Abstract Number: 020-0775

Operations strategic management and sustainability

Edson Pinheiro de Lima1, Sergio E. Gouvea da Costa2 and

Pamela Mocelin Manfrin3

Industrial and Systems Engineering Graduate Program – PPGEPS

Pontifical Catholic University of Parana – PUCPR

Curitiba – Brazil

Tel.: +55 41 3271 1333

1, 2, 3

POMS 22nd Annual Conference

Reno, Nevada U.S.A.

April 29 to May 2, 2011

Abstract

Companies’ operations network systems are being redesigned to cope with new performance requirements, which are based on social responsibility conscious, environmental management system design and economic sustainability. These aspects define dimensions for operations performance and should be integrated in a unified design framework. The set formed by these three dimensions is named triple bottom line and could individually be defined by performance drivers. If a structural framework is used for defining operations strategy, multiple relationships could be mapped between performance drivers and decision areas in each of the studied dimensions. The objective of this paper is to propose operations strategic management design framework based on sustainability design requirements. Literature review is the methodology used for defining the conceptual base that informed the proposed framework. The synthesis produced from literature review defines theoretical determinants that are the building blocks of operations strategic management design framework founded in sustainable operations based approach.

Keywords: operations strategy, strategic management, performance measurement, sustainable operations

Introduction

Research in Operations Management has indicating over the last ten years a growing interest in themes related to operations sustainability and its implications for supply chain management, operations strategy, performance measurement, and lean systems (Taylor and Taylor, 2009, Pilkington and Meredith 2009, Pilkington and Fitzgerald, 2006).

Gold et al. (2010) argue that supply-chain-level competition and the challenges of designing sustainable operations reflect worldwide growing environmental and ethical awareness. This fact induces supply chains to operate as quasi meta-organizations, creating a favorable condition for developing a ‘collaborative paradigm’ in supply chain management. According to these authors a sustainable operation requires closer interaction between all involved actors, ensuring at the same time economic, environmental and social performance. Performance criteria are also developed based on a product’s total life-cycle.

An increasing emphasis on sustainability studies could be traced back to the report produced by The World Commission on Environment and Development (1987), The Brundtland Commission, that defined sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

Isaksson and Steimle (2009) observe that sustainable development is not only an issue for nations but also for companies. They highlight the importance of big corporation’s in driving sustainable development. The challenge that is presented for companies is not only defined by reducing pollution. Corporate social responsibility (CSR) represents enterprises’ commitment to behave socially and environmentally responsible while achieving their economic goals.

Hutchins and Sutherland (2008) discuss an alternative definition of sustainability, providing some assistance on creating operations based concept: “design and operation of human and industrial systems to ensure that humankind’s use of natural resources and cycles do not lead to diminished quality of life due either to losses in future economic opportunities or to adverse impacts on social conditions, human health and the environment.’’ They also highlights that these definition requires a clear metrics, for judging the efficacy of any decision on the resulting sustainability.

Linton et al. (2007) formulate some questions that also clarify the scope and content of sustainability. These questions are:

  • What resources will future generations require?
  • At what levels can pollutants be released without having a negative effect on future generations?
  • To what extent will new sources of depletable resources be identified in the future?
  • At what level can renewable resources be exploited while ensuring that these resources remain renewable?
  • To what extent can technology address sustainable use of resources with continued increases of material wealth?
  • To what extent can market forces drive sustainability?
  • Do lifestyles need to change and if so how?
  • What sort of policies is required to achieve sustainability?

Seuring and Muller (2008) propose future directions for sustainable supply chain management development, observing that sustainable development is often reduced to environmental improvements, and a theoretical background is often missing:

  1. Sustainable supply chain management has to take into account a wider range of issues and, therefore, look at a longer part of the supply chain.
  2. Sustainable supply chain management deals with a wider set of performance objectives, thereby taking into account the environmental and social dimension of sustainability.
  3. There is a much increased need for cooperation among partnering companies in sustainable supply chain management.

