Calculating Carbon Emissions with an ERP System

By Steve Bieszczat, Chief Marketing Officer, DELMIAWorks

For years, medical device manufacturers who already face extensive quality and safety regulations have been comparatively slow to adopt sustainability initiatives. However, a United States National Institutes of Health (NIH) report estimates that healthcare systems — ranging from professional diagnostic tools and invasive surgical devices to consumer-grade medical offerings — account for 4% to 8% of greenhouse gas emissions.

The realization is leading several large healthcare networks, retailers, and medical product manufacturers to publish goals of becoming carbon neutral by 2050. To meet those milestones, they will need to go beyond the carbon footprint generated by their own operations. They will also need, and expect, the middle tiers of their manufacturing supply chain to document and reduce greenhouse gas emissions.

Those suppliers, contract manufacturers, and other mid-tier medical product manufacturing firms who implement a formal sustainability and carbon footprint management program will be well positioned to become the preferred vendors for larger manufacturers. Additionally, medical product manufacturers and suppliers of all sizes can recognize significant cost savings by reducing related materials, energy, and labor-related expenditures. In the process, these companies will get a head start on meeting emerging government regulations aimed at reducing greenhouse gases.

Calculating and reporting carbon footprint can seem daunting at first, but most medical product manufacturers and suppliers already have a powerful system on hand to automate this process: the enterprise resource planning (ERP) software already managing their operations. But before looking at how an ERP system can be used to calculate carbon footprint, let’s examine a few fundamentals.

The components of a carbon footprint

Carbon emissions are denoted as a carbon dioxide equivalent or CO₂e, which means the weight of CO₂ emissions with the same global warming potential as an equal weight of other greenhouse gases. The United States Environmental Protection Agency (EPA) lists 18 factors that typically comprise a businesses’ carbon footprint. For most medical product manufacturers, these can be summarized as purchases of energy, raw materials, and supplies; logistics (notably shipping); and waste and disposal. It’s possible to find the CO₂e content (or impact) of almost any material or activity on the internet. For instance:

Companies’ carbon emission sources are categorized as “Scopes,” which were first introduced in the Green House Gas Protocol of 2001. Scope 1 refers to greenhouse gases directly produced by a company’s operations. Scope 2 covers purchased electricity, heat, cooling, or steam. Scope 3 includes greenhouse gas emissions associated with the production of all other goods and services that the company purchases (eg, from its supply chain).

Notably, one medical product manufacturer’s Scope 1, 2, or 3 emissions can be another company’s Scope 3, and the general rule of thumb is that, if you buy it, you own its carbon footprint. This is why corporate customers and large manufacturers need to understand their suppliers’ carbon footprints while tracking their own.

Carbon footprint accounting

The first step in calculating carbon footprint is to identify the major contributing factors. Carbon footprint and purchasing spend tend to be highly related, so the top three or four categories of purchasing spend are likely to be the top contributors to carbon footprint. For many medical product manufacturers, a good goal is to baseline, track, and reduce the company’s carbon footprint from 80% of the carbon-related spend.

Two common approaches to estimating a baseline carbon footprint are the spend method and activity-based carbon accounting.

The spend method, also known as revenue reporting, calculates carbon footprint by using purchased data, online carbon equivalent tables, and/or specific equivalents provided by the manufacturer’s suppliers to produce a baseline. Then, if an upstream customer requests carbon footprint data, the company will provide the pro-rata portion of the baseline based on the customers’ purchase volume as a percentage of total sales. For example, a $20 million manufacturer may have a baseline carbon footprint of 13.23 million lbs of CO₂e. Here, the footprint reported for a customer with a $5 million account would be 25% or 3.3 million lbs of CO₂e. While widely adopted, this reporting method can be inaccurate on an individual customer basis.

The activity-based carbon accounting (reporting) method calculates carbon footprint per unit of production. This approach provided two distinct advantages over the spend method. First, it accurately calculates the carbon footprint of an item, assigning the correct footprint without influences from other factors that may determine the selling price but have no carbon impact. Second, activity-based carbon accounting is actionable. Since this method directly measures the carbon input to a product, standard root cause analysis and corrective action measures can be implemented to reduce the footprint on a systematic basis. For these reasons, activity-based reporting is considered the gold standard of carbon footprint reporting and is the method upstream customers will prefer, and eventually, require.

