Unversty of Cambrdge Department of Engneerng, Insttute for Manufacturng 17 Charles Babbage Road Cambrdge CB3 0FS U.K. Keywords sustanablty, measurement and evaluaton, key performance ndcators (KPI), performance, mprovement, companes Abstract It s uncertan whether the use of sustanablty KPIs leads to performance mprovement. Surveys followed by ntervews wth practtoners were used to nvestgate sustanablty KPIs n manufacturng. It was found that: Surveyed companes are not sure whether sustanablty KPIs are leadng to performance mprovement. Choosng approprate boundares and metrcs wll greatly nfluence actvtes and mprovement. It s dffcult to make trade-offs between socal, economc and envronmental metrcs, because all are mportant. In certan stuatons we may need to consder one metrc more than others. Socal metrcs may be dffcult to measure, but are of ncreasng nterest to government and ndustry. Measurement and control of mpacts outsde of drect scope are of concern. Some companes n our ntal survey consder themselves ether too small (nsuffcent barganng power) or too large (too many supplers or customers, complexty) to manage ths effectvely. Leaders are lookng beyond the metrcs they have used n the past but requre support from outsde of ndustry. For nstance, companes may want to move from the ethos zero waste to landfll to resource effcency, but do not know how to measure and compare these dfferent approaches. Start-ups or sustanablty followers may want to begn by usng the best measurement avalable. There are opportuntes n both nternal and external sustanablty reportng. Companes may not always measure what s needed, or make use of ther own metrcs to mprove external communcatons. Learnng wthn the company between dfferent stes s mportant but may be dffcult because of dfferences n energy management systems, geographcal areas, age of equpment, personnel expertse and other factors. Also, the poltcs of nter-ste competton may be a barrer. Future research requres a deeper understandng of the desgn of sustanablty KPIs and the performance management systems needed to delver mprovement. Background Sustanablty s an area of ncreasng nterest for ndustry and ts stakeholders. Globally, governments and organsatons are begnnng to address these ssues through polcy dscussons and mplementatons. Non-Governmental Organzatons (NGOs) contnue to rase awareness of the negatve consequences of ndustral actvty for the envronment and socety and hence for future generatons, on the other. Mndful of the mpact they can have, and the demand from varous stakeholders, some companes now aspre to address the ssues of sustanablty at strategc and operatonal levels. As companes are explorng the ssues, they attempt to embed sustanablty n ther plannng and management systems. It s at ths pont that the domans of sustanablty and performance management meet. Ths research ams to gan an understandng of the nature of sustanablty key performance ECEEE 2012 SUMMER STUDY on Energy effcency n ndustry 247

2 Bocken et al 2. SUSTAINABLE PRODUCTION DESIGN, SUPPLY CHAIN INITIATIVES ndcators (KPIs); how they are appled n practce and to what extent they dffer from standard KPIs. Are the challenges dfferent to the problems assocated wth standard KPIs and the performance management systems n whch they st? The man research queston nvestgated n ths paper s: What are the challenges of usng sustanablty KPIs n practce? What s measured gets done? It s often assumed that what gets measured, gets done. Quotng Lord Kelvn ( ; as quoted n Kuhn, 1961): When you cannot express t n numbers, your knowledge s of a meager and unsatsfactory knd. The tradtonal bass for measurement s ndeed control orented and based on the vson that what gets measured and s made vsble gets done, but there has been a major shft n the focus of performance measurement from controllng towards mprovng organsatonal performance. Neely (1998, p. 71) dentfed the followng four generc reasons for measurement: to check poston (smlar to Lord Kelvn s vews), to communcate a poston, to confrm prortes and compel progress. Accordng to Lynch and Cross (1995, p.1) the ratonale for performance measurement s to stmulate behavour, whch leads to contnuous mprovement n customer satsfacton, productvty and flexblty. Ultmately, mprovement s the aspred outcome of performance measurement n organsatons. Performance measures and Key Performance Indcators (KPIs) are often used as synonyms, but KPIs may be vewed as those measures that provde managers wth the most mportant performance nformaton to help them and ther stakeholders understand organsatonal performance (Marr, 2012). KPIs should lnk to the strategc objectves of the organsaton and therefore help montor the executon of the busness strategy. As Walsh (1996) descrbes: organsatons strve to mprove what they do and how they do t. The results of ther efforts are measured through Key Performance Indcators. Accordng to Walsh (1996) KPIs consst of key performance outcomes (KPOs) and Key Performance Drvers (KPDs, the busness processes to acheve the outcomes). Clearly, preferred outcomes need to be lnked to the processes requred to acheve these outcomes and the ncentves to encourage desred outcomes to be acheved. The system put n place to lnk measures, busnesses process and actons and aspred outcomes, s also referred to as a performance management system. Metrcs are mportant, but the performance management system tself s of great mportance to acheve the desred effect. Table 1 shows the dstncton between measurement and management. Ths ndcates that merely havng measures s nsuffcent and performance management (e.g. employee nvolvement, ncentves) s requred to ensure measures are acted upon. Establshng a performance management system s not a straghtforward process. For example, Ftzgerald and Moon (1996, p. v) argue there s broad consensus that some form of performance management system needs to be mplemented as an essental part of organsatonal control, but there s no exact method to develop such a system. The defnton of what consttutes a performance management system s not straghtforward: At one level t s smply a set of metrcs used to quantfy the effcency and effectveness of past actons. [Ths] gnores the fact that a performance measurement system encompasses a supportng nfrastructure. ( ) A more complete defnton s that a performance management system enables nformed decsons to be made and actons to be taken because t quantfes the effcency and effectveness of past actons through the acquston, collaton, sortng, analyss, nterpretaton, and dssemnaton of approprate data. (Neely 1998, p. 4 5) There s no clear defnton of a performance management system, but there are some basc elements. Ftzgerald and Moon (1996, p. v) refer to the followng consderatons to