Kleindorfer et al. (2005) commented that investments in sustainable technologies, operations, and supply chains could be justified by the following factors:

  1. The costs of materials and energy will continue to grow as the world economy expands and as rapidly industrializing countries, such as China and India, make strong demands on these resources.
  2. Public pressure for environmental, health, and safety performance is likely to remain strong, leading to strengthened property rights, additional regulations, international agreements on controlling negative externalities and preserving resources, and reductions in subsidies.
  3. Increasing awareness of triple bottom line (3BL) issues could increase consumer demand for products made by companies subscribing to 3BL practices.
  4. People’s growing antipathy to globalization is leading to strong non-government organization activity regarding businesses’ sustainability performance.

According to Kleindorfer et al. (2005) sustainable OM is defined as the set of skills and concepts that allow companies to structure and manage their business processes to obtain competitive returns on its capital assets without sacrificing the legitimate needs of internal and external stakeholders and with due regard for the impact of its operations on people and the environment.

Wilkinson et al. (2001) state that a sustainable approach addresses two challenges for enterprises business. Firstly, there are commercial pressures due environmental demands, represented by government regulation on environmental controls and standards, customer pressure for renewable forms of energy, and a conscious to be a responsible corporate citizen in society. Secondly, there are internal pressures related to human resources sustainability, that are delimited by an environment of increasing staff turnover, declining firm loyalty, increasing work hours and stress levels, and declining satisfaction levels.

Demands for a sustainable approach in OM could be also justified by the pressure exerted by internal and external stakeholders on multinational companies, who show a mature concern regarding environmental and social conditions at global supply chains, particularly in developing countries sites (Andersen and Skjoett-Larsen, 2009).

The present paper intends to discuss the proposed questions in order to review content definition for operations strategy, considering sustainable OM.

Sustainable operations strategyand performance

A value proposition is required for developing the theoretical foundations of a sustainable operations strategic management system.

Porter and Kramer (2006) state that companies do not manage their business to obtain a full synergy regarding society aspirations and demands. Companies should conceive a value proposition that integrates sustainability models and concepts to their business strategy, creating a real proposition of corporate social integration.

Seliger (2007) proposes a value proposition for sustainable development based essentially in enhancing human living standards. He also points out that sustainable political, economic, and social stability can be achieved only if humankind – not merely the developed countries – can create jobs and living conditions that favor human dignity.

According to Ueda et al. (2009), sustainable value is a result of a co-creation process based on dynamic interaction among social, natural and artificial systems. They also state that there is an implicit desire in society that enterprises, mobilizing their decision-making processes, are able to accomplish an overall purpose of mankind and their social organizations and individual objectives. If this happen, the necessary conditions are established for dynamic interaction among decision-making agents that have various goals and values. In this context, a special attention should be given to social mechanisms of values, such as network externality, social dilemma, public goods, and lifestyles.

A critically and important aspect of sustainability is the fact that it is systemic concept. The operation of the elements that define the system should sustain each other, an analogous behavior that the organs play in a body working together to sustain a human being (Cabezas et al., 2003).

Sustainability by the proposed definitions is a temporal concept that depends on specific contexts, in its social, cultural, economic and environmental aspects, in past, present and future situations. There is a dialetic tension between institutions regarding the specialization proposed by their missions’ statements and the society demands in defining their responsibilities in guaranteeing common good. There is an establishing common sense regarding the sustainability concept evolution, requiring for that purpose political democracy, social equity, economic efficiency, cultural diversity, environment protection and biodiversity conservation (Ratner, 1999).

Sustainability value proposition should be incorporated in a management system, that is, it will be developed the foundations of a sustainable operations strategic management system.

The following discussion attempts to integrate operations strategy models to performance measurement system requirements, using sustainability as a moderating factor.

