4
Metrics—
If You Can Measure It,
You Can Manage It

This chapter details three powerful analytic tools—the input/output mass balance analysis, life cycle analysis, and break-even analysis. These diagnostic tools help you see what’s up with your organization so that you can make changes. The input/output mass balance analysis quantifies your releases to water, emissions to air, and solid waste; the life cycle analysis shows the impact of your product or service from cradle to grave; and the break-even analysis tells you how much savings you will get from environmental improvements or how much you have to decrease costs or increase revenue to pay for environmental improvements.

Input/Output Mass Balance Analysis

Matter cannot be created or destroyed; it can only be changed from one form to another. This basic law of physics and chemistry is the theory behind one of the most powerful tools in sustainability auditing—the input/output mass balance analysis. In simple terms, the weight of the raw materials and manufactured goods you buy plus the water and air you add should equal the weight of products you ship plus the weight of your emissions to air, the weight of garbage and recyclables that leave your facility, and the weight of material you discharge down the drain.

Most large farming operations are now required to do an IOMBA, which tracks the ultimate fate of the nitrogen and phosphorus in the fertilizer and the manure they use to grow their crops.

To see how powerful an IOMBA can be, consider Aveda’s story. Dr. Don Stone, an accountant and former business management professor at the University of Massachusetts, led this part of Aveda’s audit. He added up the weight of the packaging, the organic ingredients that went into the products, and the water added and then looked at the weight of the products shipped and the concentration of organic ingredients in the products. Don calculated that there were over 1 million pounds of missing organic ingredients—an almost unbelievable discovery, representing about 34 percent of the company’s cost of goods.

The big accounting firm that Aveda used had not detected this loss. As far as those accountants were concerned, everything was fine. Aveda bought (very expensive) natural ingredients, mixed them with a lot of water, bottled them, and sold the final packaged products for a very large multiple over the costs of the raw materials, resulting in a large profit. Everyone was happy.

David told Horst Rechelbacher that there were four possibilities as to where the missing 1.2 million pounds of raw organic materials were going. The first possibility was losses of raw material as emissions. The raw materials Aveda bought included a lot of natural, great-smelling volatile organic compounds. During mixing with hot water, the volatiles could, well, volatilize (evaporate). These VOCs could be floating in the air. If this was the case, the problem could be fixed by putting Ping-Pong balls in the vats, installing lids on the batch reactors, or using retorts to condense the volatiles and return them to the vats. David tested the air in the factory for VOCs and multiplied the amount by the fresh air exchange rate. This accounted for only a few thousand pounds of loss on an annual basis.

The second possibility was that the ingredients could be traveling down the drain. During the cleaning process between batches, a significant quantity of product could be accidentally or intentionally discharged. If that was the case, using compressed air to clean tubing or other remediation strategies could control these losses. David reviewed the monthly analysis of the oils, nitrogen, phosphorus, and biological oxygen demand (BOD) of the sewage, and it accounted for only a few thousand pounds of ingredient loss on an annual basis.

The third possibility was that the ingredients to be compounded into products and placed into packaging could have failed quality inspection or been damaged and subsequently thrown away. The contents of the Dumpsters were analyzed and quantified to determine the weight of ingredients thrown away, but this showed that the Dumpsters accounted for only a few thousand pounds of ingredient loss on an annual basis.

As Sherlock Holmes said, “When you have eliminated the impossible, whatever remains, however improbable, must be the truth.” David told Aveda’s audit liaison team that someone was stealing from the company. The plant manager, who was not a fan of the audit in the first place, lost his cool, refuted the findings, and told the other members of the team that the audit was a big waste of time and money.

The owner of the company felt differently. Horst said, “I got a lot out of the audits. I found I had a business that was diverting 34 percent of my raw material. That really raised the flag. I hired a detective agency, which completed the investigation in only one week. The detective said, ‘You can drive up to the factory where your material is going. Here is the address. You can drive up with a station wagon or a delivery van or a truck and pick up whatever you need.’”¹

The private detective learned that the plant manager had redirected the raw materials to a factory he owned. He was manufacturing products from the raw materials purchased by his employer. Aveda saved millions of dollars by plugging a leak in the supply chain. The audit cost very little in comparison.

Horst added, “Just as the audit was being conducted, Estée Lauder made an offer to buy the company. When I found out how many employees were involved in the rip-off, it broke my heart. It motivated me to get out of the business.