develop performance management systems (developed by Prof. Davd Otley): the dmensons of performance an organsaton seeks to encourage; approprate standards set for these measures; rewards gven for achevng these. Ths suggests that a vson needs to be formed of the desred performance; ths desred performance needs to be made concrete, and ncentves need to be put n place throughout the organsaton to acheve performance. Ftzgerald and Moon (1996, p1) lst fve characterstcs of performance management systems: performance management systems are drven by corporate strategy, fnancal and non-fnancal metrcs are adopted; comparatve measures are mplemented (to benchmark performance); results are reported regularly to promote knowledge and acton; and the system needs to be drven by top or senor management. Smlarly, Maskell (1991, p. 19) lsts the followng characterstcs of performance management systems: these must be drectly related to the manufacturng strategy; prmarly use non-fnancal measures; vary between locatons; change over tme; be smple and easy to understand; provde fast feedback to operators and managers; and be mprovement rather than solely montorng focused. Moreover, havng predctve performance measures s mportant (Neely et al., 1995). Walsh (1996) created a KPI checklst whch hghlghts some of the requrements for performance management systems: KPIs need to be algned wth corporate strategy, be traceable to busness processes, there should not too be few (suffcent coverage s requred) or too many KPIs (measurement costs tme and resources), KPIs should encourage wn-wn stuatons (benefts to all departments), and be relevant to all people. Marr (2010) documented Table 1. The dfference between measurement and management. Adapted from Lebas (1995). Performance measurement Measures based on Key Performance Indcators Measures to detect devatons Measures to track past achevements Measures to descrbe status (potental) Measures of output Measures of nput Performance management Tranng Team work Shared vson Management style Employee nvolvement, Dalogue Incentves, rewards 248 ECEEE 2012 SUMMER STUDY on Energy effcency n ndustry

3 2. SUSTAINABLE PRODUCTION DESIGN, SUPPLY CHAIN INITIATIVES Bocken et al how to desgn KPIs and found smlar requrements. The lnk to strategy s mportant, the person who uses the nformaton and ther requrements should be known, each KPI should have an owner, data collecton methods need to be developed, reportng gudelnes and responsbltes should be assgned and cost-and benefts of reportng should be defned, and unntended consequences should be antcpated, amongst others (Marr, 2010). From the above, t can be concluded that the lnk to strategy, employee engagement and responsblty, clear measures, regular montorng, ncentves to drve acton and mprovement, and ncorporaton of non-fnancal metrcs are mportant elements of performance management systems. Sustanablty measurement The sustanablty movement has ts roots n sustanable development. The noton of sustanable development was frst coned n the report Our common future, produced by the World Commsson on Envronment and Development (WCED, 1987). The WCED (1987) descrbes the process of economc development as essental for rasng the qualty of lfe of those around the planet but hghlghts the deleterous consequences of ndustral actvty on global and local eco-systems. Sustanable development s termed as development that meets the needs of the present wthout compromsng future generatons ablty to meet ther own needs (WCED, 1987, p. 43). The WCED (1987) document s framed at a natonal and geopoltcal level and focuses on equty (ntergeneratonal and global) and needs, n partcular the needs of the poorest n the world. In developed markets, where basc needs are wdely met, ths noton can be a dffcult concept to translate nto busness terms and therefore address as part of strategy and operatons. There have however been several attempts to reframe sustanablty to make t more relevant to busness. The term trple bottom-lne coned by Elkngton (1997) uses busness language to explan sustanablty and ncludes economc, envronmental and socal bottom lnes. Smlarly, Jackson et al. (2011) refer to the followng sustanablty dmensons: proft (fnancal performance, flow of captal, and a company s economc nvolvement n socety), people (a company s mpact on ts employees and the socal system wthn ts communty) and planet (effects on they local, natonal, and nternatonal resources). Krajnc and Glavč (2005) defned a composte sustanablty ndex, whch conssts of economc (corporate mpacts on economc well-beng of ts stakeholders and local, natonal and global economc systems), socal (atttude of the company to the treatment of ts employees, supplers, customers, and mpact on socety at large), and envronmental (mpacts of the company on lvng and non-lvng natural systems) dmensons. Accordng to Elkngton (1997) the three bottom lnes are constantly changng to socal, poltcal, economc and envronmental pressures, so the sustanablty challenge s tougher than each ndvdual bottom lne n solaton. Moreover, Elkngton (1997, p. 91) argues the trple bottom lne tself could rase a number of ethcal ssues: How should economc, socal and envronmental prortes be assessed and traded off? Over a decade after the concept of the trple bottom lne was coned, a dverse range of companes have begun to address sustanablty. In some cases these companes report on ther progress externally, often n the form of company reports but there are varous forms of trple bottom lne dsclosure. Elkngton (1997, p. 165 based on jont project wth SustanAblty, Delotte & Touche and IISD) descrbes the followng forms of trple bottom lne dsclosure: nvoluntary (e.g. accdents, campagns); mandatory (e.g. annual reports and accounts) and voluntary (e.g. sustanablty supplements to annual reports) reportng. In general, these documents tend to report on outcomes, and say lttle about the nternal processes and devces for delverng mproved sustanablty performance wthn the organsaton or the wder supply or value chan. Non-fnancal measures and user nvolvement n performance management Tacklng sustanablty at a company level, appears to present a novel challenge. Organsatons are charged wth actng upon more factors than the domnant model of frm management had prevously demanded. What are the mplcatons for performance management n organsatons? Two elements of effectve performance management systems the need for ncorporatng non-fnancal metrcs and the nvolvement of users of the system wll be hghlghted because they are of specal nterest for sustanablty performance mprovement. Effectve performance management systems lnk fnancal and non-fnancal performance measures n an organsaton. The most well known framework for performance management s Kaplan and Norton