14 December 2009

Not Ready for Cap-and-Trade: US Manufacturers

The carbon cap train may be leaving the station, whether aboard the EPA, White House & Congress Railroad or on the high-speed rail from the Copenhagen Circus.

But left behind and potentially dead on the tracks may be US manufacturers, especially those in the industrial equipment sector.

There are nearly 46,000 industrial manufacturing companies in the US and Canada ranging in focus from machinery, aerospace, and petroleum refining to printing, chemicals, food, and medical devices, to computer systems and peripherals, pharmaceuticals, and paper. (These are the Dunder Mifflins of the world.)

Imagine you are the CEO of a small to mid-size company with under a billion dollars in revenue that supplies a part or product for a larger original equipment manufacturer (OEM).

The OEM is charged with reducing its carbon footprint, but there is only so much it can do at the home office, facilities, and transportation. So the OEM turns to its suppliers and says, "What are you doing to reduce my carbon footprint?"

Suddenly, you are charged with meeting those targets or potentially losing their business. But your company is ill-equipped to track reductions or even to establish a benchmark against which to measure reductions.

"Well," one government official familiar with the situation said to me. "You can use your enterprise software to track various components, just like you do with other management issues."

Maybe, or maybe not.

A new survey conducted by Reed Business Information for IFS North America, a global enterprise applications company, shows that US manufacturers, even large ones, are not ready to measure their environmental impact. (The survey will be available December 28th.)

Many of these companies are currently not tracking environmental metrics, and most lack the technological or management infrastructure to do so in a cost-effective manner.

One survey respondent, who works for an aerospace and defense manufacturing company with more than $2.5 billion in revenue, said his company would "like to have this embedded, versus buying and integrating a third party package or writing my own solution."

Currently, neither Oracle nor SAP, the most widely used enterprise business software applications have built-in environmental footprint management tools.

Oracle recently entered into a partnership with OMRON to "create a solution that will help companies track and reduce energy consumption in manufacturing and non-manufacturing environments," according to a spokesperson with the company.

SAP has several solution modules, including SAP Carbon Impact, but as of this writing it is unclear whether they offer a fully integrated product.

IFS, which commissioned this survey, released a product with an embedded "eco-footprint" tool last February, but they only serve a fraction of this market in a specific niche.

"We are not an ERP solution for every manufacturer," says Chuck Rathmann, a spokesman for IFS North America. "We are kind of a niche player for complex, engineer-to-order manufacturing, asset intensive industry, aerospace and defense and a couple of other verticals."

So, even if the major enterprise solution providers are working on tools to help with the transition, many companies will need time to adjust to new regulations and expectations.

Middle-market companies, especially those doing under $1 billion in revenue, are in a particularly tough position. They simply can't afford the costs of consulting and integration necessary to track environmental metrics.

With only 20 percent of the over 260 mid-size companies in the IFS survey indicating they are tracking their eco-footprint, it could be a long process. And what about companies over $1 billion? Only 36 percent say they are currently tracking it.

Few would argue that tracking this stuff isn't important. In fact, 83 percent of those surveyed said it was important. However, the number one reason for that importance was compliance.

The timeline, however, is a different story. Regulators and government officials need to take into account that people can't just flip a switch and make this happen.

But is anyone in Washington or Copenhagen considering the unintended consequences of their decisions on this sector? I doubt it.

In fact, I'd be surprised if any one of these companies has a seat at the table in the global climate summit in Denmark -- they typically aren't heavy on marketing or lobbying budgets. But once again they may be left out in the cold.

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