The Business Case for Sustainability at Cummins by ewghwehws

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									The Business Case for Sustainability
         at Cummins Inc.
Introduction

               • Team
                 –   Rina Horiuchi
                 –   Sara Nosanchuk
                 –   Alexis Olans
                 –   Kari Walworth


               • Faculty Advisor
                 – Prof. Tom Lyon


               • Company Liaison
                 – Tina Vujovich
                      VP of Marketing &
                      Environmental Policy
Courses

•   Competitive Environmental Strategy
•   Systems Thinking
•   Negotiations
•   Managing Change in Organizations
•   Industrial Ecology
•   Sustainable Energy Systems
•   Environmental Conflict Management
•   Institutions for Sustainability
•   Non-market Strategies
•   Psychology of Environmental Stewardship
•   Finance
•   Corporate Strategy
•   Organizational Behavior
•   Marketing
•   Management Presentations
Purpose

• Determine whether or not there is a
  business case for sustainability at
  Cummins.

• Make and communicate a compelling case.

• Provide suggestions for how to integrate
  sustainability throughout the company.
What We Did

• 1500+ hours of work

• 60+ hours of interviews with 39
  different employees

• Research on sustainability frameworks

• Research on other companies

• Discussions with professors

• Analysis, Presentation, Report
How We Made the Case

• Understood the target audience

• Investigated the case for sustainability

• Customized the message
Business & Industry

•   Diesel engine & power business
•   Heavy manufacturing industry
•   Commodity market
•   Founded in 1919
•   $10 billion in revenues in 2005
•   Businesses include
    –   Engines
    –   Power-generation
    –   Distribution
    –   Components
History & Culture

• Emphasis on Vision, Mission, & Values
    – “Right thing to do.”
•   Strong presence of founder
•   Brand: Dependability
•   Data-driven company
•   Focus on environmental regulations
Investigating the Case

• Analysis frameworks
  – WWF, SustainAbility, Natural Step, etc.
  – Class Material
• Company operations & processes
• Company-specific environmental, social,
  and financial research
  – Life-cycle Analysis
  – Financial Analysis
• Feedback
 Customizing the Case

Sustainability =          7S Framework          Cummins
   Long term                                    Strategic
    planning                                    Principles




                                               5 Reasons
               2 Reasons                   1. History
                                           2. Vision, Mission,
 • Sustainability isn’t new to Cummins.        Values
                                           3. Macro-Environmental
 • A sustainability strategy will enable       Trends
  Cummins to reap financial benefits.      4. Financial Benefits
                                           5. Competition
Presentation Flow

      What is sustainability?

      Why should Cummins pursue a
       sustainability strategy?
        – Sustainability isn’t new to Cummins
        – A sustainability strategy will enable
          Cummins to reap financial benefits


      How can Cummins implement a
       sustainability strategy?
What is Sustainability?
Natural resources exist
  in fixed quantities.
Natural resources face
 increasing pressure.
Stability of global ecosystems
           are at risk.
Global inequity threatens
     social stability.
What is sustainability?

                        environment




                      SUSTAINABILITY
                                       global
           business
                                       society




Sustainability means ensuring the success of
Cummins business, the global society, and
 environment for both the short term and
                 long term.
 Why should Cummins pursue a
   sustainability strategy?


• Sustainability isn’t new to Cummins.
• A sustainability strategy will enable
  Cummins to reap financial benefits.
Cummins History

Sustainability is part of Cummins’ history.

• “Patient Capital”
• “Sociability”
• Charitable Giving &
  The Cummins Foundation



                              J. Irwin Miller
 Cummins History

                        “…being a socially responsible
                          company is not only the right
                          thing to do, but is good
                          business. What is good for
                          the world also is good for
                          Cummins and all our
                          stakeholders. The concept
                          of sustainability is important
                          to Cummins and the nearly
Tim Solso                 30,000 employees who work
2005 Cummins
Sustainability Report
                          hard every day to deliver on
                          our vision and mission.”
Vision, Mission, Values

Sustainability is in line with Cummins’ vision,
 mission, and values.

• Vision: Making people’s lives better by
  unleashing the power of Cummins
• Mission:
  – Demanding everything we do leads to a cleaner,
    healthier, safer environment
  – Creating wealth for all stakeholders
• Values: Corporate Responsibility, Diversity,
  Global Involvement
Macro-environmental Trends

Cummins is already tracking sustainability-
 related macro-environmental trends.

• Natural resource constraints
  & climate change
• Globalization
• Demographic shifts
• Technology trends
 Why should Cummins pursue a
   sustainability strategy?