s (1992) balanced scorecard, whch allows managers to look at the busness from four key perspectves (the fnancal, customer, nternal busness and nnovaton and learnng perspectve). The authors demonstrate that busness measures are lnked (e.g. satsfyng customer goals affects fnancal goals). Ftzgerald et al. (1991) also effectvely lnk dfferent dmensons of busness performance, and dstngush between performance measures that relate to results (e.g. fnancal performance) and those that determne the results (qualty, flexblty). A thrd example s Lynch and Cross (1995) pyramd of measures that ntegrates performance through the herarchy of the organsaton. To make the lnk wth sustanablty specfcally: good envronmental performance (e.g. corporate carbon emssons reductons) and socetal contrbutons (e.g. communty outreach) may affect fnancal performance drectly (e.g. carbon emssons reductons may save cost) or ndrectly through an mproved mage. For example, Carbon Trust (2011) ntervewed 200 leaders n large companes and found that ther man expected benefts of green busness development ncluded enhanced green reputaton (75 %), whereas 40 % quoted ncreased revenues and 30 % ncreased profts. By addng sustanablty KPIs, companes appear to hope to boost some of ther more conventonal KPIs (revenue, proft) and satsfy stakeholders. Includng fnancal performance measures and non-fnancal measures (e.g. socal and envronmental) and dentfyng the levers between them s recommended n the performance management lterature (e.g. Maskell, 1991; Kaplan and Norton, 1992) and may be of partcular nterest to drve sustanablty projects and mprovements forward. The successful mplementaton of performance management systems depends on nvolvement of users of the system (n effect everyone n the organsaton). For nstance, ECEEE 2012 SUMMER STUDY on Energy effcency n ndustry 249

4 Bocken et al 2. SUSTAINABLE PRODUCTION DESIGN, SUPPLY CHAIN INITIATIVES the man barrers to performance management system mplementaton mentoned by Bourne et al. (2000) nclude: the resstance to measurement durng performance management system desgn and use phases; computer systems ssues durng mplementaton; and top management commtment dstracton between desgn and mplementaton. Accordng to Clarke (1994) a major source of falure n change programmes s the lack of communcaton managers need to overdose communcaton, and as bottom-up change s essental early nvolvement and genune consultaton are essental. It s also mportant to nvolve nternal users and stakeholders as suggested by Clarke (1994) awareness of stakeholder needs s part of beng an effectve organsaton. Walsh (1996) argues that KPIs need to be relevant for all people n the organsaton, and each job level should be able to contrbute deas towards what should be measured, as what works at management level does apply to the factory floor. Toor and Ogunlana (2010) nvestgated stakeholder perceptons of KPIs n the publc sector and found that the ron trangle of cost/ prce, tme, and specfcatons (or qualty) does not longer apply but other performance ndcators such as safety, effcent resource use, effectveness, stakeholder satsfacton, and reduced conflcts are ncreasngly mportant. Although there are techncal challenges (e.g. the mplementaton of IT systems) stakeholder engagement and nvolvement are ncreasngly mportant for the development of effectve performance management systems. When consderng the trple bottom lne of sustanablty n performance management, the group of nterested and nvolved people expands outsde company boundares, whch adds to the challenge. In effect, n the case of envronmental and socal ssues, t may not be the CEO of a company who determnes whether performance was up to par, but governments, NGOs, communtes and customers affected, who decde to purchase a company s products or not. Stakeholder nvolvement and consultaton are therefore mportant for performance management, whch deals wth sustanablty ssues. Sustanablty performance management There s stll debate on the exact defntons and measures of sustanablty. Jackson et al. (2011) argued that n the lterature there s no real consensus as to the exact dmensons used to measure sustanablty performance, but there s broad agreement that t consders the mpact of companes on socety as a whole. If conventonal performance management (e.g. qualty, proftablty) were dffcult, sustanablty reportng (ncludng three dmensons people, planet, and proft; Jackson et al., 2011) and performance management would mply even bgger challenges as the rules of reportng are less clear-cut than mandatory fnancal reportng. A report from the envronmental consultancy Trucost, publshed by the UK government Department for the Envronment, Food and Rural Affars (DEFRA, 2006), ncludes some of these challenges n corporate sustanablty reportng: reports lack quantfcaton, depth or rgour, and most busnesses wll have supply chan mpacts they should understand and consder reportng. However, there s no sngle, quantfable measure companes can use as a KPI for supply chan mpacts (DEFRA, 2006, based on a research by The Envronment Agency, 2004). Accordng to Jackson et al. (2011) several arguments are made aganst trple bottom lne reportng, perhaps because of the fear of the unknown, the feelng that n the end nothng wll change or nothng stays the same so attemptng to exert control s folly; tme commtments, dvergent expectatons, mplementaton rsks, and worres that corporate actons mght not support ntentons (e.g. although a company reduces ts carbon footprnt per product they may smultaneously am to sell more whch ncreases ther overall footprnt). Table 2 draws an analogy between conventonal economc performance management and sustanablty measurement, based on 10 tests of effectveness of measures developed by Neely et al. (2002). Although fnancal reportng s clearly lad out n fnancal reportng requrements, socal and envronmental reportng s not. Sustanablty reportng s stll largely voluntary and s open for nterpretaton, whch s the source for the challenge of sustanablty performance mprovement. The lterature on sustanablty measurement s substantal, although there s a lack of understandng of how sustanablty can be ntegrated n practce and performance management of frms n partcular. Some of the prevalent topcs nclude the defnton, dentfcaton and measurement of sustanablty ndcators. For example Arena et al. (2009) provde an extensve revew of ndustral sustanablty defntons and nclude examples for each dmenson, summarsed n Table 3. It s beyond the scope of ths study to nclude all sustanablty metrcs but some examples of studes are gve whch have sought to make a startng pont: Székely and Knrsch (2005) lsted a range of sustanablty metrcs based on corporate sustanablty reports and Marshall and Brown (2003) nvestgated