Linking Supply Chain Management to Environmental Management: A Country-Level Analysis Honor Thesis Proposal

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Linking Supply Chain
Management
to

Environmental Management:

A Country
-
Level Analysis






Honor Thesis Proposal





Candidate: Zhimin Mao

Advisor: Stephan Vachon










March 7, 2006










***Do not quote or post without permission from the Zhimin M
ao and Stephan Vachon

1

Linking Supply Chain Management to Environmental Management:

A Country Level Analysis




1.
Introduction


With the planet population expected to grow to 8 billion in 2020, consumption will
inherently increase, creating pressure on a
ll industries to supply more goods and services
and, therefore, creating strain on the natural environment. Over the last decade,
increasing awareness regarding climate changes and natural resource depletion has been
evident across several industries and i
n the population.
For example,
i
nternational
agencies and national governments
have met
regularly to establish goals regarding ozone
depletion, gas emissions, and waste reduction (
e.g.
, Kyoto meeting of 1997). One
consequence of this general awareness reg
arding the natural environment is
a
greater
scrutiny of manufacturing organizations


operations and supply chain practices by
different stakeholders

groups
.
T
he impact of manufacturing organizations on the natural
environment should not be studied from an
isolated perspective but rather by explicitly
recognizing
the critical role of
upstream and downstream organizations in the supply
chain
[1, 2]
.


Several studies linking
supply chain management
to

the natural environment
has
been
published
in recent years
[3
-
8]
.

Most of the
se

studies
have
consider
ed

the
manufacturing plant or the firm as the unit of analysis

and
rarely have they made
an
assessment of the entire supply chain particularly
when
survey methodology

was
adopted
.
This
thesis

departs from
the usual
supply chain

studies
by considering
aggregate data at the country level. It
contribute
s

to the existing
literature
in two ways.
First, it develops the concept of a country’s supply chain strength.
Supply chain strength
is def
ined as the availability and quality of
local
organizations
that are
composing
/
part of
the

supply chain.
Second, it empirically tests the relationship between
a country’s
supply chain strength and different
national
environmental management indicators.


T
here are
three

additional sections to this thesis proposal. Next, the literature leading to
the conceptual development of supply chain strength and its linkage to environmental
management

is reviewed
.
The methodology, which includes the presentation of th
e data
employed

and

the con
struction of the variables

needed
for the analysis
,

is found in
Section 3.
Also
,

in Section 3
,

preliminary results
from the analysis

are presented and
briefly discussed
. A timeline for the completion of the thesis is proposed in
the last
section.



2.
Literature Review


The relationship between supply chain management and the natural environment has
been researched under
different terminologies such as green purchasing
[9]
, reverse
logistics and reverse sup
ply chain
[10, 11]
, product stewardship
[12]
,
and green supply
chain
[5, 13]
. Despite this increasing interest, the lite
rature mainly focused on
manufacturing organizations and their immediate links in the supply chain (
i.e.
, suppliers
and customers).
Accumulated knowledge from that body of literature supports the fact

2

that
inter
-
organizational activities
,

whether upstream

with the suppliers or downstream
with the customers
,

are associated with sound

environmental
management

and better
environmental performance
.
Despite the fact that a country
’s

(or region)
industrial
profile is always central to corporate decisions and is

fundamental to economic
development and/or growth
[14]
,

very little research has investigated the linkage
between a country’s
industrial
supply chain and its environmental performance or
practices
.


T
he
failure in the
literature to conduct
that kind of
investig
ation
can
be
explained
by the lack of
a
clear
definition
or concept regarding


supply chain


for such a
unit of analysis
.

This section proposes the concept of supply chain strength to define the
state of supply chains in a country. A second objective of
this section is to present the
argument and theoretical development leading to the relationship between supply chain
strength and environmental management indicators.


2.1.
Toward
a

Conceptualization of

a Country’s
Supply Chain Strength


Networks of corp
orations existing in a nation are not stranger to the concept of economic
clusters
[15, 16]
.

In fact, clusters are defined as a critical mass of organizations

(
private
and publics
)

and
the pr
esence of synergy within a particular industry.
Such
synergy
,

speared by intense competition and quality suppliers,
creates

a
rich operating context

providing
a
competitive advantage

to firms operating in that cluster
.
Well known
American clusters i
nclude the electronic/IT industry in the Silicon Valley, the
automotive industry in Michigan, and the cinematograph
ic

industry in Southern
California.
In this thesis, the notion of clusters is focused
on
two important stakeholder
groups;
the suppliers and

the customers. I
n other words
, the focus is
on
the supply
chain.


