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Finding the ROI of a manufacturing green investment

Manufacturers like the thought of sustainability, but is there a return on green investments?

When it comes to being efficient and operating in a cost-effective manner, manufacturers stand out from the pack. After all, increasing efficiency was the only way many manufacturers of all sizes managed to weather the recession.  But when it comes to committing to a green investment, manufacturers are generally not ahead of other industries, experts said.

With the recession only just fading from the rear-view mirror, many small- and medium-sized manufacturers fear that adopting sustainability in their operations will equate to adding cost, something they loathe to do without hard return on investment (ROI).

Being more environmentally friendly by consuming fewer resources in production is often the happy byproduct of a lean manufacturing effort that seeks to eliminate waste, said Mike Coast, president of the Michigan Manufacturing Technology Center, an advisory firm in Plymouth Township, Mich. "They might reduce their use of resources as part of being lean, but as far as being green to be green? I don't see manufacturers doing it," he said. 

This is short-sighted, according to George Favaloro, managing director of the U.S. sustainable business solutions practice at the Boston office of PricewaterhouseCoopers. "In today's world, businesses have more of their value in their brand than in hard assets. That can be put at risk if they're not operating in a responsible manner," he said.

The market value of green investments

Some manufacturers, especially those that make consumer goods, have shown the market what they stand for and expressed the values of the company through their sustainability programs, according to Favaloro. "A number of firms have really oriented their brand around sustainability," he said. "Today, there is hyper-transparency. People want to understand what a brand stands for. Sustainability is a key aspect of that."

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Santa Clara, Calif.-based security gateway manufacturer Stoke Inc. has found that customers now treat sustainability as a checklist item, said Stoke Vice President of Operations Paul Cianci. The expectation is there, and being able to demonstrate green-mindedness makes Stoke more competitive, according to Cianci. 

In sectors like consumer electronics, there is now an expectation that more green investments will be used, according to Dave Meyer, senior consultant for EORM (Environmental Occupational Risk Management) Inc. in Portland, Ore.  "Businesses are beginning to respond to customer requirements and consumer preferences," he said.

Sometimes the push to be greener comes from outside forces, making the need to prove ROI irrelevant. It is not uncommon for the largest player in a supply chain to mandate that its suppliers use more sustainable practices. "There has been an increasing amount of pressure on second- and third-tier manufacturers to lean up and green up their manufacturing processes," Meyer noted.

Green regulations: Not just for Europe anymore

The pressure to do better comes from regulation, as well. European Union countries have been on the leading edge of green mandates, and the United States is beginning to follow suit. Case in point: the Conflict Minerals rules established by the Securities Exchange Commission as an outcome of passage of the Dodd-Frank Act.  California recently adopted aspects of the Restriction of Hazardous Substances (RoHS), for example. REACH (Registration, Evaluation, Authorization and Restriction of Chemicals) may soon reach U.S. shores, as well.

"RoHS and REACH and the new conflict minerals rules are driving manufacturers to look at new, innovative ways to manufacture their goods and services in an environmentally responsible manner," Meyer said. The regulatory climate -- as well as the desire to do the right thing for the brand and its customers -- is driving manufacturers to focus more on design for sustainability, he added.

As with Stoke, making sustainability a priority can be a competitive advantage, which is the ultimate ROI. "I would argue [manufacturers] have to [be greener], especially if it helps them optimize their resources and reduce waste, and especially given the pressures they face coming out of the recession," Meyer said

Formally defining the enterprise's stance on environmental practices is a good move to make -- as long as the company backs up what it says. 

"There is a general understanding that we are stressing the earth and using more natural resources than the earth can provide us," Favaloro said. "We all have parts to play in addressing that. Brands that are responsible and forward-looking [make] an important statement to the community about the values of the brand."

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