the use of envronmental metrcs n corporate reportng n partcular. Lamberton (2005) performed a hstorcal analyss of sustanablty accountng and fnds that, to add rgour to reportng, the objectve of the reportng model; the prncples underpnnng use; data capture; reportng frameworks; and the qualtatve attrbutes of the nformaton produced, are crtcal ssues whch need to be addressed durng the developmental phase need to be clear. To measure organsatonal performance, Hubbard (2001) suggests a sustanablty scorecard, ncludng fnancal, customer, nternal process learnng and development, envronmental and socal performance. Hubbard (2001) recognses the challenges of selectng ndcators (to capture the essence of performance), collectng (e.g. data avalablty) and measurng and weghtng ndcators (e.g. quanttatve or qualtatve). Krajnc and Glavč (2005) developed an approach for sustanablty measurement, whch ncludes selectng, groupng, judgng, weghtng and normalzng, calculatng and combnng sub-ndces. However, no evdence s provded on how these measures may lead to performance mprovement n practce. Despte the many lterature contrbutons on defnng sustanablty, there s a lack of understandng of how sustanablty may be embedded n corporate performance management systems. Ths paper seeks to contrbute to the understandng of the use of sustanablty KPIs n practce and the lnk to performance mprovement. The methodology used to further explore ths s descrbed n the secton below. 250 ECEEE 2012 SUMMER STUDY on Energy effcency n ndustry

5 2. SUSTAINABLE PRODUCTION DESIGN, SUPPLY CHAIN INITIATIVES Bocken et al Table 2. Sustanablty adds complexty to performance management. Note. The tests n the left column are taken from Neely et al. (2002), and the sustanablty consderatons are added by the authors. Test 1. The truth test: are we really measurng what we set out to measure? 2. The focus test: are we only measurng what we set out? 3. The relevancy test: Is ths the rght measure of the performance factor we want to track? 4. The consstency test: wll the data always be collected n the same way whoever measures t? 5. The access test: s t easy to locate the data needed for measurement? 6. The clarty test: s any ambguty possble? 7. The so-what test: can and wll reported data be acted upon? 8. The tmelness test: can the data be accessed rapdly and frequently enough for acton? 9. The cost test: s the measure worth the cost of collectng and processng? 10. The gamng test: s the measure lkely to encourage undesrable behavours? The added complexty of sustanablty n performance measurement Tme and cost can be measured objectvely n organsatons but perceved qualty s more dffcult to objectvely measure. Measurng envronmental performance s challengng but socal performance s even more challengng. For nstance: Is the amount of donatons to charty a good measure of corporate socal responsblty? What s the ultmate focus of measurng envronmental performance? If companes measure and reduce envronmental mpact of ther manufacturng stes and products but ntend to sell more, ths wll ncrease ther total envronmental mpact. Is the number of tmes customers flled out a consumer survey postvely a relevant measure for customer satsfacton? Is waste reducton the ultmate measure, or do we need to develop a measure that focuses on rethnkng product desgn? Generally accepted accountng prncples specfy how data need to be reported. Gudelnes and standards exst for dfferent types of sustanablty reportng (e.g. ISO for Envronmental management and Lfe Cycle Assessment) but these leave room for nterpretaton. How can there be consstency wthn and across company boundares? There s consstency and clarty on the data that need to be reported yearly and these data are to be found n publc annual reports. Companes can largely choose whch sustanablty data to report and there are complextes n obtanng data from supplers. Investors generally know how to nterpret fnancal data n annual reports, so whlst there s room for nterpretaton (e.g. forecasts) nvestors can cope wth ambguty. The defnton of sustanablty and ts dmensons (the trple bottom lne) leave much more room for nterpretaton and ambguty than fnancal reportng, whch wll make nterpretaton even more complex. Use of the balanced scorecard (Kaplan and Norton, 1992) s an example of puttng busness performance measures nto practce. Internal sustanablty measures and suppler sustanablty scorecards exst (e.g. Walmart, M&S) but what s the nternal ncentve scheme and management system to encourage performance mprovement? Fnancal markets run to quarterly and yearly reportng rhythms. Currently, there s no standard sustanablty accountng scheme. Untl a smlar scheme to generally accepted fnancal accountng rules emerges, companes wll work wth multple systems and data collecton and comparson may be cumbersome. Most economc measures reported annually are legal requrements, and these costs are budgeted for. Sustanablty reportng s largely not mandatory and the cost of measurng (e.g. a full envronmental Lfe Cycle Assessment) may not always be easy to justfy A pure cost focus may leave employees unmotvated and lead to unexpected cost (e.g. sck leave). Effcency mprovements n energy use at home may lead people to buy more products and servces because they have more ncome left to spend (rebound effect; Grubb, 1990) Methods to nvestgate sustanablty KPI use Ths work was conducted as part of the early actvtes of the EPSRC Centre for Innovatve Manufacturng n Industral Sustanablty. The Centre s a collectve of four unverstes and multple partners from manufacturng, retal, employer organsatons and unons as well as Quas Autonomous Non- Government Organsatons (QUANGOs) engaged n resource and carbon effcency. The am of the Centre s to address ssues of ndustral sustanablty, delverng more value to a greater proporton of a growng populaton whlst sgnfcantly reducng green house gas emssons and halvng resource use. A domnant topc of member nterest durng one of the frst meetngs was that of KPIs or metrcs and ther lnk to performance mprovement n sustanablty. In response to ths nterest, a short study was commssoned to examne the current state of practce amongst the Centre s members and to help nform future research. The am was to establsh what works and what does not work and under whch crcumstances wthn the scope of sustanablty metrcs and ther use. The results of ths and subsequent follow up engagements forms the bass of the analyss presented n ths paper. Respondng to the member nterest a sustanablty audt was developed, whch conssted of a smple evaluaton (Appendx A) supplemented wth 5 questons. Ths was shared amongst the members to elct ther current practces n sustanablty assessment. The followng questonnare text was used to support the smple audt: 1. Please lst the sustanablty metrcs you measure (e.g. waste n factores; carbon emssons of products). 2. How do you do ths? In other words: whch sustanablty measurements/evaluatons do you typcally use? (E.g. monthly factory reportng of total waste; full product LCA) 3. What s good and bad about your current measures? (e.g. effectve; accurate; tme-consumng; dffcult to get data) ECEEE 2012 SUMMER STUDY on Energy effcency n ndustry 251