“The whole thing became a great lesson and had a great result because Aveda became the tail that wagged the dog when it was incorporated into Estée Lauder and made Estée Lauder, a much bigger company than Aveda, into a much more environmentally responsible company with a proportionally bigger impact on the world.”²

PERFORMING AN IOMBA

To perform an IOMBA, you need to try to capture the weight of everything that comes into your facility and everything that leaves your facility.

A powerful tool for enhancing sustainability, the IOMBA is also great for determining shrinkage. At one time Joe owned three coin-operated laundries. Every load of wash requires a predetermined amount of water. If you take total gallons on the water bill and divide it by the amount of water used in each wash, you can tell how many washes were completed. Multiply that by how much is charged per wash and you can see if someone is opening the cash boxes and taking your money. Although Joe didn’t realize it at the time, sustainability contributed to profits. His analysis uncovered a theft from the coin boxes and led to the arrest of the thief and to more accurate profits.

Input/output analysis applies to many different enterprises. Another example was in the production of soft drinks at Marty’s Soda Mix, owned by Joe. Marty’s used an incredible amount of water in making soda. (This was well before the company evolved into a more socially responsible and sustainable business.) Marty’s was charged sewage fees based on the amount of water it bought. After completing the input/output mass balance analysis, Joe found that Marty’s was being charged for water going into the soft drinks as if the water was going into the sewer drain. Joe installed a separate water meter to track the water in the soft drinks, and the sewage bill decreased by close to 80 percent—another significant savings and contributor to profits.

The more granularity you apply to this exercise, the more accurate your results will become. Whatever you can identify as an input or output, you should quantify. However, you probably will have to do some estimating to complete the mass balance. And the mass balance will rely on inputs you gleaned by performing your sustainability audit. (See resource D to get a structure for your IOMBA.)

For example, weigh your mail and incoming packages a few days per year to make a daily average and multiply by the number of days of mail delivery per year. Or just weigh one of the mail crates, totes, or bags and multiply by the number of containers per day and then by the number of days mail is delivered per year. This gives you a total weight for mail received over the course of the year.

Try to do the input / output analysis for at least your top ten input materials and top ten products. If you use, for example, milk, corn, aluminum, wood, paper, or glass as input material, track the weight of the material through to the output. For example, how much milk comes into the facility? How much milk leaves the facility as product? How much goes down the drain or into the Dumpster?

Measure when you can. Use invoices, bills of lading, and packing slips when you have them. Estimate when you have to.

A sample IOMBA calculation for milk as a raw material is included in resource D.

Finding out where the stuff you buy goes is of critical importance to becoming sustainable and to increasing profits. What action would you take if you knew that 10 percent or even 5 percent of the raw material you buy ends up down the drain, in the Dumpster, in the air, or in someone else’s pockets?

If you keep your bills (for purchases as well as for energy, fuel, water, sewage, and waste disposal) accessible and have good records and accounting software, even for a medium-sized manufacturing company, the IOMBA should not take more than one person-week of staff time to prepare.

Life Cycle Analysis

Another comprehensive analysis of the sustainability of your enterprise is the life cycle analysis. The LCA is now the most widely accepted scientific methodology for quantifying a product’s or service’s environmental impact from cradle to grave or, as green architect, author, and innovator William McDonough describes it, cradle to cradle,³ because ideally a product should have no “grave.” It should be able to be recycled into a new product.

David was fortunate to be invited to participate in the evolution of this methodology almost seventeen years ago, working with the EPA and a room full of other scientists. The LCA’s premise is to assess and quantify every single impact a product or service has in all stages in its life cycle from preproduction through manufacturing, packaging, and distribution to use and disposal as a function of inputs of energy, water, and material and outputs of releases to water; emissions to air; solids for reuse, recycling, or disposal; ecological considerations; toxicological considerations; and other impacts on humans and the environment.

Key to the efficacy of the LCA are the boundary conditions selected—that is, what to include and what not to include in the life cycle analysis. The boundary conditions should be drawn such that the LCA includes all activities where your actions and your money have an impact on the environment.

For example, several life cycle analyses were done to compare cloth diapers (from a diaper service) to disposable diapers. The results initially showed that the disposable diaper was the environmentally superior choice. But an examination of the boundary conditions revealed that the disposable diaper LCA assumed that, as per the manufacturer’s instructions, the contents are removed from the disposable diaper and flushed down the toilet prior to disposal, when, in fact, this is almost never done. People toss the diaper with its solid and liquid contents into the garbage. When the LCA was accordingly revised, it showed that the diaper service cloth diaper was the superior choice.