• Sustainability isn’t new to Cummins.
• A sustainability strategy will enable
  Cummins to reap financial benefits.
Financial Benefits of Sustainability


• Mach Filter
  – Background
  – Financial Assessment
  – Environmental Assessment

• Beyond Mach
  – Sustainability Business Drivers
  – Financial Tools
Mach Background


        • Fleetguard Mach Filter:
          – Launched February 2006
          – Plastic housing instead of steel


        • Benefits of plastic over steel:
          – Lower material cost
          – Fewer total filter components
            required
          – Potential to incorporate additional
            features
          – Wider variety of disposal options
Mach Background

• Why was Mach developed?
  – Pressure from European customers and
    distributors for more disposal options
  – Need for cost reductions
  – Differentiation in a commodity market

• What was different about the product
  development process?
  –   Use of external design firm
  –   Adherence to VPI, DFSS
  –   Global input
  –   Dedicated resources
Mach Financial Assessment

• Cost savings of 30% over previous
  product from:
  –   Material cost reductions
  –   Labor and overhead cost reductions
  –   Centrifuge product line efficiencies
  –   Transportation reductions


• Additional profits from:
  – Mach2 product derivative
  – Other (future) product derivatives
  Mach Financial Assessment

             2006        2007         2008          2009         2010


  Mach
 Savings     $X           $X           $X            $X          $X


 Profits
  from
Derivative   $Y           $Y           $Y            $Y          $Y
Products



 TOTAL
Profits      $Z           $Z           $Z            $Z          $Z
  and
Savings


              Financial data was designated as “confidential”.
Mach Environmental Assessment

But is the Mach filter really a more
 environmentally friendly product than its
 steel predecessor?

Life-Cycle Analysis
• Provides an objective way to assess a product’s
  overall environmental impacts
• Is compatible with Cummins’ data-driven philosophy
• Was necessary to determine whether Mach
  supported a sustainability strategy
  Mach Environmental Assessment

                                  Energy Resource Consumption (ERC)
                                          by Life-Cycle Phase


                             35
                             30
 Net ERC
                             25
                                                                       End-of-Life
                  MJ (LHV)




                             20
                             15                                        Use
                             10
                                                                       Manufacturing
                              5
  Energy
Recovery                      0                                        Material
  During Mach Filter
                             -5
                                        Steel Filter                   Provision
End-of-life
                                      Mach Filter       Steel Filter
                                       Net ERC:          Net ERC:
                                       26.29 MJ          28.40 MJ
Mach Environmental Assessment

                             Global Warming Potential (GWP)
                                   by Life-Cycle Phase

                   2.50
                   2.25
                   2.00
                   1.75
                                                              End-of-Life
    kg CO 2 eqv.




                   1.50
                                                              Use
                   1.25
                   1.00                                       Manufacturing

                   0.75                                       Material
                                                              Provision
                   0.50
                   0.25
                   0.00
                           Mach Filter      Steel Filter
                          Net GWP: 1.85   Net GWP: 2.32
                           kg CO2 eqv.     kg CO2 eqv.
Lessons Learned



        • Mach was profitable & more
          sustainable.



        • What can we take away from
          this example and apply to the
          rest of Cummins businesses?
  Drivers of Financial Benefits


                 Business Driver          Effect on Profitability

                 Operational Efficiency   ↓ Costs
Sustainability
Strategy
Drivers of Financial Benefits

• Reducing energy & material use are key
  components of sustainability, and can lead
  to operational efficiency and cost
  savings.



• The Mach filter resulted in cost savings
  through material, labor, energy, and
  transporation savings.
  Drivers of Financial Benefits


                 Business Driver          Effect on Profitability

                 Operational Efficiency   ↓ Costs
Sustainability   Business Growth          ↑ Revenues
Strategy
Drivers of Financial Benefits

• Addressing sustainability issues can lead
  to innovation and new business, which
  result in new sources of revenue.



• With the Mach filter, solving an
  environmental issue led to a new line of
  filters and other related products.
  Drivers of Financial Benefits


                 Business Driver          Effect on Profitability

                 Operational Efficiency   ↓ Costs
Sustainability   Business Growth          ↑ Revenues
Strategy
                 Risk Management          ↓ Costs
Drivers of Financial Benefits

• A sustainability strategy supports risk
  management by encouraging long-term
  thinking and avoiding potential costs in
  the future.



