Abstract Number: 002-0417

Second World Conference on POM and 15th Annual POM Conference, Cancun, Mexico, April 30 - May 3, 2004.

Sustainable Production Systems Evaluation Using the Analytic Hierarchy Process

Adrien Presley

Division of Business and Accountancy

Truman State University

100 East Normal

Kirksville, MO 63501

Phone: 660-785-4361

Email:

Laura Meade

Graduate School of Management

University of Dallas

1845 East Northgate Drive

Irving, TX 75062-4736

Phone: 972-721-4072

Email:

Abstract

Companies are becoming increasingly aware that choices made about products and processes can have profound environmental impacts. An emerging area in these environmental decisions is Sustainable Development and Production, which looks at developing and manufacturing products in such a way as to be environmentally friendly and socially conscious to workers, consumers, and communities while ensuring a fair return and long term viability to the company. The objective of this paper is introduce sustainability and to present a conceptual decision model, using the Analytic Hierarchy Process to assist in evaluating the impact of an organization’s sustainability performance.

Keywords

Sustainable development and production, environmental management, AHP

1. Introduction

A growing worldwide business concern is the issue of sustainability. Sustainability, or sustainable production and development, is defined as economic activity that meets the needs of the present generation without compromising the ability of future generations to meet their needs. It is an issue that is seen at both macroeconomic and microeconomic levels. At the highest level, the development and application of sustainability is a world wide concern in which the United States is lagging behind other countries. Finland, Norway, Sweden and Canada were among the top countries in a 142 nation rating conducted in 2002 based on the Environmental Sustainability Index (ESI) [4]. At a more micro level, companies are becoming increasingly aware that choices made about products and processes can have profound environmental impacts [3]. Companies are increasingly in a quandary as to how to address the issues pertaining to environmental friendliness, social conscious towards workers, consumers, and communities, as well as ensuring a fair return and long term viability to the producing company when developing and manufacturing products. Sustainability is based upon three dimensions: economic, social, and environmental [2]. The evaluation of these environmental management (EM) decisions in such an environment requires analysis across all of these dimensions. However, interaction and conflicting goals makes the integration of the dimensions difficult, as does the need to integrate the needs and desires of multiple constituencies and stakeholders. There are also organization barriers to environmental change such as attitudes from staff and top management as well as industry barriers such as knowledge, information, and regulatory constraints and technical availability [5]. These impacts are further complicated in that impacts extend beyond any single enterprise where the entire supply chain must be considered.

Management tools exist in practice and literature to support environmental decisions. Among these are environmental management initiatives, environmental indicators, life-cycle assessment, and the ISO 14000 certification framework. However, these tools, both in isolation and taken together as a set, have shortcomings. Among those listed in literature include the lack of criteria addressing all dimensions of environmental impact, lack of integration of criteria (especially integrating qualitative and quantitative criteria), difficulty in considering and integrating stakeholder requirements, and scarcity of guidance in choosing which tools to use [1,13]. Review of literature also indicates that with a few exceptions, the use of operations research decision-making tools is not common in this area.

This paper describes the progress of a project that seeks to develop and validate a conceptual model to aid in the environmental systems decision-making process. The model will utilize the Analytic Hierarchy Process (AHP) as a framework for EM decision-making. AHP allows both quantitative and qualitative criteria to be entered into the model and offers an overall solution for the model [11]. The focus of the paper is not on the mathematical aspects of AHP. AHP instead is used as a framework for presenting and discussing the various dimensions and criteria for evaluating sustainability decisions.

2. Sustainable Development and Production

Traditional production companies are beginning to understand and pursue a corporate goal of sustainable development. While the term sustainable development is somewhat ambiguous and ill-defined to production companies, the overall definition has not changed in 15 years since it was first defined by the World Commission on Environment and Development. The Brundtland Report defined it as "development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs" [14]. Sustainability is based upon three components: economic, social and environmental. Economic aspects of sustainability include, but are not limited to, financial performance, employee compensation, and community contributions. Examples of social aspects are public policymaking, fair labor standards, and equal treatment of all employees. Environmental aspects include impacts on the air, water, land, natural resources, and human health. [2]. At its broadest definition, sustainable development refers to managing the development of communities, nations, regions, and indeed the entire planet in such a way as to ensure efficient resource use, creation of efficient infrastructures, protection and enhancement quality of life, and the creation of new businesses to strengthen economies. It concerns itself with the creation of healthy communities that can sustain this quality of life for this and future generations. Sustainability is often seen as a community or institutional response to threats against human and planetary survival. Sustainable development provides a framework under which communities can use resources efficiently, create efficient infrastructures, protect and enhance quality of life, and create new businesses to strengthen economies.