For companies in the dairy business, such as Ben & Jerry’s and Stonyfield Farm, several published LCAs have shown that over 90 percent of the adverse impact of milk products in terms of carbon and other polluting emissions to air and releases to water is on the farm. If you are a milk product manufacturer and you don’t have boundary conditions to account for these on-farm life cycle impacts, your LCA is meaningless.

Gary Hirshberg of Stonyfield agrees. “What we do to green the company inside, even if we completely eliminated our internal environmental footprint, still has a minimal impact on our overall environmental footprint. The biggest environmental issue is the cows on the farm. Conventional factory farms have the biggest impact. Feedlot organic farms [where the cows are confined but fed organic feed] have a lower impact. Organic family farms where the cows are pasture fed have the lowest impact. To lower it even more, we have implemented our Greener Cow program to address cows’ enteric emissions [burps] of methane. As part of that, we just completed a six-month study where we took cows off corn and soy and put them on flax, and we got up to a 19 percent decrease in methane emissions. Methane is the second most impactful greenhouse gas with over twenty times the impact of carbon dioxide per molecule. Not only was there a precipitous drop in emissions, but there also was a huge improvement in omega-3.”⁴

Stonyfield’s second biggest impact is packaging. After the University of Michigan’s Center for Sustainable Systems did an LCA on Stonyfield’s packaging, the company implemented the suggestions and reduced its packaging impact by 12 percent in one year.

In another case, life cycle analyses revealed that the edible chelating agent ethylenediaminetetraacetic acid (EDTA) contained in detergents, cold cuts, and mayonnaise, went right through the wastewater treatment plants unmodified. When it was discharged into rivers and streams that had previously been contaminated with heavy metals, the EDTA pulled the heavy metals out of the sediments and resuspended them in the water column, repolluting the rivers with heavy metals.

If you have to err in the precision of your LCA boundary conditions, err on the conservative side—assume the boundary conditions are greater than you imagine. This is part of the basis of the Precautionary Principle, which is required by law in some places. The Precautionary Principle requires that an action or substance be proved safe before you do it or use it.

Make sure that your purchases are on the correct side of the boundary when doing your LCA. Your purchasing decisions have a profound impact on the planet. You’ll find more on purchasing considerations in chapter 9.

LCAs provide powerful and often-unanticipated insights into the impact of a company’s products and services. The LCA aspect of the Aveda audit, for example, revealed that because of the company’s choice to source ingredients entirely from plants, which included the planting and maintenance of various trees from which the ingredients were sustainably harvested, Aveda actually sequestered more carbon dioxide annually than it produced, including the emissions of the fuel used to run its facilities and transport its products. Aveda had no net carbon footprint and actually was a net oxygen producer.

Horst Rechelbacher said, “The LCA showed that every time a client picks up a bottle of our shampoo they are greening the planet. Hearing that was a great moment for me.”⁵

Another company that got good news from an LCA was Motherwear, which manufactures garments that allow women to breast-feed discretely. Jody Wright, Motherwear’s president, said, “My major goal in developing Motherwear was to support mothers to nurse their babies. Breast-feeding has a profound impact on the health and happiness of families and especially newly developing human beings.”⁶ For Jody, the great environmental impact of breast-feedding—reduction in transportation, animal feed, waste, carbon monoxide, feeding supplies, and so on—is simply frosting on the cake.

By producing garments that empowered women to breast-feedd and because of Motherwear’s communications outreach, Jody estimates that the company has touched 1 million women. The average Motherwear customer breast-fed her child for 16 months compared to 2.3 months for the average American mother. The company’s LCA showed that for the 1 million women Motherwear touched, 58 million pounds of steel was saved (from infant formula cans), 15 million pounds of fiber was saved (from paper labels on the cans, boxes for the cans, and tampons because breast-feedding delays the onset of menstruation). In addition, 1 billion pounds of cow milk was not produced and fed to infants. This saved 625 million gallons of water, 270,000 pounds of herbicides, 80,000 pounds of insecticides, and 12 million pounds of synthetic fertilizer, as well as 15 million gallons of oil, which would have produced 325 million pounds of carbon dioxide needing 83,000 acres of forest to absorb.

