Material flow balance and activity-based costing in textile manufacturing

Environmental Analysis

Charlie Jo Environmental Analysis

Material Flow Balance

Whether or not it is explicitly recognized as such, efficiency is one of the primary goals of any business endeavor, as greater efficiency means greater profitability. In recent years efficiency, including the environmental efficiency and impact of an organization, has been seen as of increased importance and has been the focus of many developing theories and tools. The material Flow balance chart and concept is one such tool; theoretically it demonstrates all of the inputs and outputs of any business operations, and ideally the inputs equal the outputs (thus balancing the two sides of the chart). In reality, it is nearly impossible for a business to account for every single element of input and output that it produces, and this is especially true of manufacturing concerns that have large and diverse amounts of physical inputs and outputs as essential parts of their business model. A material flow chart is still useful, however, in that it can demonstrate where loss is occurring and thus where inefficiencies might exist.

Many companies that deal with abundant raw goods include material flowcharts in their sustainability reports or other investor publications or for other internal reasons. A typical Australian mining concern, for example, uses a flowchart (one of several) to illustrate their use of certain chemicals in a refining process, demonstrating the quantities of the reactants and the ore needed and the output range of refined minerals and metals as well as waste products that are the result of these processes. Input to output ratios can thus be easily seen, as can waste levels, and any difference between input and output means a part of the process isn't entirely understood and some form of loss is occurring and remains unaccounted for.

Basic Material Flow Balance for Charlie Jo's

Sustainable Supply Chains

Sustainability is a word that gets used a lot today without very detailed or specific considerations of what it means. Some of the benefits of sustainable supply chains are pretty obvious and straightforward, but others are more subtle and complex; understanding how sustainable supply chains benefit a business and its operating environment is key to bringing Charlie Jo's into the future of business efficiency and profitability. Sustainable supply chains tend to provide the most cost-effective means of procuring resources and carrying out necessary processes, when the full environmental and other costs of operation are taken into account. On a longer-term basis and with more involved planning and scrutiny, sustainable supply chains can lead to greater innovation and a utilization of previous waste resources, not only cutting costs but actually generating new revenue streams. Sustainability also tends to create greater levels of insulation from price shocks, minimizing the impact of cost drivers to a business.

Charlie Jo could go about implementing sustainable supply chains with relative ease, though not without certain significant switching costs. One of the first places to look for greater sustainability is in the massive amount of water used in processing and production -- 90,000 litres are required to produce 1000kg of clothing, and 70,000 of those litres end up leaving as waste water. If the processing system could be modified in a way that allows the bulk of the waste water to be recycled, or treated and used by another downstream facility for another process, much greater sustainability in terms of this natural resource would be achieved. The sourcing of other raw materials and the chemicals and ides utilized in the manufacturing of Charlie Jo's clothing products could also be carried out on a more sustainable basis, using natural dyes from easily replenished stores and chemicals that are also less processed and thus more easily procured and disposed of.

In order to carry out these steps in achieving a more sustainable supply chain, Charlie Jo's will need to develop and implement a procedure for evaluating their suppliers. One of the first parts of this procedure should be to examine the suppliers' own material flow balance, to see how wasteful the company is and how conscious it is regarding its environmental impact and overall efficiency. Regular improvements in efficiency should also occur with all suppliers just as they should at Charlie Jo's, and checking for these regular improvement will help keep Charlie Jo's more connected to and aware of its suppliers and their levels of sustainability. Charlie Jo's should also keep track of any regulatory violations its suppliers are charged with to ensure its own full compliance with environmental codes and ethical concerns. Life cycle analysis is also a useful method for Charlie Jo's to ascertain its own sustainability and that of its suppliers; determining the full environmental impact of each input into the company at each stage in the process of the company's business operations will lead to a far more accurate understanding of the direct and indirect costs associated with such operations as well as the overall sustainability of the company's endeavors. Elements of the process that have very short life cycles and/or that result in significant or hard to manage waste should be eliminated in favor of alternatives whenever possible.

Solar Energy Investment Evaluation

Current energy costs (at 20 cents per kWh) are $3,000 per 1000kg of clothes, meaning a cost reduction of 75% (as expected from the installation of the panels) is equal to a savings (or "cash inflow") of $2,250. The panels present an initial cost of $22,000 ($25,000 less the $3,000 rebate from the government). Using the payback method, then, it would take close to ten years for the solar panels to make fiscal sense, and given the expected life of 5 years for the solar panels it does not seem worthwhile. This does not take into account the costs of the carbon emissions, the likely rise in energy costs over the next five to ten years, or the potential premium that can be charged by cleaner and greener companies, however, and is therefore an inadequate method.

The Net Present Value method of valuation is more accurate in its appraisal. This equation is more equipped to take into account changes in costs and cash flows on an annual basis, and with energy prices likely to increase this will yield a better view of the situation. Assuming a 10% annual increase in the price per kWh yields the following costs of 15,000 kWh of purchased electricity:

Year 0: $3,000

Year 1: $3,300

Year 2: $3,630

Year 3: $3,993

Year 4: $4,392

At a 75% savings, cash inflow would be:

Year 0: $2,250

Year 1: $2,475

Year 2: $2,723

Year 3: $2,995

Year 4: $3,294

The additional savings in preventing costs of carbon emission removal can be estimated at two cents per kg, for an additional annual savings of $3,000. According to the Net Present Value equation, each of these projected inflows must be discounted by the discount rate (given as 5%), resulting in the following determination of value:

NPV = (5250)+(5475/1.05)+(5723/1.05^2)+(5995/1.05^3)+(6294/1.05^4) = $26,012, meaning the project is definitely worth the initial cost of $22,000 even from a purely financial perspective.

Environmental Performance Indicators

Data

Heavy Lin.

Efficiency

Swimwear

Efficiency

Raw mat.

0.821917808

0.826446281

Electricity

0.0

0.0

Chem. & dye

40

15

40

10

Water input

70000

0.008571429

20000

0.02

Water waste

60000

0.01

10000

0.04

Solid waste

2

2

Carbon equiv.

0.0

0.0

Finished prod.

Efficiency is very similar in both product lines in terms of raw material and electricity usage; it takes far more water and produces much more waste water to produce the heavy linen clothes, though solid wastes and carbon equivalents are identical. A slight difference in chemical and dye use favors the production of heavy linens as opposed to swimwear.