Identify and analyse some of the approaches covered in the text for detecting and preventing failure.

| September 28, 2018

MANUFACTURING
& SERVICE

inf

OPERATIONS
MANAGEMENT

®

Vol. 8,
No. 1, Winter 2006, pp. 5–22

doi 10.1287/msom.1060.0095

issn 1523-4614_ eissn 1526-5498_ 06_ 0801_ 0005

© 2006 INFORMS

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Extending the Horizons: Environmental
Excellence as Key to Improving Operations

Charles J. Corbett

Anderson School of Management, University of
California, Los Angeles, 110 Westwood Plaza, Box 951481, Los Angeles,
California 90095-1481, charles.corbett@anderson.ucla.edu

Robert D. Klassen

Richard Ivey School of
Business, University of Western Ontario, London, Ontario, N6A 3K7 Canada,
rklassen@ivey.uwo.ca

The
view that adopting an environmental perspective on operations can lead to
improved operations is initself
not novel; phrases such as “lean is green” are increasingly commonplace. The
implication is that any operational system that has minimized inefficiencies is
also more environmentally sustainable. However, in this paper we argue that the
underlying mechanism is one of extending the horizons of analysis and that this
applies to both theory and practice of operations management. We illustrate
this through two principal areas of lean operations, where we identify how
successive extensions of the prevailing research horizon in each area have led
to major advances in theory and practice. First, in quality management, the
initial emphasis on statistical quality control of individual operations was
extended through total quality management to include a broader process
encompassing customer requirements and suppliers’ operations. More recently,
the environmental perspective extended the definition of customers to
stakeholders and defects to any form of waste. Second, in supply chain
management, the horizon first expanded from the initial focus on optimizing
inventory control with a single planner to including multiple organizations
with conflicting objectives and private information. The environmental
perspective draws attention to aspects such as reverse flows and end-of-life
product disposal, again potentially improving the performance of the overall
supply chain. In both cases, these developments were initially driven by
practice, where many of the benefits of adopting an environmental perspective
were unexpected. Given that these unexpected side benefits seem to recur so
frequently, we refer to this phenomenon as the “law of the expected unexpected
side benefits.” We conclude by extrapolating from the developmental paths of
total quality management and supply chain management to speculate about the future
of environmental

research in operations
management.

Key
words: environmental management; sustainability;
quality management; supply chain management History: Received: March 2,
2004; accepted: January 7, 2005. This paper was with the authors 12 months for

3 revisions.
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Introduction

The
growing number of recent papers and special issues in the operations management
(OM) litera-ture on environmental management demonstrates the rapidly
increasing importance of these issues.1
This observation in itself may justify a survey and synthe-sis of the
literature. However, the main objective of this survey is to answer the
question why and how

1
European Journal of Operational Research,
2000,121(2); 1997,102(2). Computers & Industrial
Engineering, 1999,36(4). Interfaces, 2000,30(3);2003,
33(4). International Journal of Operations and Production Man-agement,
2000,21(2). Production and Operations Management, 2001,

10(2/3);
2003, 12(3). Several others are in their final stages at this time.

this
trend is relevant and interesting from the perspec-tive of “mainstream” OM
research and practice. Are environmental issues just a passing fad, or does the
environmental perspective have a more fundamental and far-reaching impact on
OM?

We take the latter view and argue that the
nature of environmental issues is such that they are provoking a powerful
paradigm shift in OM research as they force scholars, frequently guided by
leading-edge practi-tioners, to adopt a broader, more holistic view of the
operations being studied. We support this claim by first revisiting the
evolution of total quality manage-ment (TQM) and supply chain management (SCM),
both important dimensions of lean operations (Shah and Ward 2003).

5

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Corbett and Klassen: Environmental Excellence as Key
to Improving Operations

Manufacturing & Service Operations Management 8(1),
pp. 5–22, © 2006 INFORMS

Why focus on these two specific areas?
Although at first glance they might appear quite separate, their developmental
paths over time share important sim-ilarities. From this cursory review, we
observe that in both streams a paradigm shift occurred when the scope of
analysis was broadened beyond what was customary at that time. By
extrapolation, we believe that the expanded awareness of environmental issues
in OM research is already leading to a similar broad-ening of scope of analysis
and will therefore cause a similar paradigm shift. In closing, we speculate on
the future development of environmental manage-ment research in OM—with the
intention of inviting criticism and debate.