6 Bocken et al 2. SUSTAINABLE PRODUCTION DESIGN, SUPPLY CHAIN INITIATIVES Table 3. Examples of sustanablty dmensons. Based on ndcators dentfed by Arena et al. (2009). Economc Envronmental Socal Economc performance (e.g. proftablty) Market presence (e.g. market share per country) Indrect economc mpacts (e.g. affluence) Materals (e.g. % recycled) Energy (e.g. % renewable) Water (e.g. m 3 used, level of polluton) Bo-dversty (e.g. number of trees cut down and re-planted) Emssons (e.g. tonnes of CO 2 emtted by factores) Waste (e.g. waste to landfll/ waste dverted from landfll) Product and servces (e.g. reusablty, energy durng product use) Complance (e.g. envronmental fnes) Transport (e.g. mode of transport, dstance from factory to retal) Work practces and adequate workng condtons (e.g. mnmum wages, 5-day workweek) Dversty and equal opportuntes (e.g. % of female employees, % female employees n management) Relatons wth the communty (e.g. employment of local workers) Socal polcy complance (e.g. tranng and development opportuntes) Consumer health (e.g. number of ncdents reported durng product use, postve contrbutons to consumer health) Safety (e.g. number of accdents or deaths n factory operatons) Human rghts (e.g. no chld labour, far treatment of workers) 4. Whch mprovements would you want to see n the short and long-term? 5. How would you evaluate your performance? (very qualtatve self-assessment multple answers are possble e.g. factory X s best possble; factory Y s worst). Large companes may want to restrct themselves to a specfc geographcal area or product type. Companes were asked to complete the self-evaluaton n response to these questons and were gven examples (drawn from the grey and academc lterature) to stmulate ther responses (Appendx A). Sem-structured ntervews, based on the questons above were conducted wth the UK-based QUANGOs, who have experence both n usng metrcs and observng practce. They were asked to draw on ther own experence of metrcs as well as the companes and organsatons they nteract wth, to augment the fndngs from the survey. Follow up ntervews were conducted wth four of the surveyed members, to respond n more depth on the subject of the survey. A workshop to revew results and engage wth a leadng exponent dentfed from the survey (large manufacturng organsaton), a QUANGO (workng on resource effcency), and a start-up company that was begnnng to assess sustanablty, as well as researchers from each of the unverstes nvolved. At each stage (survey, ntervew, workshop) the fndngs were fed back to the members to ensure that the researchers nterpretaton of the data collected reflected ther understandng and worldvew. The members were nvted to gve feedback va phone or e-mal. Durng the workshop, each of the researchers made notes on the dscussons held and provded a summary of the ssues rased. These summares were then collated by the lead researcher. The partcpatng organsatons are lsted n Table 4 (made anonymous). QUANGOs have observed a range of companes and so are n some way representatve of a range of experences n ths area. Sustanablty KPIs n practce Ths secton descrbes the fndngs of the use of sustanablty KPIs n practce and draws lnks wth evdence found n the lterature. Fndng 1: Surveyed companes are not sure whether sustanablty KPIs are leadng to performance mprovement It was found that surveyed companes are unsure whether sustanablty KPIs are leadng to performance mprovement. Moreover, choosng approprate boundares and metrcs wll greatly nfluence mprovement. Survey fndngs: Most surveyed companes have some form of sustanablty measurement n place. The companes that use sustanablty KPIs ndcated these facltate montorng and assgnng ownershp, but they do not always effectvely lead to performance mprovement. To gve an example of Company-5 s evaluaton of sustanablty KPIs: Good vsblty / ownershp, Bad not clear f all KPI s can drve the correct behavours, benchmarkng s complex. Some of the suggested mprovements nclude: Global defntons and boundares KPI range that wll drve the correct behavours. Intervews fndngs: Two ntervewees ndcated they were not sure whether ther sustanablty KPIs are suffcent to drve performance mprovement. For nstance, envronmental performance varaton between factory stes shows that havng metrcs n place does not necessarly lead to the desred mprovements, whch augments the survey response that there s a need to transfer knowledge nternally. Second, there s a dscrepancy between the dfferent behavours KPIs are drvng: KPIs whch target to reduce energy use n factores wll have dfferent effects from a product lfe cycle approach whch ams to reduce emssons across a product lfe cycle (from raw materals sourcng to producton, storage, use and dsposal). Anecdotal evdence from one of the ntervewees shows that mprovement n product lfe cycle car- 252 ECEEE 2012 SUMMER STUDY on Energy effcency n ndustry

7 2. SUSTAINABLE PRODUCTION DESIGN, SUPPLY CHAIN INITIATIVES Bocken et al Table 4. Organsatons engaged at each stage of research. Note. Maturty s based on self-assessment. * Indcates that the assessment was done by a researcher who works closely wth the company. Organsaton Partcpant SKPI Survey Intervew Workshop Maturty Company 1 Establshed Large company CEO Hgh X Company 2 Start-up Small or Medum Sustanablty lead szed company (SME) Medum X X Company 3 Establshed Large company CEO Hgh X Company 4 Establshed Multnatonal Sustanablty lead company Hgh X X Company 5 Establshed Multnatonal company Company 6 Establshed Multnatonal company Company 7* Establshed Multnatonal company Manufacturng sustanablty lead Manufacturng sustanablty lead Researcher (on behalf of company) Hgh X X X Hgh X X Company 8 Start-up SME Co-owner Medum X QUANGO 1 Sustanablty expert N/A X QUANGO 2 Regonal leader N/A X X Hgh X bon emssons has led to negatve mpacts on manufacturng energy use and carbon emssons on multple occasons. It appears that both product lfe cycle and manufacturng sustanablty KPIs are therefore requred to drve change. One ntervewee (Company 6) mentoned: Is t possble to play around wth KPIs to get the rght output? [We need to gan] understandng [of] KPIs that contradct each other Workshop: Durng the workshop a dscusson emerged on sustanablty metrcs and whether these lead to performance mprovement. The SME noted that wthout sustanablty