Using an ERP system to capture carbon footprint

Within a medical product manufacturing environment, each production element carries some inventory of carbon footprint, so ERP systems are well suited for tracking the carbon inventory of a finished good just as they would track other items in inventory. Ideally, a manufacturer's ERP system will have the capacity to track machine time and labor as well as raw materials and shipping costs. A method for using an ERP system to track the carbon inventory of finished products on a per-unit basis can be broken into five key steps.

1. Create carbon inventory items in the ERP system’s inventory item master. Here, each item’s cost represents the carbon emission for that item per unit of measure. For example, one pound of plastic typically has a carbon footprint of 2 pounds CO₂e. The average US cost for one kilowatt of electricity is 0.85 pounds of CO₂e, and ground shipping costs 0.36 pounds of carbon per ton-mile.

2. Augment each bill of manufacture (BOM) with the carbon inventory items and their respective consumption per finished good unit. Raw material carbon impacts are easy to determine since the BOMs already contain the material quantities required to calculate carbon content. For instance, with the manufacturer of plastic eye-dropper, the bill of material would contain a carbon cost (ie, the material’s carbon factor times the item weight) for the pipette, the cap, and the bulb.

3. Estimate the energy content (impact) for an item. The simplest method is to take the operation’s entire energy cost (in CO₂e) and divide that total footprint by the total number of work center operating hours to establish an average CO₂e per operating hour. Here, ascribing energy costs to production hours takes into account the carbon costs of lighting, heating, air conditioning, and axillary equipment, among other contributing factors. By contrast, the most accurate method is to calculate the energy operating cost of each individual work center, but it is also the least practical in terms of creating and maintaining the work center factors over time.

The most practical approach falls squarely in the middle. Once an average CO₂e per operating hour is established, the next step is to split the average calculated value into high, medium and low work center CO₂e factors — for example assigning 75% of the average value to an efficient electric machine versus 150% of the average value for older hydraulic equipment. Over time, accuracy can be improved incrementally by adding more work center efficiency factors. This approach recognizes variations in work center energy efficiencies. As a result, pushing work to more efficient work centers can be rewarded, and maintaining work center energy consumption estimates is more manageable.

4. Evaluate shipping’s impact on CO₂e. Shipping often represents an immaterial amount of a medical product manufacturer’s overall carbon footprint, generally around 2% to 4%. A quick test of materiality is to use the business’ overall shipping expense; then convert those dollars to CO₂e per dollar (or pound of product). A reasonable conversion value is 0.5 lbs. CO₂e per shipment costs a dollar. If the shipping cost is material, the company can either use the approximation or obtain more accurate values from its carriers when adding the item to the ERP system.

5. Automate carbon calculations and reporting. With the first four methods in place, the ERP software’s costing and inventory control systems can automatically calculate the carbon cost per item, as well as report carbon costs by item, customer, or category — just like any other inventory. These costs can even be printed directly on shipping labels and documentation. Additionally, dashboards can be set up in the ERP system to make daily carbon output and progress towards goals readily visible to everyone in the company.

Reducing manufacturers’ carbon footprint

With the proper ERP set-up, manufacturers can treat the carbon footprint or carbon inventory of production operations just as they would any other business expense. Moreover, when the activity-based method is applied to calculating carbon footprint by item, medical device manufacturers can use their ERP systems to apply the same lean manufacturing and continuous improvement principles to emissions reductions as they do to initiate routine cost reductions and quality improvement projects. Examples include the ability to:

Sustainability is an acquired discipline and at first glance can seem like a formidable undertaking to medical device manufacturers already facing extensive regulatory compliance and reporting demands. This makes it all the more important for companies in the medical product industry to measure the impact and progress of their sustainability initiatives in reducing emissions, costs and waste while increasing productivity and efficiency. By using ERP systems to treat the carbon footprint of manufacturing activities like any other business expense, medical product manufacturers can make the recording and reporting of environmental impacts routine and efficient while positioning themselves in the supply chain as responsible, preferred providers.

About the author:

Steve Bieszczat is the chief marketing officer at DELMIAWorks, responsible for DELMIAWorks’ brand management, demand generation, and product marketing. Prior to DELMIAWorks, Bieszczat held senior marketing roles at ERP companies IQMS, Epicor, and Activant Solutions. His focus is on aligning products with industry requirements as well as positioning DELMIAWorks with the strategic direction and requirements of the brand’s manufacturing customers and prospects. Bieszczat holds an engineering degree from the University of Kansas and an MBA from Rockhurst.