Hence, b
uilding on the principle
s

of economic clusters

the concept of supply chain
strength
is defined as
the richness
of a nation
’s

industrial and commercial network
s
.
Two major dimensi
ons compose the value or richness of networks: (i)
the
availability of
the suppliers
and
of the presence of sizeable
markets
,
and

(ii)

the
quality of the
organizations composing the network
, that is the production/operations capabilities of
the suppliers a
nd the sophistication of the customers
. In network theory terms

these two
dimensions correspond
to
the number of
ties

(direct and indirect)
and the value of these
ties

[17]
.
Therefore, s
upply chain strength
aims to characterize
the local (or
domestics
)
organizations in
the supply
base

as well as in
the distribu
tion channel
.



2.2. Linking Supply Chain Strength to Environmental Management



One of the main objectives of this
thesis
is to evaluate the impact of supply chain
strength on
the
natural environment. H
ypotheses
linking supply chain strength
to
environm
ental management
are
theoretically
developed

making references to the
existing literature in supply chain management and strategic management
. These
hypotheses are made along three dimensions of environmental management:
(i)
the
degree of
adoption of envi
ronmental systems

by a country’s corporations
,
(ii) the level
of environmental
innovation

in a country
, and
(iii) a country’s
environmental
performance.


In recent years, more responsibilities regarding supplier’s practices
have been

assigned
to buying co
rporations. For instance, Nike was associated in the 1990s with the child
labor practices of its contract manufacturers in East Asia putting the American

3

sportswear company in a precarious situation and resulting in
declining sales.

Nowadays, corporation
s need to implement control and monitoring activities to assure
that their suppliers act in
social
ly

responsible
manner
.
This is
usually
part of a due
diligence and risk minimization strategy.
However, as
the number of suppliers in a
supply network
increa
ses,
the degree of control and monitoring activities, particularly
associated with environmental management increases
[13]
. It is not rare for
a
corporation to reduce that load of activities by requiring suppliers to adopt particular
environmental management systems such as ISO 1400
1

[18]

or to participate into a
voluntary
industry program
such as the
Responsible Care
code of conduct
in the
ch
emical
industry

[19]
.


On the other hand, c
orporate environmental management that includes such activities as
adopting an environmental management system (e.g., ISO 14001) or participating in an
industry voluntary code of conduct can yield
significant advantage such
as better quality
and improved productivity
[20, 21]
.

Hence, in supply chain where quality
suppliers
compete and sophisticated customers dictate
the
market conditions, proactive
environmental management
become a way to differentiate or to be more cost
competitive
[22]
.

Hence, a link can be made between the characteristics of a supply
chain and environmental management practices in a country.


H1:

As supply chain strength increases in a country, proactive environmental
management is increasingly adopted
by
the
organizations

of that country
.


The number of network ties and the quality of these ties are two variables that w
ere
positively associated w
ith technological innovation
[17]
. For instance, collabo
ration
with suppliers and customers has been linked to the adoption of the pollution prevention
and innovative environmental technologies
[2, 23]
. Geffen and Rothenberg
[24]

found a
link between environmental innovation and supplier involvement in the buying
organization processes. Such involvement is not possible without
suppliers having strong
production
/operations

capabilities.


H2:

As supply chain strength increases in a country, environmental innovation
in that country will be higher.


Supply chain strength also means that
manufacturing
performance
is
improved

(
e.g.
,
costs, quality, delivery and flexibility)
[23]
. Such improvement
s

are also

acknowledged
to
benefit

the natural environment

[25]
. This correlation between environmental and
manufacturing performance was develop under the premises set by the Porter Hypothesis
[20]

and the theoretical development of the natural
-
resource
-
based view of the f
irm
[26]
.
Furthermore
, the positive relationship betw
een environmental performance and financial
indicators is
now
widely accepted
[27
-
29]
. For example, Vachon and Klassen
[23]

found
evidence
s

that green partnership in the supply chain, whether with customers or with
suppliers, were

positively associated with quality, delivery and flexibility performance in
organization
s in the package printing industry

while improving environmental
performance.


H3:

As supply chain strength increases in a country, environmental performance
is also

improving in that country.




