A tool for finding and reducing environmental costs

Editor's note: Only recently have companies begun to think seriously about accurately determining, tracing, and reducing the specific costs associated with the environmental impact of their products or services, and extending this concern to include the use, maintenance, recycling, and ultimate disposal of the product. Product-life-cycle casing is necessary, because the costs of past, current, and future environmental sins must be accurately accounted for in determining the profitability of a product or service.

Joseph Fiksel, a senior director in the Environmental Systems and Technology Division of Bartelle in Columbus, Ohio and Jeannie Wood, experience manager, Environmental Services for Arthur Andersen in New York City were interviewed recently on product-life-cycle casting.

Question: What is a product life-cycle?

Jeannie Wood: In its traditional and simplest form, a product life-cycle includes the development, introduction, mass production, and discontinuance of the product.

Q: What is product-life-cycle costing (PLCC)?

Joseph Fiksel: PLCC is the systematic collection and monitoring of full-life-cycle costs to make informed decisions on design, manufacture, and support for a product.

Q: How does this relate to the environment?

Wood: From the environmental perspective, PLCC relates to the physical aspects of a product--extraction of raw materials, development, production, logistics (transportation, distribution, handling), use, disposal, and recycling. It takes into account the "total cost of ownership," which includes customer use, energy, maintenance, and disposal costs.

Q: Is PLCC a new concept?

Wood: No. Traditionally, it relates to marketing. From this viewpoint, decisions regarding product mix, profitability of various product mixes, pricing, timing for product introduction or discontinuance, target costing, and outsourcing versus insourcing are made from PLCC data. This has not included costs which go beyond company boundaries, such as costs for consumer maintenance and disposal. Companies are now feeling pressure to minimize disposal costs, especially in Europe, where manufacturers must take back used cars, refrigerators, and electronic equipment.

Q: How do insourcing versus outsourcing decisions enter into environmental PLCC?

Wood: A company outsources when it buys a part for a product that it manufactures. A computer company will often outsource a PC [personal computer] board rather than make it in-house (insourcing). When companies make insource-outsource decisions regarding product components, they often neglect their environmental responsibilities for outsourced parts. Companies should consider possible toxicity of outsourced parts and potential liabilities associated with the company putting its own label on such a part. At the other extreme, some companies ask suppliers their own specific questions related to systems, processes, and policies of the supplier. They do this rather than ask if the supplier is ISO-14000 certified, because ISO 14000 may not address all of their concerns.

Q: Why has PLCC gained momentum in recent years?

Fiksel: Interest in PLCC has gained momentum for two reasons. One is the increased emphasis on resource productivity and efficiency within United States firms. We've gone through a series of management revolutions--first a quality movement, then re-engineering. Businesses are more closely scrutinized, financial instruments are more sensitive, and people are seeing new cost variables that provide opportunities to reduce costs and improve profit margins over competitors.

The second reason is the tremendous surge of interest in environmental management and the effort to integrate that with business management. It has been proven that, if companies understand the environmental impact of their business decisions, they will use less energy and material, generate less waste, and have a smoother, more efficient, and more elegant operation.

Q: How is PLCC used in business now?

Fiksel: For years, PLCC has been used to support every type of business decision--whether to develop a new product, how to market it, where to sell it, and how to price it. What is new is the extent to which, and the thoroughness with which, it is practiced. The military has been using PLCC for years as part of its procurement process. For example, the Army traditionally asks for a life-cycle-cost estimate before it purchases a new weapon. This includes the cost for purchasing, spare parts, maintenance, upgrades, and training. The Army usually has a 10- to 20-year planning horizon for that.

Q: How do companies treat environmental costs?

Fiksel: To recognize the full range of environmental costs that will influence decision-making, a company must understand all stages of the product life-cycle, and costs incurred by anyone associated with the product. On the company side, there is a movement toward activity-based costing (ABC), an attempt to understand all costs associated with a specific business activity--component procurement, managing a manufacturing facility, product distribution, and customer service. In a broader sense, more diffuse activities are included, such as product stewardship, stakeholder communication, and compliance management.

In ABC systems, companies have someone accountable for every cost, and the management structure is more efficient. This is better than using overhead accounts as receptacles for costs--such as environmental-compliance costs--that people cannot allocate effectively.

Q: Who are the stakeholders of a company?

Fiksel: Stakeholders include any individual or group that has an interest in the product or its associated processes. This encompasses customers, investors, partial owners, regulators, company employees, suppliers, and other third parties or contractors that do business with the company. Not the least important are the residents in the community where the company does business. These people are often directly affected by products, even though they may not even use them.

Q: How can accompany use PLCC to reduce waste?

Wood: A major benefit of PLCC is that it provides data for ways a company can reduce, eliminate, and consolidate product components. This is not usually done in the traditional marketing type of PLCC. The goal is to standardize the product-manufacturing process up to the "mass customization" stage--where the process must be modified to accommodate a specific customer. By reducing variability in the production process, a company reduces waste because it uses resources more efficiently.

Q: How does PLCC help in making company decisions regarding the environment?

Fiksel: There are various classes of decisions that a company might make to have a product or process that is more environmentally sensitive and less costly, ranging from those that involve no real investment--changing procedures, revising a maintenance schedule, or retrofitting equipment--to a fundamental redesign of the product. PLCC provides a lens by which a company can better understand the financial impact of these decisions.

Q: How is PLCC related to product-life-cycle assessment (PLCA)?

Fiksel: These are related conceptually but unrelated in the way they have been practiced. The disciplines evolved separately, because PLCC requires an accountant and PLCA involves engineers and scientists. PLCA focuses primarily on nonfinancial aspects: the flow of materials and energy as a product moves through its life cycle (for example, how much coal, steel, aluminum, and energy is consumed at each stage of product manufacturing, or the inventory component of PLCA). Companies must then consider the environmental impact of those materials and energy, and the wastes generated at each stage.

There is a continuum from straightforward product costing, to PLCC, and to the concept of "full-cost accounting." PLCC focuses on well-understood costs that are within the control of the firm. Full-cost accounting goes well beyond that, into a realm of theoretical costs that require economic models to compute.

Full-cost accounting attempts to understand the social, or global, costs incurred by the business or product--such as the cost "to the earth" of releasing carbon dioxide. These costs are somewhat fictitious--like monetary equivalents for theoretical costs, which are highly controversial. Electric utilities, for instance, are charged for these externalities--impacts normally external to the firm and not included in the firm's cost structure. Economists are trying to determine these costs and the portion of that burden that should be borne by industries.

Q: How should companies implement PLCC?

Wood: It is very important to set boundaries. The project is then not so overwhelming, and it becomes exciting. People in different functions--accounting, supply, supply management, design engineering, and service--begin talking and moving toward the same objective. Some companies say that this talking together is the biggest benefit of the program. The goal is to locate the data. If it does not exist, consider hiring a consultant to facilitate the process.

Copyright Central New York Business Journal Sep 16, 1996
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