Hart (2005) develops a sustainable operations strategy maturity model, inspired by the framework proposed by Hayes and Wheelwright (1984), that is organized in the following levels:

  1. The current internal strategies are to improve internal operations with continuous process improvements related to sustainability, such as, employee involvement, waste reduction, energy conservation, and emission control.
  2. The current external strategies are to improve extended supply chains by analyzing upstream supply chains to make trade-offs in the choice of materials and processes and pursuing closed-loop supply chains for remanufacturing and safe disposal.
  3. Internal strategies for the future include investing in capabilities to recover pollution-causing chemicals during manufacturing, to develop substitutes for non-renewable inputs, and to redesign products to reduce their material content and their energy consumption during manufacturing and use.
  4. External strategies for the future include developing core capabilities in products, processes, and supply chains for long-term sustainability and pursuing strategies to facilitate it.

Margolis and Walsh (2003) argue that it is necessary to develop a better understanding about social performance and real benefits to society. In their opinion, it should be questioned corporate social performance and competing conceptions of the firm down to their very roots.

Neely (2005) formulates a list of researching questions regarding performance measurement that could also cover the sustainability aspects in operations strategy and performance measurement. The list could be interpreted by a sustainability approach:

  • How to design and deploy enterprise performance management rather than measurement systems for sustainable operations and/or enterprises?
  • How to measure performance across sustainable supply chains and networks rather than within organisations?
  • How to measure intangible as well as tangible assets for external disclosure as well as internal management, regarding principles of sustainability?
  • How to develop dynamic rather than static measurement systems for sustainable operations and/or enterprises?
  • How to enhance the flexibility of measurement systems so they can cope with organisational changes regarding sustainable organizational models?

Operations strategy maturity model and sustainable performance research questions delimit the content of sustainable operations strategic management system.

Sustainable operations strategic management

Glaser (2006) questions how much decision-makers have to consider interests of stakeholders other than stockholders and the broader community? Does the current legal framework encourage or discourage decision-makers with regards to these non-stockholder interests?

Aras and Crowther (2008) comment that companies are increasing their level of responsibility and accountability regarding their stakeholders. A proper governance should be developed and it cover four aspects of sustainability:

  1. Societal influence, which it is defined as a measure of the impact that society makes upon the corporation in terms of the social contract and stakeholder influence.
  2. Environmental impact, which it is defined as the effect of the actions of the corporation upon its geophysical environment.
  3. Organizational culture, which it is defined as the relationship between the corporation and its internal stakeholders, particularly employees, and all aspects of that relationship.
  4. Finance, which it is defined in terms of an adequate return for the level of risk undertaken.

Taking the purpose of regulating and establishing recommendations for environmental and social affairs, several standards and recommendations are being conceived. Some examples are: Accountability - AA 1000; Social Accountability - SA 8000; Global Reporting Initiative – GRI; Environmental Management Standards - ISO 14000; International Guidelines for Social Responsibility - SR ISO 26000 (CastkaandBalzarova, 2008, Mitra and Webster, 2008, Porter and Kramer, 2006).

Castka and Balzarova (2008) envisage that organizations can develop an evolutionary process from designing and implementing management systems, based on ISO 9000 and ISO 14000 standards, adopting accountability principles described by SA8000 and AA1000, toward creating a truly stakeholder-focused organization that is defined by ISO 26000 recommendations.

Boyd et al. (2007) when developing a corporate concept for social responsibility, found its development establishing that corporate social responsibility (CSR) in a general sense reflects obligations to society and stakeholders within societies impacted by the firm. Responding customer and shareholders’ concerns for CSR, many companies are implementing programs covering their entire supply chains. These programs are oriented to ensure that suppliers behave in a social responsible manner with respect to labor practices and/or environmental issues.

Moreno et al. (2010) understand CSR as process that companies develops in order to assume responsibilities for their operations consequences regarding social, economic and environment aspects. Companies also develop mechanisms for reporting their activities and for creating a dialogue among their stakeholders.