• Sustainability goes hand-in-hand with
  some of the risks Cummins has identified
  such as meeting environmental
  regulations and having safe operations.
  Drivers of Financial Benefits


                 Business Driver          Effect on Profitability

                 Operational Efficiency   ↓ Costs
Sustainability   Business Growth          ↑ Revenues
Strategy
                 Risk Management          ↓ Costs

                 Customer Demands         ↑ Revenues

                 Brand Equity             ↑ Revenues

                 Human Capital            ↑ Revenues, ↓ Costs
Valuation of Sustainability


• Financial methods that may undervalue
  sustainability initiatives.
  – Payback Period
  – Discount Rate


• Financial methods that better account for
  sustainability benefits.
  – Sensitivity Analysis
  – Real Options
Financial Benefits of Sustainability


A sustainability strategy will enable Cummins
to reap financial benefits.


 Sustainability                            ↑ Revenues
   Strategy                                ↓ Costs
                  Risk Management
                  Business Growth
                  Operational Efficiency
                  Customer Demands
                  Brand Equity
                  Human Capital
How can Cummins implement a
   sustainability strategy?
The Goal Tree

• Connects employees’ day-to-day work
  with company objectives
• Used for annual planning and employee
  evaluations
• Needs to be connected to company vision,
  mission and values
Integrated Approach

• Helpful to have a Framework to guide next
  steps and actions
  – Measure sustainability of current processes
  – Guide design of more sustainable processes
  – Provide a common methodology
• Four-Question Sustainability Framework
  – Based on the Natural Step Approach
1. What materials does Cummins use
   to build its products and facilities?
2. What are the impacts of Cummins’
   manufacturing processes?
3. What are the impacts of Cummins’
   products when in use?
4. What actions is Cummins taking to
  address social issues throughout the
  value chain?
Applying the Framework

How Cummins Compares today…

                                      CMI CAT DC   FORD GM
    What materials does the
1   company use to build its                   √
    products?                         √   √    -   √+   √
    What are the impacts of the
2   company’s manufacturing
    processes?                        √   √    √   √+   √+
    What are the impacts of the
3   company’s products when in
    use?                              √   √-   √   √+   √+
    What action is the company
4   taking to address social issues
    throughout the value chain?       √+ √-    √   √+   √+
Applying the Framework

How Cummins Compares Tomorrow…

                                      CMI CAT   DC   FORD GM
    What materials does the
1   company use to build its
    products?                         ?   ?     ?    ?   ?
    What are the impacts of the
2   company’s manufacturing
    processes?                        ?   ?     ?    ?   ?
    What are the impacts of the
3   company’s products when in
    use?                              ?   ?     ?    ?   ?
    What action is the company
4   taking to address social issues
    throughout the value chain?       ?   ?     ?    ?   ?
Applying the Framework

1. What materials does Cummins use to build its
   products?

•   Metal
•   Plastics and Rubber
•   “Prohibited” Substances
•   Coolant/Antifreeze/Lubricants
•   Remanufactured Engines
•   Sourcing
Applying the Framework

•   Current assessment
•   Vision
•   Steps to get there
•   Barriers to change
•   Solutions to barriers
•   Time horizon
Create a Sustainability Vision

• Why?
  – Communicate where the company wants to be
    in 30 years
  – Give employees a framework to understand
    changes that will take place


• What is a vision?
  – A stretch goal
  – Looks beyond today’s economic and
    technology limitations
  – Might not even seem attainable
Cummins Sustainability Vision Statement


• Develop products and services that use non-
  harmful materials and run on non-petroleum
  based fuels while remaining cost competitive and
  generating steady revenue.

• Have facilities powered by renewable energy
  that generate zero waste and no harmful
  emissions while remaining a low-cost producer.

• Improve people’s lives—both those who are
  directly impacted by Cummins’ actions and
  members of the broader global society.
Next Steps Presented to Cummins

• Refine the vision
• Incorporate sustainability into Goal Tree
• Integrate Four-Question Sustainability
  Framework into processes
• Use life-cycle analysis as a data-driven
  tool for decision-making
• Recognize limitations of current financial
  tools
Recap

        What is sustainability?

        Why should Cummins pursue a
         sustainability strategy?
          – Sustainability isn’t new to Cummins
          – A sustainability strategy will enable
            Cummins to reap financial benefits


        How can Cummins implement a
         sustainability strategy?
 President & Chief Strategist Feedback

• Strengths
  – Four-Question Framework
  – Connection with company history, vision, mission &
    values
  – Identifying sustainability business drivers
• Challenges
  – More data needed to measure sustainability benefits
  – Vision Statement
• Next Steps
  – Share framework with EHS Council & Product Line
    Architects
  – Integrate into product design processes
Takeaways

• “Business Case” is different for every
  company and industry.
• Sensitive topics and skepticism need to be
  addressed strategically.
• A clear vision & feasible roadmap is critical.
• Financial data is difficult to get, but
  essential.
• Masters Projects can make a difference!
Questions?

								
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