One of the challenges of LCAs is that the results sometimes seem like apples and oranges. For example, what is worse— one manufacturing process that produces 5 million pounds of biological oxygen demand, another that produces 500 pounds of mercury, or another that produces 5 curies of plutonium?

There is a way to convert from apples and oranges to apples and apples so that you can compare alternatives. In fact, you do it all the time when you use money. Money has become the supreme arbiter of value. Every activity can be scored in terms of money.

For example, the Tellus Institute in Boston performed a life cycle analysis of packaging materials under a contract from EPA, the New Jersey Department of Environmental Quality, and some industry trade associations. After Tellus inventoried and quantified all of the inputs, environmental releases, and impacts, it “monetized” the environmental impacts by assigning costs for environmental remediation. The dollar figures effectively indicated what it would cost, on a perton basis, to eliminate all of the environmental problems created by the packaging.

LCAs are complex and can involve hundreds of thousands of calculations. You can hire professionals whose specialty is preparing LCAs. These LCAs can cost up to $250,000 or more. However, there is still value in doing one yourself.

Resource E includes a blank Life Cycle Analysis Matrix and an example of a completed one. We recommend that you complete one for every company and new product, process, or service you are contemplating introducing and for your existing main products, processes, and services. Complete an LCA Matrix at least qualitatively, if not quantitatively, to the best of your ability and available resources. Even the most expensive, professionally prepared LCAs begin with the completion of an LCA Matrix.

To simplify the process and make it easier to understand, after you write a few qualitative words in every box, color code each box in the matrix: red for the most severe environmental impacts, yellow for a marginal impact, or green for no negative impact. Every impact for each company, product, or service should fit into at least one category on the matrix.

As part of Walmart’s new Sustainability Index,⁷ not only is the company requiring its vendors to fill out vendor questionnaires (see chapter 9), but it is also requiring LCAs to be done on all of its products by 2012, and these LCAs will all be open sourced and available to everyone. To this end the company has helped create the Sustainability Consortium,⁸ an organization of manufacturing companies working with Walmart and the University of Arkansas and Arizona State University.

A large number of LCAs are already open sourced and available. The United Nations Environment Program in conjunction with the Society for Environmental Toxicology and Chemistry (UNEP-SETAC) has created an International Life Cycle Partnership, known as the Life Cycle Initiative,⁹ from which you can access many completed LCAs for various products, processes, and services.

EPA has a life cycle assessment resource¹⁰ from which you can access LCA information. Included in it is a summary of global life cycle inventory data resources. The National Renewable Energy Laboratory has LCAs in seventy-three different product categories.¹¹ If your product or service is not there, you can combine many of these seventy-three to recreate your product.

Break-Even Analysis

A comprehensive understanding of your financial statement is an integral component of sustainability. As our friend Ben Cohen is fond of saying, “A business can be successful as a business and unsuccessful as a force for social change, but it cannot be unsuccessful as a business and successful as a force for social change.”

Every small and medium-sized business must have adequate financial accounting controls, and the owner or manager must review these numbers on a regular basis. Although our concentration has been on nonfinancial considerations for sustainability, we strongly urge you to have a deep-rooted understanding of your past financial performance, present position, and future budget projections.

Performing a break-even analysis will provide you with the tools you need to make an informed decision on whether a sustainability cost will have a positive return on investment (ROI).

To prepare a break-even analysis, you have to look at every line item in your profit and loss (P&L) statement and ask the question, “What are the fixed expenses that I will incur even if I don’t sell a single product or service?” Put those items in the fixed expenses column.

For those items that you have to buy and replace only if you are actually selling product, put those items under variable cost. Sometimes an item will be split between fixed expenses and variable cost. Then add up the variable costs and the fixed expenses. The total variable cost is then divided by the net sales, producing the variable cost percentage. Subtracting this percentage from 100 percent yields the profit projector. When you divide the total fixed expenses by the profit projector, the result is the company’s break-even point.

You can do this exercise whether your P&L is very detailed with many lines or not very detailed at all. The more detail, the more accurate your break-even analysis will be, but either way this will give you a very powerful insight into your business and the bottom-line impact of implementing sustainability programs.