4





3. Methodology

and Analysis


The
hypothesized relationships were tested u
sing two international datasets: (i)

The
Global Competitiveness Report: 2004
-
2005
[30]

and
(ii)
the 2005 Environmental
Sustainability Index
[31]
. The Global Competitiveness Report 2004
-
2005

is an annual
publication of The World Economic Forum (WEF)

which
provides the most up
-
to
-
date
data source for 104 countries on their comparative strengths and weaknesses.

Using a
common survey instrument, this report examines factors affecting and economy’s
business environment and its ability to sustain economic growth. Special attention was
paid on the macroeconomic environment, the quality of public institutions which
u
nderpin the development process, and the level of technological readiness and
innovation.

The 2005 Environmental Sustainability Index is a composite data base
which examines 21 elements of
environmental sustainability

covering natural resource
endowments, past and present
pollution

levels, environmental man
agement efforts,
contributions to protection of the
global commons
, and a society's capacity to improve
its envir
onmental performance over time
.


3.1. Dependent Variables: Environmental Man
agement Indicators


A total of ten indicators
assessed
a country’s
environmental management

over the three
dimensions
:
(i)
the adoption of environmental systems,
(ii)
environmental
innovation,
and
(iii)
environmental performance.


3.
1
.1
.

A
doption of envir
onmental systems


Three indicators were used to asses
s

the degree of environmental management
:
(i) the
number of
ISO 14001

certified facilities in a country
,

(ii) the degree of participation in
Responsible Care
(chemical industry)
, and
(iii) the prevalenc
e of
corporation
environmental management.


The first indicator is measured by the
number of ISO 14001 certified
facilities
normalized by the size of the economy (
GDP

adjusted for the purchasing power parity)

in each country.
The second indicator of envir
onmental management system measure the
level of participation
in the Responsible Care Program
as provided by
the Chemi
cal
Manufacturer's Association and reported in the Environmental Sustainability Index
[31]
.


These
two

hard


numbers indicators are supplemented by a perceptual variable using
data from the Global Competitiveness Report
[30]
. This perceptual variable, termed
corporat
e

environmental management
, was constructed from seven items that assess the
preva
lence of
different environmental practices in corporation on a scale f
ro
m one to
seven

(
see
Appendix
A
)
.


Th
e seven items were
tested for internal reliability
and have a

Cronbach
-
α of .982
, which is above the recommended threshold of .70 for new
constructs
[32]
.
An exploratory factor analysis (with varimax rotation) using

all
seven
items suggests that the items were loading
o
n one dimension

with all factor loadings
above
.93 and variance extracted exceeding 90%

(Table 1)
.

T
he average of the items
was computed
to form the
corporate environmental management
variable
and
sub
sequent
ly used for

analysis.



5

INSERT TABLE 1 ABOUT HERE


3.
1
.
2
.


Corporate and industrial innovation


Two indicators were used to assess the degree of environmental innovation.
Both
variables are excerpted from the Environmental Sustainability Index
[31]
.
Knowledge
creation measures the level of knowledge creation in environmental science, technology,
and policy.
It
is an index developed from data
compiled at the Yale Center for
Environmental Law and
Policy. The second
indicator is

from the
World Economic
Forum Survey

and constituted the result of a principal component analysis on items of
the survey conducted in 2004.


3.
1
.3. Environmental performance


F
ive indicators
, namely

waste recycling rate, g
eneration of hazardous waste, water
pollution, energy efficiency, and greenhouse gas emission
, are measuring a country’s
environmental performance
.

The generation of hazardous waste measures the level of
hazardous waste. The water pollution measures the i
ndustrial organic water pollutant
(BOD) per available freshwater. The greenhouse gas emission measures the carbon
emissions per million US dollars GDP.



3.
2.

Supply Chain Strength


A total of six related
items

were
used

to measure a country’s supply chai
n strength

(s
ee
Appendix
A
). These items mea
su
res the sophistication of the local buyer, the avialability
and quality of the local supplier, as well as the
state of local cluster development
.
This
last item reflect the size and depth of economic clusters a
s judged by the respodents.
All
six
items
were tested for internal reliability
(Cronbach
-
α =
.964
)
. A
n exploratory factor
analysis (
with varimax rotation) using all the items s
u
ggests that they were
loading
on
one dimension

with factor loading all exceedin
g
.87 (
Table
2
)
. Subsequently, the average
of the items was used as a metric for the supply chain strength.



INSERT TABLE 2 ABOUT HERE


3.
3.

Control Variables


Three variables were used to control for other factors which could influence the
dependent va
riables. These variables are
population
, population density
,

and
economic
wealth
.