metrcs (but wth a clear sustanablty vson) t has developed a sustanable busness. The multnatonal had been developng performance management systems (smlar to a pyramd type of structure as suggested by Lynch and Cross, 1995) for over a decade, and noted that ths performance management system was key to makng sustanablty mprovements. Lterature dscusson: Despte havng sustanablty KPIs n place, mprovement may not always occur. Incentves may be useful: Ftzgerald and Moon (1996) argue ncentves are requred n performance management systems and Clarke et al (1994) and Bourne et al. (2000) vew user nvolvement as mportant for effectve performance management systems. Wth the absence of sustanablty measures (besdes fnancal performance measures) n busness bonus schemes, t may be hard to drve sustanablty performance mprovement. Fndng 2: A broader set of sustanablty KPIs s felt to gve deeper nsghts but when analysng possble actons trade-offs need to be made between socal, economc and envronmental outcomes It was found that by measurng more (.e. envronmental and socal performance), companes gan deeper nsghts. However, companes fnd t dffcult to balance the decsons on how to allocate ther resources: how can they choose between far-trade and organc purchases? Moreover, certan actons have negatve consequences (e.g. product mprovements may lead to added complexty n manufacturng) so how to make the rght decson? In certan stuatons companes may need to consder one metrc more than others. Furthermore, socal metrcs may be dffcult to measure, but are of ncreasng nterest to government and ndustry. Survey fndngs: Socal metrcs seem to be of nterest, but are more dffcult to measure. Company 3 commented on a socal metrc: Wth more proft we would do t (.e. the cost and resources assocated wth measurement s lmted and ths affects the ncluson of the socal metrc). Company1 commented the followng: [ths socal metrc] s not currently measured and [we are] unsure how to show ths. One of the bgger companes (company 6) mentoned: Socal aspects [are assessed] more ad hoc. Intervew fndngs: Company 5 noted that many socal sustanablty ntatves were happenng but these were bottom-up ntatves rather than top-down drven, whch may be the case because of the nature of the measure (e.g. seekng to contrbute postvely to local communtes). Company 2 noted that demonstratng qualty s (obvously) the prmary means of delverng customer value, followed by prce. Although ts products enable envronmental savngs, Company 2 found that qualty and cost are (stll) consdered frst by customers. Workshop fndngs: The partcpatng companes and QUANGO recognsed the dffculty of balancng dfferent sustanablty metrcs, as companes are stll valued based on proftablty and shareholder value. Accordng to the SME, the economc element of the trple bottom lne s very mportant but often forgotten. Moreover, although measurng socal sustanablty has become more popular, the ways to measure ths are not clear as found by the QUANGO that gets specfc queres from SMEs on how to measure socal sustanablty. ECEEE 2012 SUMMER STUDY on Energy effcency n ndustry 253

8 Bocken et al 2. SUSTAINABLE PRODUCTION DESIGN, SUPPLY CHAIN INITIATIVES Lterature dscusson: Elkngton (1997, p. 91) already argued that the trple bottom lne could rase a range of ethcal ssues: How should economc, socal and envronmental prortes be assessed and traded off? Despte of years of research n ths area, the ssue of trade-offs perssts n practce. Currently, the company s vson helps companes balance decsons (as also suggested n the performance lterature, e.g. Maskell, 1991; Walsh, 1996). Fndng 3: Experenced companes n the sustanablty feld are lookng beyond the metrcs they have used n the past It was found that sustanablty leaders are lookng beyond the metrcs they have used n the past but requre support from outsde of ndustry. Start-ups or sustanablty followers (.e. those wth an nterest n actvely managng for sustanablty but have no experence) want to begn by usng the best measurement avalable. Survey fndngs: Two examples of survey responses show the need to move beyond metrcs used n the past: We would lke to make further mprovements n the re-use of our packagng as opposed to re-cyclng of our packagng (Company 3); ( ) There should be a standard measure that can compare resource usage/sustanablty across dfferent resource types. For example, we are used to a measure of carbon emssons when talkng about a road vehcle travellng a mle but what s the [equvalent for other sectors]? (Company 2). Intervew fndngs: It was found that the most mature companes n the feld of sustanablty are reconsderng ther metrcs contnually n response to changng stakeholder requrements and growng mprovement and understandng n the feld of sustanablty. Company 6 mentoned some metrcs are more establshed (e.g. emssons per tonne of producton n manufacturng), but others such as product lfe cycle footprnts are stll evolvng, and there s data uncertanty n calculatng these emssons (e.g. how to calculate suppler emssons?). Smaller companes and sustanablty followers mentoned they are keen to learn from what leaders are dong, as they do not have the capacty and resources to develop best practce n ths area. QUANGO 2 mentoned companes are movng from waste preventon to resource effcency as an example of changng metrcs. Workshop fndngs: The QUANGO mentoned many of the sustanablty leaders they are workng wth want to move beyond metrcs used n the past, for nstance, they want to move from the ethos zero waste to landfll to resource effcency, but do not know how to measure and compare these dfferent approaches. Start-ups as ndcated by the QUANGO and the SME want to begn by usng the best measurement avalable. Lterature dscusson: Neely et al. (1995) found that measurement n SMEs s a luxury, and often success and falure are obvous n the less complex envronment of a SME. If SMEs can buld on sustanablty practces of ndustry leaders ths can save them sgnfcant resources (research and development) they do not have. Fndng 4: Measurement and control of mpacts outsde company boundares are of concern It was found that measurement and control of mpacts outsde of drect scope are of concern. Some companes n our ntal survey consder themselves ether too small (nsuffcent barganng power) or too large (too many supplers or customers, complexty) to manage ths effectvely. Survey fndngs: Emssons outsde factory or company boundares are of concern but cannot always be controlled. One SME mentoned: as a busness we ( ) have been measurng several [envronmental metrcs] on our partner/ potental customer s stes (Company 2). A slghtly larger company (Company 1) mentoned: we are manly dealng wth bgger companes who want to mpose ther understandng of ths on us rather than use