The argument that adopting an environmental
per-spective can help firms improve their performance has been made before.
Porter and van der Linde (1995) provide several examples of how environmen-tal
conditions encouraged firms to use resources more efficiently and become more
productive as a result. Hart (1995) provides a more detailed discussion of how
a focus on environmental performance can be a competitive resource for firms.
Larson et al. (2000) invoke the Schumpeterian notion of “creative destruc-tion”
to explain how firms, when forced to adopt a new perspective such as
sustainability, become more entrepreneurial and end up discovering new goods
and services. Hart and Milstein (1999) and Hart and Christensen (2002) propose
that focusing on the “base of the pyramid,” i.e., developing products and
ser-vices tailored for the world’s poor, is one way to invoke such creative
destruction. A parallel mech-anism applies not only to practice but to research
as well: When scholarly communities are forced to adopt a broader perspective,
the theoretical base of that community is enriched as a result. In fact, both
practice and theory of OM seem to be subject to a “law of the expected
unexpected side benefits” (which we formalize at the end of this paper) when
adopting an environmental perspective: Although ex post there are numerous
examples of how an environmental per-spective has improved practice and
enriched theory, it is near impossible to predict ex ante precisely where these
benefits will emerge. This paradox may help explain why environmental research,
despite having a 30-year track record, has struggled to enter main-stream OM
theory and practice for so long.

This paper aims to make two contributions.
First, it reviews the intersection between lean operations— particularly TQM
and SCM—and environmental management, highlighting selected papers that have
extended the traditional scope of analysis. Second, there is some evidence that
firms with better environ-mental performance also achieve better stock market
performance (Klassen and McLaughlin 1996, Derwall et al. 2005), which would contradict
capital mar-ket efficiency. This paper proposes that the mecha-nism that
underlies the linkage between a broader (environmental) perspective and
improved perfor-mance makes the precise nature of those improve-ments
unpredictable, which may help explain why capital markets underestimate the
value of environ-mental programs. We believe that these arguments can be
extended to the context of social issues in OM, but the very limited research
in that area prevents us from verifying that belief (Carter 2005).

The structure of this paper is as follows.
First, con-sciously oversimplifying, the paper begins by con-sidering how
environmental issues, strategy, financial performance, and operations are
intimately inter-twined. Next, we paraphrase the evolution of TQM into three
stages: an initially narrow scope applying specific tools, followed by the
revolution that resulted from the broader horizon emphasized by TQM, lead-ing
to the currently emerging further extension of TQM to include environmental
perspectives. We then review selected literature on environmental manage-ment
and TQM in more detail. The next section devel-ops an analogous review and
extension of SCM. We conclude with our predictions about the future role of
environmental research in operations management.

Role
of Operations in Implementing Environment, Strategy, and Performance

Before
reviewing the evolution of TQM and SCM and the role of an environmental
perspective in that evolution, it is important to understand the basic linkages
between environmental management, firm strategy, and financial performance. The
gen-eral understanding of both environmental manage-ment and firm strategy have
shifted significantly in recent years, placing increasing demands on firms to
consider many stakeholders.

Corbett
and Klassen: Environmental Excellence as Key to Improving Operations

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Manufacturing
& Service Operations Management 8(1), pp. 5–22, © 2006 INFORMS

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Environmental
Management and Firm Strategy

It
is instructive to briefly highlight how our under-standing of the firm has
evolved. The firm is one of history’s great catalysts for innovation and
cre-ation of novel products and services, and often—but not universally—for
improved standards of living. In particular, the widespread, international
movement toward limited-liability joint-stock firms has allowed for
unparalleled growth while simultaneously cre-ating complex tensions among
investors, employ-ees, and society (Micklethwait and Wooldridge 2003). When
this basic structure was promulgated into law in the United Kingdom in the
mid-nineteenth century, the primary challenge was aligning a firm’s economic
interests (i.e., shareholders) with those of professional managers, generally
termed the agency problem, not integrating environmental considerations.

More recently, much debate has focused on
where the boundary of the firm should be within the over-all value chain, often
drawing on theories of strategic resources and transaction costs (Besanko et
al. 2000). Strategic resources that generate sustained competi-tive advantage
are defined as assets, capabilities, and organizational processes, controlled
by a firm, which have value, are rare, are difficult to imitate, and have few
substitutes (Barney 1991). A firm’s resources can either be acquired in the
case of tradable resources (Black and Boal 1994), or they can be path
depen-dent, accumulating over time (Dierickx and Cool 1989). In parallel, other
scholars and practitioners have advanced the need to recognize a broad array of
stakeholders, extending beyond investors, man-agement, customers, and suppliers
to include local and global communities, regulators, nongovernmen-tal
organizations (NGOs), and others. This is com-monly termed stakeholder theory
(Freeman 1984, Clarkson 1998), with stakeholder management repre-senting a
potential strategic resource (Hart 1995).