First, t
he population is a good indication of a country size and as such should be
included to control for size in the analysis. Using the size of the unit of analysis in
en
vironmental management is current and usually takes the form of the number of
employees in

a plant or in a company. Because countries population vary greatly (e.g.,
China vs. Canada), it was transformed using the
natural logarithmic of the population for
each country

[33]
.
Second, t
he population density gives the direct measurement of a
country’s
population pressure

on a country’s natural environment
.
For instance, it is a

6

good proxy for the degree of urbanization and environmental stress coming from the
population.


Finally
,
economic wealth is an important variable to be included as it reflects
d
ifferent
competitive pressure
s and, therefore, different

in environmental
priorities. For instance,
i
n advanced economies like the
United States
,
strong governmental agencies are
monitoring activities and legislating corporate impact on the natural enviro
nment: that is
most likely not the case for
emerging economies such as China
.



3.5.

Preliminary Results


Bivariate correlations for
all
the variables are reported in
Table 3
1
.
It is noteworthy that
seven out the ten dependent variables are significantly cor
related with supply
chain

strength. However, two of those correlations are surprisingly negative suggesting that
supply chain strength is detrimental.

The correlation table also reveals the potential for
collinearity in the regression as the supply chain

strength variable is highly correlated
with GDP per capita (.77, p < .05).



INSERT TABLE 3 ABOUT HERE



The hypotheses were tested using multiple
ordinary
-
least
-
squares (
OLS
)

regression
analysis.
To eliminate the influence from the strong positive associ
ation
between
GDP
per Capita and Supply Chain Strength, two different regressions for each dependent
variable

were run
.
First, the regression was run using only the three control variables.
Second, the supply chain strength variable was added to the model
. Such hierarchical
linear regression allows assessing explicitly the impact of supply chain strength on the
environmental management. Preliminary results provide strong support for Hypothesis 1
with supply chain strength being significantly and positively

linked to the participation
to Responsible Care and Corporate Environmental Management. We also found similar
support for Hypothesis 2. However,
the linear regression analysis confirms the mixed
results provided by the correlation in regards to environm
ental performance, hence, for
Hypothesis 3.


At this point, we still believe that the high correlation between supply chain st
rength and
the GDP per capita can be problematic. Therefore,
more refine analyses are planned.
For instance, we are investigating

the possibility to use a
n approach similar to a
two
-
stage
-
least
-
square (2SLS)
estimator

rather than a simple OLS.


That
approach,

inspired
by King and Lenox
[29]
,
would
first compute

the residual
s

from an OLS using supply
chain strength as a dependent variab
le and GDP per capita as an explanatory variable.
The residuals would then be used as a proxy for supply chain strength in the analysis of
environmental management.


4
. Timeline




1

Dependent variables were coded so that higher the value better it is for the natural environment. For
example,
the greenhouse emission variables, which was initially measured to reflect worst environmental
performance as it increases was transformed to reflect better performance as the variable increases.


7

The thesis should be complete
d

by the end of
the 2006
summer
.

Professor Vach
on
,
while taking a position at
HEC
-
Montreal in June 2006
,
will remain
the thesis advisor
through its completion
. The content of the thesis will also be submitted for publication
in an academic journal: an extended abstract is currently under review for
Jo
urnal of
Cleaner Production
. The
journal Editor’s
assessment
regarding the paper suitability

for

the
journal is imminent.
If accepted, a full paper will be required September 1, 2006. If
not accepted, a paper will be submitted to one of the following journ
als in August 2006:
Environmental Science and Policy
,
Journal of Environmental Management
,
Organization and Environment
.


Spring 2006



Complete
/refine

data analyse
s.



Complete
/refine
the literature review.


Summer 2006



Draft of
the
thesis
(to be completed by

July 1)



Working paper ready for journal submission (
to be completed by
August 1)



Final draft of thesis (
by
September 1)


Fall 2006



Presentation
(defense)
of the thesis (
by
October

15
)



C
orrections
and extensions if needed
(October
-
November)



Final submissio
n (
by
December

15
)



8

Appendix A


Corporate Environmental Management


10.08

In your country, environmental marketing, eco
-
labeling, and other efforts to
respond to “green” consumer demand are (1 = unimportant, 7= widespread and
profitable)

10.09

How many companies in y
our country adhere to environmental management
systems such as ISO14000? (1 = almost no companies, 7 = most companies)

10.10

Corporate environmental reporting in your country is ( 1 = nonexistent, 7 =
widespread)