While to many, sustainable development takes on a macroeconomic flavor described by the WCED, to others it has a more local or microeconomic view. Sustainability is the new buzzword for businesses of all sizes, but defining it is up to each individual company. While most people and organizations would surely agree with the philosophy and aims of sustainable development, its implementation remains problematic. Most work in sustainable development has been at the national and community level, with less work found which addresses the measurement and management at the company level [13]. The Lowell Center for Sustainable Production defines sustainable production as “the creation of goods and services using processes and systems that are: non-polluting, conserving of energy and natural resources, economically viable, safe and healthful for workers, communities and consumers, and social and creatively rewarding for all working people.” We use this definition in this paper.

There exists a relationship between regulation (both self-imposed and mandatory) and business sustainable development. Based on several case studies it was found that if incentives in the marketplace are given, companies will innovate to greener processes [12]. However, recently the sustainable practices including waste reduction, recycling, reuse and waste diversion, are being pursued by more companies as they are finding inefficiencies in their processes. “Many companies are pursuing sustainability because they are finding business value in it”. [8]. Sustainability has become a strategic imperative for all businesses in the 21st century and has become a fundamental market force affecting long-term financial viability and success [10]. A major issue in sustainable development is how to operationalize its concepts. To executives, adopting and implementing sustainable development requires identifying how their company fits in the larger ecological and economic environment and identifying the actions required for its survival. The creation of the Dow Jones Sustainability Group Index is indication that the business world is beginning to take the concept of sustainability seriously. In 2001, the International Prize for Sustainable Development ($100,000) was awarded to the CEO of Interface Inc., a company that manufactures carpet, fabrics and other interior products. The award is given for achieving sustainability in business and has only been given out 7 times in the last 28 years [6].

3. AHP Model For Sustainability

This research uses the Analytic Hierarchy Process (AHP) as a framework for EM decision-making. Saaty [11] developed the AHP for decision structuring and decision analysis. AHP allows a set of complex issues that have an impact on an overall objective to be compared with the importance of each issue relative to its impact on the solution of the problem. AHP is a comprehensive framework that is designed to cope with the intuitive, the rational, and the irrational when making multi-objective, multi-criterion and multi-actor decisions – exactly the decision-making situation found with environmental management. While AHP is conceptually easy to use, it is decisionally robust so that it can handle the complexities of real world problems. AHP models a decision-making framework that assumes a unidirectional hierarchical relationship among decision levels. The top element of the hierarchy (apex) is the overall goal for the decision model. The hierarchy decomposes to a more specific attribute until a level of manageable decision criteria is met. The hierarchy is a type of system where one group of entities influences another set of entities.

In this section, the progress and plans for developing a AHP model for sustainability is presented. In the interest of space and focus, the bulk of this discussion will be on the development of the model and the criteria selected. The discussion therefore, is not technical, but rather managerial in that the AHP model is used as a framework for presenting the major issues related to sustainable production. Future research and papers will detail the use of the model and the mathematical manipulation of the AHP model.

3.1 Identification of Criteria

To identify a core set of evaluation criteria, the literature was reviewed to identify the most commonly mentioned factors. In addition, environmental management standards including ISO 14000 and initiatives developing indicators such as the World Business Council for Sustainable Development were examined for additional factors. Through the review some natural groupings applicable to the AHP model emerged. Among these were strategic factors, stakeholders, benefits and disbenefits of sustainability, and characteristics of process/product/system under consideration. Some other criteria which did not fit so well into these categories were also identified. The following presents a brief discussion of some of these categories of factors as well as some individual factors.

Stakeholders: This cluster of factors refers to those groups of people or individuals who are affected by the implementation of an environmental management system and/or have input or influence into the decision process. Major individual stakeholder groups include Owners and Management, Customers, Employees, External Agencies (including Government and Non-Governmental agencies), and Society/Community (which would include the local and global communities a company operates in and the views of society at large).

Dimensions of Sustainability: To facilitate analysis, the metrics for evaluating an environmental system were organized into a set of categories referred to as the Dimensions of Sustainability. Basically, it is believed that different stakeholders will have differing perceptions of the importance of the dimensions. For example, Societal stakeholders would be expected to put more weight on environmental metrics such as groundwater pollution than on a financial metric such as the payback period for the company. Below, the dimensions and some example individual metrics are presented.