Thus, the complex web of linkages and
tensions created among multiple stakeholders forces manage-ment to address both
social franchise issues and eco-nomic franchise issues simultaneously
(Kleindorfer and Orts 1998). To have a viable economic franchise, a company
must have the requisite capabilities and associated tangible and intangible
assets to gener-ate sufficient cash flows to pay for the cost of its inputs and
for the transformation of these into the

products
and services it offers. In contrast, a viable social franchise exists when the
company has the req-uisite capabilities and associated tangible and intan-gible
assets to generate sufficient legitimacy among key stakeholders, such as the
public and its NGO surrogates, regulators, and its own employees and customers,
that its operations are compatible with applicable social and legal norms.

Environmental issues clearly affect both types
of franchise, as discussed in the following sec-tions. For instance, Hart
(1995) identifies continu-ous improvement and stakeholder management as two key
specific organizational resources related to proactive environmental
management. These are both knowledge-based resources that can build lasting
competitive advantages because of their causal ambi-guity and social
complexity, while also supporting environmental policies that go beyond
compliance and control to proactively focus on prevention (Russo and Fouts
1997). The rapid widespread acceptance of voluntary environmental programs,
including ISO 14000, the Global Reporting Initiative, and various greenhouse
gas and other emissions trading schemes, is an immediate consequence of the
increased impor-tance attached to the social franchise and its impact on the
economic franchise. The next question is how all this relates to firm
performance.

Environmental
Management and Financial Performance
The
research relating environmental management to firm performance is fragmented
across the finance, corporate social performance, economics, account-ing, and
environmental management literatures. The traditional economic view suggests
that any envi-ronmental improvement made by a firm transfers costs previously
incurred by society back to the firm (Friedman 1962, Bragdon and Marlin 1972,
McGuire et al. 1988). Hence, environmental performance was expected to be
negatively linked to operational and, ultimately, financial performance.

Counter to this perspective, others have
identi-fied strategies in which environmental management can improve firm-level
financial performance and overall competitiveness (Porter and van der Linde
1995, Reinhardt 1999). Moreover, poor environmen-tal performance can reduce a
firm’s market val-uation (Klassen and McLaughlin 1996, Konar and

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Corbett and Klassen: Environmental Excellence as Key
to Improving Operations

Manufacturing & Service Operations Management 8(1),
pp. 5–22, © 2006 INFORMS

Cohen
2001). Superior financial performance has been found in firms with better
environmental per-formance across multiple industries (Kiernan 2001, Derwall et
al. 2005). Although the link between envi-ronmental management and financial
performance has been discussed for more than three decades (e.g., Bragdon and
Marlin 1972), the results reported by empirical studies are often conflicting
or ambiguous, fostering an ongoing debate in the literature (Russo and Fouts
1997, Derwall et al. 2005).

As a result, a richer and more nuanced
picture continues to emerge. In part, these mixed results are indicative of the
complex set of relationships that underlie the apparent linkage between
envi-ronmental management and financial performance. First, the relevant measures
must be multidimen-sional, particularly for environmental performance. Second,
environmental issues can affect performance either by increasing revenues
through new market opportunities, competitive differentiation, and stake-holder
management or by cutting cost through pro-cess improvement, waste reduction,
and stronger system-oriented capabilities (Klassen and McLaughlin 1996). Third,
these effects can be absolute, in which case they can (in principle) be
measured by compar-ing performance before and after, but often they are
relative, in the form of avoided costs or avoided loss of market share,
compounding the measurement chal-lenge. Finally, superior environmental
performance is often, to some degree, a reflection of good manage-ment more
broadly, rather than the sole root cause of good financial performance. Even
then, though, any initiatives a well-managed firm embarks on, environ-mental or
otherwise, are, by definition, more likely to be valuable.

In particular, as Derwall et al. (2005) point
out, find-ing a positive relationship between environmentally responsible
practices and stock market performance, as they do, suggests that the market is
not pricing environmental characteristics of firms correctly. In fact, the
traditional assumption of market efficiency would require that subjecting a
portfolio to any addi-tional constraints, such as limiting it to
environmen-tally responsible firms, would reduce the risk-return efficiency of
that portfolio. If proactive environmen-tal management truly leads to better
financial perfor-mance, an efficient capital market should take that

into
account by attaching higher valuations to firms with superior environmental
performance, reducing their stock market return as a result. The fact that
firms with superior environmental practices outper-form others suggests that
capital markets underes-timate the future benefits of those practices. That
would be consistent with the “law of the expected unexpected side benefits”:
Although such benefits are consistently present in retrospect, the precise
nature or magnitude of these benefits are unpredictable in advance. The fact
that the business environment in which firms operate is becoming increasingly
complex (due to globalization, technological develop-ments, social change,
etc.) adds to this unpredictabil-ity but also further strengthens the need for
better understanding of these forces surrounding firms and the interactions
between them. We return to this issue at the end of the paper.

