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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