10.11

Companies in your country consider cleaner produc
tion, material flow
management, waste reduction and recycling, and life cycle management of
products to be (1 = irrelevant, 7 = important)

10.12

In your country, energy efficiency and the transition to new and renewable
sources of energy is (1 = a low priority,
7 = a high priority)

10.13

Business planning in your country now considers long
-
term factors such as
global climate change and other environmental risks to be (1 = unimportant, 7
= important )

10.14

Socially and environmentally responsible investing in your country is

( 1 =
absent, 7 = frequent)



Supply Chain Strength


7.04

Buyers in your country are (1 = slow to adopt new products and processes, 7 =
actively seeking the latest products, technologies and processes)

8.01

Buyers in your country are (1 = unsophisticate
d and make choices based on the
lowest price, 7 = knowledgeable and demanding and buy based on superior
performance attributes)

8.02

Local suppliers in your country are (1 = largely nonexistent, 7 = numerous and
include the most important materials, compo
nents, equipment, and services)

8.03

The quality of local suppliers in your country is (1 = poor, as they are
inefficient and have little technological capability, 7 = very good, as they are
internationally competitive and assist in new product and proces
s development)

8.06

How common are clusters in your country? (1 = limited and shallow, 7 =
common and deep)

8.07

Collaboration in your clusters with suppliers, service providers and partners in
your country is (1= almost nonexistent, 7 = extensive and in
volves suppliers,
local customers, and local research institutions)


9

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,
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[2
4]

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12

Table 1

Rotated factor matrix on corporate environmental management
a


Items

Corporate E
nvironmental Management

V10_08

0.959

V10_09

0.934

V10_10

0.951

V10_11

0.971

V10_12

0.963

V10_13

0.930

V10_14

0.95
6

Cronbach α

0.982

Variance Extracted

0.906

a

Extraction method: principal component analysis. Rotation method: varimax with
Kaiser Normalization.






Table
2

Rotated factor matrix on supply chain strength
a

Items

Supply Chain Strength

V7_04

0.941

V8
_01

0.940

V8_02

0.933

V8_03

0.949

V8_06

0.872

V8_07

0.927

Cronbach α

0.964

Variance Extracted

0.860

a

Extraction method: principal component analysis. Rotation method: varimax with
Kaiser Normalization.



Table 3

Correlation

Variables

1

2

3

4

5

6

7

8

9

10

11

12

13

Environmental Management














1

ISO14001 Adoption

-













2
Responsible Care

.28*

-












3
Environmental Management
a

.16

.60
*

-











Corporate Innovation














4

Innovation Index

-
.06

.09

.09

-










5
Environmental Innovation

.14

.47
*

.86*

.10

-









Environmental Performance














6
Recycle Rate

.13

.61
*

.77*

.14

.63
*

-








7
Hazard

-
.14

-
.17

-
.30*

-
.15

-
.22

-
.26

-







8
Water Pollution

-
.02

-
.15

-
.25*

.06

-
.2
7
*

-
.06

-
.01

-






9

Energy Efficiency

-
.02

-
.13

-
.02

-
.13

.00

.20

.09

-
.15

-





10
Green House Gas Emission

.12

.
31
*

.
28
*

.18

.35
*

.34
*

-
.02

.07

-
.57*

-




Supply Chain Strength














11
Supply Chain Strength
b

.15

.
64
*

.90
*

.03

.84
*

.74
*

-
.28 *

-
.33
*

.
12

.23 *

-



Control Variables














12

Population
c

-
.05

.07

.08

-
.10

.00

-
.02

-
.38
*

.03

.07

-
.1
8

.15

-


13

Density

-
.07

.08

.11

-
.09

.12

.20

-
.06

-
.42
*

-
.07

.0
5

.22*

-
.03

-

14
GDP per Capita
d

.22 *

.64
*

.7
3
*

.01

.70
*

.82
*

-
.22

-
.24*

.14

.31
*

.
77
*

-
.11

.19

* p
-
value <
0.05

a

Mean of
10.08, 10.09, 10.10, 10.11, 10.12, 10.13, 10.14 in section X of
The Global Com
petitiveness Report (2004
-
2005)

b

Mean of section 7.04, 8.01,8.02, 8.03, 8.06, 8.07 of The 2005 Environmental Sustainability Index

c

Nat
ural logarithmic transformation of population for each country

d

Natural logarithmic transformation of GDP per Capita for each country