The Role
of Operations Management

Given
the importance of environmental issues in the management of the firm, how does
operations con-tribute? Of course, researchers in OM can easily and simply
dismiss this question with the riposte that, for a firm, environment is
operations. Given that pro-cesses use resources as inputs, transform energy and
materials, and generate goods and services as outputs (not to mention wastes),
and that managing processes is increasingly seen as critical for business
success (Pall 2000), it is inescapable that environmental excel-lence can only
be achieved through implementing cost-effective changes at the process level
(Hopfen-beck 1993). And indeed, the currently dominant view of OM as focusing
on process management (includ-ing improvement enabled through TQM and business
process reengineering) has been influential in environ-mental management,
notably in process-oriented cer-tifications such as the ISO 14000 family of
standards.

However, simply taking for granted the
central-ity of OM to environmental improvement would do injustice to the
complexity of the linkages outlined earlier. After all, while good operations
can lead to environmental excellence, which in turn can improve financial
performance, good operations can also simultaneously engender environmental
excellence and financial success, without there being a causal link between the
latter two. Or financial success can

Corbett
and Klassen: Environmental Excellence as Key to Improving Operations

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Manufacturing
& Service Operations Management 8(1), pp. 5–22, © 2006 INFORMS

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allow
firms to invest in good operations and environ-mental excellence. Or a more
deep-seated “good man-agement” can drive operational, environmental, and
financial success. The list of possible permutations is lengthy. The cursory
review offered earlier indicates that there is some truth to each of these
views; in this survey, though, we highlight yet another mech-anism that
explains the importance of environmental management for the broader operations
community: Environmental excellence drives operational excel-lence (and both
drive financial success separately and jointly). Below, we turn to the fields
of TQM and SCM to support this view.

Environmental
Issues in TQM

The
Evolution of TQM

Early
work in quality control focuses on methods such as acceptance sampling (Dodge
and Romig 1929) and control charts (Shewhart 1931). Optimal policies are
determined by specifying what levels of Type I and/or Type II errors are
acceptable (i.e., rejecting a good lot, or accepting a bad one) without
explicit consideration of the causes and consequences of such errors.

A critical aspect of the TQM revolution of
the 1970s and 1980s (Evans and Lindsay 2001, Juran and Godfrey 1998) was to
emphasize the need to take a broader view of “quality.” For instance, qual-ity
should be defined in terms of meeting customer requirements rather than purely
in terms of defects. The costs of defects could extend beyond the process that
generated the defects, as in the case of a part that fails in the field,
triggering a warranty claim, even though it passed inspection before it was
shipped (Garvin 1983). Moreover, the source of quality prob-lems can lie
outside the process itself. For example, it is usually better to reduce the
variability of a sup-plier’s quality than to simply accept or reject batches as
they are received.

Statistical tools such as acceptance sampling
or con-trol charts must be one component of a broader pro-gram that integrates
organizational culture, employee training, data collection, root cause
analysis, and continuous improvement, to name several aspects. In short, the
TQM revolution pushed the OM com-munity to adopt a broader perspective,
including

processes
upstream and downstream, as well as the organizational context surrounding
those processes. Although any individual aspect or implementation of TQM may or
may not have been successful, the prin-ciples of TQM have become widely
accepted in theory and practice.

Fundamental
Linkages Between TQM and Environmental Management
The
linkages between quality and environmental management are illustrated by the
recent emergence of terms such as “total quality environmental man-agement” and
by the similarity between standards such as ISO 9001 (quality) and ISO 14001
(environ-ment), discussed below. To include environmental issues, the frame of
reference offered by TQM must be stretched in several directions.

First, the notion of a “defect” must be more
com-prehensive and include any waste that is generated within a process or
while using or disposing of a product. Where “zero defects” was a central tenet
of TQM, “zero waste” is a significant step beyond. However, many of the tools
and principles that apply to quality management are equally relevant for
envi-ronmental improvements (Corbett and Van Wassen-hove 1993, Madu 2003). For
example, in statistical process control, the objective is to monitor a process
continuously to rectify out-of-control situations before they lead to costly
problems. The trade-off is between reacting too late (hence incurring costs of
defects) and reacting too quickly (with false alarms causing unnec-essary
stoppages). Applied to pollution control, one faces a similar scenario: Many
processes face fines or even shutdown once they exceed some regulatory limit on
air- or water-borne emissions. SPC can be used to monitor process emissions and
prompt action when emissions are out of control or too close to the regulatory
limits. One of the benefits of SPC is that it helps operators see and
understand problems, which (in other contexts) does improve their decision
mak-ing (Boudreau et al. 2003).

Environmental
applications of SPC have similar benefits. Operators can rarely see the
physical emis-sions caused by a process and hence cannot manage them carefully
without having the real-time pollution data available that SPC provides.
Corbett and Pan (2002) propose that process capability indices,

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