In the example below, the company manufactures and sells devices for reducing electrical consumption for lighting. It buys components, trying to order on a just-in-time basis, and assembles them. The company’s P&L shows its net sales as $3,704,000 with a $596,100 net profit. The calculations result in total variable costs of $2,077,375 and fixed expenses of $1,030,525.

To calculate the break-even point, first divide the total variable costs by the net sales. The result is approximately 56.1% ($2,077,375/ $3,704,000).

Next, determine the profit projector by subtracting the above from 100%. The result is 43.9% (100% - 56.1%).

Now divide the total fixed expenses by the profit projector to get the break-even point. The result is $2,346,616 ($1,030,525/43.9%).

The break-even point is the amount of net sales needed to break even. Sales above this number mean you profit and below this number mean you lose money.

Imagine that our hypothetical company opens the door on the first day of the fiscal year. And when someone walks in and buys an item for $1 (hooray), $0.56 of that dollar goes to cover the cost of goods, the labor associated with the item’s assembly, the incremental portion of utilities and office supplies necessary to fulfill that sale, and taxes. That leaves $0.44, but this is not profit. The company still has its fixed expenses of $1,030,525 to pay off. The entire $0.44 goes toward paying off the $1,030,525.

Another item is sold for $1. Another $0.56 is spent in filling the order, leaving another $0.44 to pay off the fixed expenses.

At the break-even point, the fixed expenses are all paid off and after the $0.56 per dollar is taken out to cover the variable costs, the remaining $0.44 is profit.

How much profit does the company make if it has sales of $1,000,000 over the break-even point? It makes $440,000 ($1,000,000 × 44%). At $2,000,000 over break even, it makes $880,000 ($2,000,000 × 44%). If it is $500,000 under break even, the company loses $220,000 ($500,000 × 44%).

If, through preventing the disposal of a raw material, using waste as a raw material, reusing packaging material, or increasing energy efficiency, the company is able to lower its variable costs by 1%, what impact would that have on its break-even point and profits?

To find out, multiply the variable costs by 99% (100% − 1%), which yields $2,056,601. The variable cost percent of net sales becomes 55.5% ($2,056,601/$3,704,000). The new profit projector becomes 44.5% (100% − 55.5%). Calculate the new break-even point by dividing the fixed expenses by the new profit projector ($1,030,525/44.5%). The result is $2,317,025, which is $29,591 less than the previous break-even point.

The net profit under this new break even is $616,874 ($3,704,000 − $1,030,525 − $2,056,601), a 3.5% increase in profit. For this model company, a 1% decrease in variable cost produces a 3.5% increase in profit. For many companies we have worked with, a 1% reduction in variable costs has produced an increase in profit by 100% or more.

Now, let’s say the company wants to spend $1,000 to make a fixed expense improvement in its operations by installing energy-efficient lighting, waterefficient fixtures, or renewable energy systems or by sending several employees to a course on diversity or green marketing. How much more sales would it have to get to pay for the $1,000 fixed expense? Divide the fixed expense by the profit projector ($1,000/43.9%) to get $2,277.

Even for large capital equipment, like a fuel-efficient furnace, a wind machine, or solar panels, the specific new fixed expense would manifest itself on the P&L as annual depreciation and, if the item is financed, annual interest.

This break-even analysis becomes a very powerful tool in gauging the cost-effectiveness of everything you do to make your company more sustainable. The break-even analysis can also be done on companies that are losing money to see what sales they need to do to break even.

The break-even analysis does not take into consideration capital and liquidity. However, it provides a tool for financiers (banks, lending institutions, investors, etc.) to evaluate the long-term prospects of an enterprise. You can find out more about the break-even analysis on the Web site associated with this book.¹²

Summary

The three metrics outlined in this chapter help to uncover theft and waste possibilities, disclose life cycle environmental impact, and tighten up financial management. The sustainable business moves beyond the financial statement and attempts to uncover all the environmental exposures related to the organization’s activities.

Three powerful sustainability tools can help you achieve this goal:

• The input/output mass balance analysis quantifies what you use and what you produce and maps where everything you use and produce goes.

• The life cycle analysis helps you uncover the impact of your products or services from cradle to grave.

• The break-even analysis helps you calculate what the financial upside or downside is for any sustainability capital expenditure or increase or decrease in material or operating costs.

With audits and life cycle, mass balance and break-even analyses, you have a great picture of where you are and a great launch point to go forward. The next chapter deals with using green design to minimize your footprint and maximize your opportunities.