Organizational: This dimension refers to benefits and effects which relate to the organization in areas such as learning and processes and includes offshoot benefits in areas not directly involved with environmental systems. These benefits and costs are typically those that are not financial in nature. It is perceived that these would be most important to the Stakeholders Owners/Management and possibly Employees (when benefits such as safety are involved). Some specific metrics identified here include improved management, improved quality of training, improved working conditions and safety, increased innovation, improved processes, increased employee motivation and morale, better company image among employees, and strategic fit. Disbenefits or barriers could include lack of management commitment and resistance to change.

Technical: This dimension refers to technical issues with the system being evaluated and would include both technical performance of the system as well as the technical competencies related to implementing the system. This dimension would be most important to Owners/Management and possibly Customer depending on what the system being evaluated is. Specific metrics here include probability of technical success, existence of required competences, availability of available resources, and time to market [9]. Additional research is currently being conducted in R&D and technology innovation literature to expand the metric set.

Financial/Market: These include the classical financial criteria used for project selection along with selected market related criteria. These would be most important to Owners/Management. Literature states that too many decisions are made solely on financial criteria. This is especially true when making decisions about sustainability that are long term in nature and have impacts to the company in question. The business case for environmental investments is more complex than simply analyzing dollars saved versus dollars spent. Many of the benefits from these investments are not quantifiable; indeed they are priceless, such as the value of preserving biodiversity, conserving natural resources, and protecting people's health and safety [2]. Financial metrics include net present value, internal rate of return, and payback period. Market metrics include those such as probability of market success of product, potential size of market, and product life cycle considerations. AHP provides the ability to integrate these with the other criteria mentioned.

Environmental: Included in this category are factors related to improved environmental performance. Example metrics include improved environmental performance, assured legal compliance, increased energy and material efficiencies, reduced pollution, impact on natural environment and conformance to ISO 14001 and other standards. This category remains the most problematic in that many of these metrics influence other metrics (e.g. increased material efficiency leads to lower cost, reduced pollution leads to improved image, etc.). This is important to all stakeholders and is one which external stakeholders play an increasing role. For example, institutional investors are realizing that companies who are pursuing a path in environmental excellence characteristics such as environmental-efficiency and environmental sustainability are driving financial performance of corporations [7].

Societal: This final category includes those effects related to a company’s interaction with external entities such as government, NGOs, communities, etc. These are obviously important to the external stakeholders of Society/Community and External Agencies. These metrics would tend to be the most qualitative in nature. Specific examples gleaned from literature include improved corporate image, better customer and supplier relations, and better cooperation and relationships with regulators and administrative bodies.

The above are the main criteria that were retained for the model described in the next section. Because the goal of this phase of the research was to develop a generic model applicable to the analysis of various environmental systems, some other possible factors identified through the research were not specifically incorporated into the model. The following are other key factors that could be added or substituted into the model as the user deems appropriate:

Product Life Cycle Stages: If the system being evaluated is a product or a process to produce a product, the stage of the life cycle (introduction, growth, maturity, and decline) for the product would provide an important decision variable.

Life Cycle Analysis: Life cycle analysis looks at the impacts of a product through its life span from production through use through disposal. Again, if the system being evaluated is a product, this would provide an additional area of analysis. Specific metrics would relate to manufacturing waste and emission, resource consumption through use, and environmental impacts of disposition. Applications looking at reverse logistics would likely include this as a factor.

Strategic Dimensions: Many applications would involve strategies as a factor. In the model chosen, strategic issues are implied through the selection and importance weighting of the criteria. If the strategic dimension is to be explicitly considered, different ways of defining the criteria are possible. For example, the use of Porter’s generic strategies is a possibility. For an operations management related application, strategies related to quality, differentiation, flexibility, cost, etc. could be explicitly identified and weighted. Strategies for specific business functions (e.g. logistics) or initiatives (e.g. agility or lean) could also be used.

3.2 Development of the Model

As mentionedin the previous section, the development of a generic model that could be adapted to various applications was the goal of this stage of the research. This generic model is shown in Figure 1 below. Basically, the levels of the hierarchy relate to the flow of decisions. The top element of the hierarchy (apex) is the overall goal for the decision model. The hierarchy decomposes to more specific attributes until a level of manageable decision criteria is met. The hierarchy is a type of system where one group of entities influences another set of entities. In the hierarchy shown, the overall goal is to pick the best environmental system (where that system could be defined as a new product, options for producing a product, whether to implement an Environmental Management System, or any number of environmental related choices. Under this we would determine the importance or influence of each of the stakeholders in the decision. Next we would determine for each stakeholder the importance of the each of the dimensions of the sustainability. This continues until the lowest level is reached – the comparison of the alternatives relative to each of the metrics.