Pedersen and Neergaard (2009) studied managers perceptions about sustainability issues, founded in their values and belief systems. Specifically they try to construct an understanding between managerial perceptions and CSR behavior. Based on empirical data obtained through a survey in a selected company. They show that some of the most important responsibilities relate to:

  • Products - the managers participating in the survey often link the concept of responsibility with the provision of environmental-friendly products.
  • People - the concern for the employees is also seen as an important priority.
  • Communities - the managers also highlight the importance of being a valued member of the local communities in which the company operates.

Hutchins and Sutherland (2008) propose a framework for organizing sustainable performance measurement regarding social aspect. They propose the following indicators:

  • Labor equity – it is desired to establish some measure that describes the distribution of employee compensation within an organization. The closer this ratio is to one, the greater the compensation equity within the company.
  • Healthcare – a metric is needed to characterize a corporation’s role in providing/supporting the healthcare of its employees and their families. A better measure might be health maintenance expenses per employee.
  • Safety – to describe the safety of the workplace within an organization, an indicator is needed that increases as the social sustainability improves. The ratio of average days not injured to the total days worked per employee could be selected for this indicator.
  • Philanthropy – a company plays important financial roles within a community and to greater society, which do not relate to its core functions as a business. It is proposed to describe a corporation’s philanthropic commitment via the ratio of charitable contributions to market capitalization.

A framework for the measures selection process may be founded in the competitive dimensions of manufacturing or service operations: price (cost/operational efficiency); quality (process and product); time (dependability and agility); flexibility (process and product); and innovation (process and product). Sustainability issues could create new performance dimensions as environment (pollution, sustainability); society (quality of working life, life quality).

An operations strategy model based on performance dimensions and decision areas constitute a basic building block for starting to study sustainability issues and operations strategy. Environmental and social responsibility could be modeled, defining relationships with performance dimensions and decision areas, in the same way that Porter e Kramer (2006) did for the value chain. Figure 1 shows schematically three axes that represent performance categories, based on simple input-output model. These categories define sustainability in terms of economic, environmental and social aspects.

Figure 1 – Sustainable performance dimensions

Source: adapted from Platts (2007)

Decision areas complete sustainable operations strategy model and they are represented in Table 1 (a) and (b), customized for manufacturing and service production processes.

Table 1 – Decision areas

(a) Manufacturing

Structural Decision Areas
Product Design / Design for manufacturing; design for assembly; design and manufacturing processes specifications.
Capacity / Capacity flexibility, shift work management, temporary labour subcontracting policies.
Facilities / Size, localization and manufacturing resource ‘focus’.
Manufacturing process technology / Automation level, technology selection, layout, maintenance policy, internal process development capability.
Vertical integration / Make-versus-buy strategic decisions, suppliers and procurement policies, suppliers’ dependence level.
Capabilities / Manufacturing vision, development paths, and best practices.
Infra-structural Decision Areas
Organisation / Structure, organisational and management processes, levels of centralization/decentralization; planning and control systems; roles-responsibilities-autonomy; communication and learning processes.
Quality policy / Quality policies, Quality models, systems and processes, Quality techniques, procedures and tools.
Production planning and control / Materials and production planning and control systems.
Human resources / Recruitment, training and development policies. Organisational culture, leadership and management styles. Reward policies. Competencies management model.
New products introduction / Manufacturing and assembly design directives. Product development cycles and matrix. Organisational issues.
Performance measurement and rewards / Performance indicators structure and use. Financial and non-financial measures. Relationships between manufacturing performance and the rewards systems and processes.
Information systems / Data and information acquisition, analysis and use processes and systems.
Continuous improvement systems / Manufacturing operations processes continuous improvement system, processes and procedures development.

Source: Slack and Lewis (2008), Mills et al. (2002) and Hayes and Wheelwright (1984)