ours whch tend to be further reachng. In respect of the product emssons the data was dffcult to get hold of for raw materals bought n from supplers. Concernng sustanable materal sourcng, Company 1 also mentoned: Due to our sze t s dffcult to always follow ths or be able to purchase these. A multnatonal company (Company 6) commented on mechansms overlookng the supply chan: Ths s a key area but [we are] never free from t! There always seems to be somethng. Confuson. ( ) Can kll brands f done mproperly. Intervew fndngs: For the bgger companes (Companes 4, 5, 6), engagng wth customers s of specal concern. They have establshed successful ntatves to help customers become more sustanable (e.g. by encouragng recyclng and reuse) and are fndng more novel ways to engage wth customers. One SME (Company 2) ndcated that ts man purpose and sellng pont s to help reduce ts customers envronmental footprnts and t needs to cooperate wth bgger companes to acheve ths on a bgger scale. Workshop fndngs: The QUANGO mentoned the mpacts of companes n rural areas: they may be major employers, whch may also be a rsk when the company leaves ths area. For the multnatonal, workng wth supplers s of great mportance. It s mportant to consder reslence to natural dsasters (e.g. due to clmate ssues) as a factor when selectng and workng wth supplers. Lterature dscusson: Sustanablty concerns the needs of current and future stakeholders (WECD, 1987). Accordng to Clarke (1994) and Toor and Ongunlana (2010) awareness of stakeholder needs s part of effectve (performance) management n organsatons. Companes seem to be ncreasngly aware of ther current and future stakeholders and want to consder ther negatve externaltes but controllng mpacts outsde company boundares may be dffcult because of complexty (a wde range of supplers) and barganng power. Fndng 5: Learnng wthn the company between dfferent stes s mportant but may be dffcult It was found that learnng wthn the company between dfferent stes s mportant but may be dffcult because of dfferences n energy management systems, geographcal areas, age 254 ECEEE 2012 SUMMER STUDY on Energy effcency n ndustry

9 2. SUSTAINABLE PRODUCTION DESIGN, SUPPLY CHAIN INITIATIVES Bocken et al of equpment, personnel expertse and other factors. Also, the poltcs of nter-ste competton may be a barrer. Survey fndngs: One multnatonal mentoned there s a need to transfer knowledge nternally (Company 6). Another multnatonal ndcated: each faclty has ts own energy/envronmental management and so cross-mplementaton (mult-ste) of ntatves s dffcult (Company 5). Workshop fndngs: The multnatonal mentoned learnng across dfferent manufacturng stes s very mportant. As most factory stes dd not naturally cooperate, they set up a teach-learn-do-teach approach, where n return for learnng from one factory ste, employees need to teach another factory ste about what they learned, whch encourages cross-factory learnng. The SME suggested an Open Innovaton model to help compettors work together on sustanablty. Ths can accelerate change across ndustres. Lterature dscusson: Accordng to Lynch and Cross (1995, p.1) the ratonale for performance measurement s to stmulate contnuous mprovement. It s mportant that the systems supportng sustanablty KPIs stmulate mprovement n ndvdual busnesses, the transfer of best practce across busness unt or factores, and ultmately across companes and ndustres. Fndng 6: There are opportuntes to mprove nternal and external sustanablty reportng It was found that here are opportuntes n both nternal and external sustanablty reportng. Companes may not always measure what s needed, or make use of ther own metrcs to mprove external communcatons. Survey fndngs: An example of a drect need mentoned n the survey was: [Can you] help us communcate better? (Company 4) Internally, there s a need for tranng on sustanablty. Company 1 noted on sustanablty: Ths needs to be communcated more through all levels of staff. Intervews: Company 2 mentoned ts nterest n seeng how others measure thngs, and fndng a common language. As the defntons and measures of sustanablty are not clear-cut, ths wll lead to confuson on what needs to be reported, and what should be reported to ensure the publc understands the message. Company 2, a SME, ndcated t does not have tme to measure every metrc they want to, let alone to wrte extensve corporate sustanablty reports or update ther webstes. In bgger companes (e.g. Company 5), success stores are not always shared nternally, although ths could be a good source for nternal learnng. Workshop fndngs: The SME ndcated there s nsuffcent tme to report the efforts they take, such as the envronmental ndcators they take nto account and how they engage wth the communty. The multnatonal also noted that many of ther actvtes (related to socal sustanablty n partcular) are not always reported, or communcated nternally and externally so there s ample scope for mprovement. Lterature dscusson: several studes have nvestgated the use of sustanablty metrcs whch are externally reported, such as Székely and Knrsch (2005) who ncluded a range of sustanablty metrcs n ther paper and Marshall and Brown (2003) who nvestgated the use of envronmental metrcs. However, through the surveys, ntervews and workshops t was found that not all sustanablty efforts are externally and even nternally advertsed so there are stll opportuntes for companes to do ths. Implcatons Companes are becomng ncreasngly nterested n concepts of sustanablty and the trple bottom lne, whch can be notced from the growng reportng efforts on socal and envronmental matters, n addton to fnancal ones. Ths challenges companes to measure ther performance n new areas. In ths paper, the authors explored the challenges faced n developng and usng sustanablty KPIs n a manufacturng practce. Although only a small sample of companes took part n ths research, ths paper does llumnate some of the ssues perceved by sustanablty leaders n ndustry to acheve sustanablty performance mprovement. Defnng sustanablty KPIs presents all the challenges and complexty of defnng performance ndcators n general (e.g. Neely, 2002), and specfc addtonal challenges. The scope of performance management s expanded (e.g. an ncreased number of stakeholders and dmensons of performance) and concepts are ntroduced that are perceved to be more dffcult to measure (e.g. socal measures). Moreover, envronmental and socal reportng s largely voluntary, and there are no unversally prescrbed codes of practce for reportng although there are emergng standards (e.g. the Global Reportng Intatve). Therefore companes must largely defne for themselves what performance n sustanablty s and how t s measured. Potental barrers to companes developng ther own strateges nclude a lack of resources (e.g. for SMEs), experence or motvaton to develop these strateges. Companes emphasse the need for a clear strategy and management system over the smple mplementaton of sustanablty KPIs. The two start-up SMEs n our sample, whch may not have performance management systems yet, have adopted a long-term sustanablty vson, whch may help to embed sustanablty n ther daly operatons. Larger companes n our sample, whch are effectvely drvng sustanablty performance mprovement, clam to have taken sustanablty performance as serously as fnancal performance and have developed smlar KPI performance systems to drve mprovement (e.g. KPI pyramds, ncentve schemes). Even wthn these management systems there are challenges: how can means be developed to measure and manage effects that are not fully understood yet (e.g. rebound effect, socal mpacts) and how to balance between water reductons and energy effcency for nstance? Currently, company strategy and vson serve as a gudelne to gude ths type of decson-makng. It appears that t s challengng to replcate success stores n sustanable performance management, even n smlar factores wthn the same company. Possble explanatory factors may nclude the age of facltes, reluctance to share wth factores who are competng for the same overheads (nter-departmental competton; Walsh, 1996), the tranng or qualty of the respectve personnel, factory culture and the complexty of the ECEEE 2012 SUMMER STUDY on Energy effcency n ndustry 255

10 Bocken et al 2. SUSTAINABLE PRODUCTION DESIGN, SUPPLY CHAIN INITIATIVES management system and decson makng structures requred. Ths renforces the noton that the mere mplementaton of sustanablty KPIs s not enough to acheve mprovements n sustanablty performance. More research s requred to gan better understandng of how to encourage and enable nter and ntra-company learnng. Leadng companes may have a role to play n supportng ther supply chan and wder ndustry. Leadng companes may provde prortes and support for supplers, for nstance on what measures are mportant, and how can these can be managed and measured best. Second, manufacturng stes that have demonstrated mproved performance n sustanablty have much to offer follower stes or companes. The teach-learndo-teach framework used by factory managers n Company 5 may be useful to mplement n other companes too. Moreover, an Open Innovaton model as suggested by the SME may help companes cooperate on jont sustanablty challenges (e.g. jont logstcs challenges) wthout compettve ground. Fnally, havng met earler targets (e.g. zero waste), or been challenged by changng crcumstances, sustanablty leaders are constantly defnng new KPIs. SMEs that do not have suffcent resources may buld on knowledge accumulated n leadng companes and reported externally. Future work could focus on the management and governance systems that defne sustanablty goals (what s mportant and how do we defne performance?) and the management systems to acheve that performance. Fnally, although the feld of sustanablty performance mprovement s evolvng at a fast pace, more work s requred n ths area: for nstance, how can trade-offs be made between the trple bottom-lnes, how can sustanablty reportng be further formalsed, and how can nter- and ntra-company learnng be ncreased? References Arena, M., Ccer, N., Terz, S., Bengo, I., Azzone, G., Garett, M A state-of-the-art of ndustral sustanablty: defntons, tools and metrcs. Internatonal Journal of Product Lfecycle Management, 4 (1-3), Bourne, M., Mlls, J., Wlcox, M., Neely, A., Platts, K Desgnng, mplementng and updatng performance measurement systems. Internatonal Journal of Operatons & Producton Management, 20 (7), Carbon Trust Rasng The Bar - Buldng sustanable busness value through envronmental targets. Busness brefng from Carbon Trust Advsory Servces. Retreved from the WWW, September 2011: Clarke, L The Essence of Change. Prentce Hall Internatonal, Hemel Hempstead, UK. DEFRA, Envronmental Key Performance Indcators - Reportng Gudelnes for UK Busness. Trucost and DEFRA, Department for Envronment, Food and Rural Affars, London, UK. Elkngton, J Cannbals wth forks. The trple bottom lne of 21st century busness. Capston, Publshng Ltd, Oxford. 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11 2. SUSTAINABLE PRODUCTION DESIGN, SUPPLY CHAIN INITIATIVES Bocken et al Peatty, K Green Marketng. Ptman Publshng, London UK Székely, F., Knrsch, M Responsble Leadershp and Corporate Socal Responsblty: Metrcs for Sustanable Performance. European Management Journal, 23 (9), Toor, S., Ongunlana, S Beyond the ron trangle : Stakeholder percepton of key performance ndcators (KPIs) for large-scale publc sector development projects. Internatonal Journal of Project Management, 28, Walsh, P Fndng key performance drvers: Some new tools. Total Qualty Management, 7 (5), World Commsson on Envronment and Development (WCED; chared by Gro Brundtland) Our common future. Oxford Unversty Press, Oxford, UK. Acknowledgements The authors were funded by the EPSRC Centre for Innovatve Manufacturng n Industral Sustanablty. We would lke to thank the Centre s members who partcpated n ths research, and provded constructve feedback at each stage. In partcular, we would lke to thank Dr. Ellot Woolley for hs contrbutons to the workshop development. ECEEE 2012 SUMMER STUDY on Energy effcency n ndustry 257

12 Bocken et al 2. SUSTAINABLE PRODUCTION DESIGN, SUPPLY CHAIN INITIATIVES Appendx A. Company self-evaluaton Note: The scorng (best possble-poor) s taken from the green performance matrx by Peatte (1992, p. 181). The ndcators were further developed by the authors to conduct a sustanablty (rather than green ) evaluaton. Area Indcators Do you use t? Do you want to use t? Self evaluaton Best Among possble the best Above average Average Better than some Poor Hgh varaton between stes/ products? Notes? E n v r o n m e n t a l S u s t a n a b l t y Factory/ Retal/ Dependng on busness) Products Supply chan Landfll waste generaton Water consumpton Energy consumpton Emssons to ar Sustanable materal sourcng Product value to consumer Recyclablty Reusablty Packagng: amount/ reusablty/ recyclablty Mult-functonalty Energy use by consumer Consumer change/ engagement Product lfespan Interacton/ postve changes drven n supply chan Logstcs & storage Soco-economc poltcal mpact/ engagement Bodversty & Land use change S o c a L S u s t a n a b l t y Internal Wder/ Supply chan mpact Workers and management relatons Employee well-beng Equalty & dversty Tranng, communcaton understandng of sustanablty Mechansms to overlook supply chan Ethcal materal sourcng (e.g. fartrade) Human rght ssues (e.g. chld labour) Communty relatons Product responsblty (e.g. health & safety) 258 ECEEE 2012 SUMMER STUDY on Energy effcency n ndustry