Environmental Purchasing for competitive advantage in the construction sector

University of Groningen

Faculty of Economics and Business

Environmental Purchasing for competitive

advantage in the construction sector

Integrating environmental criteria into a theoretical framework

for supplier selection

Master Thesis

Technology and Operations Management

“It is not the strongest organization that survive,

nor the most intelligent,

but the organizations most responsive to change”

Environmental Purchasing for competitive advantage in the

construction sector

Integrating environmental criteria into a theoretical framework for supplier

selection

Colophon

Author:

N.H.C (Niels) Edelijn

Student number:

1701576

Email:

n.h.c.edelijn@student.rug.nl

University:

University of Groningen

Faculty:

Economics and Business

Study:

MSc. Technology and Operations Management

Document version:

Master Thesis (final version)

University Supervisor:

Dr. W.M.C. van Wezel

University Co-assessor:

Drs. Ing. H.L. Faber

Company:

Heijmans N.V

Company Supervisor:

Mr. F. Hoekemeijer

Date:

November 2013

Place:

Rosmalen

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BSTRACT

Throughout the world, the construction sector is one of the largest consumers of resources. It is not a surprise that the construction sector is intrinsically linked to the environment, and it found itself at the center of concerns about environmental impact. Construction companies are increasingly made accountable not only for their internal practices, but also for their suppliers’ behavior. As a result, construction companies have begun to integrate environmental criteria into their purchasing policies and procedures. In today’s highly competitive environment, an effective supplier selection process is essential to the success of any construction organization. The main objective of the supplier selection process is to reduce purchase risk, develop close and long-term relationships between buyers and suppliers, and maximize overall value to the purchaser. In this context, supplier selection represents one of the most important functions to be performed by the purchasing department.

In literature, little attention has been paid to environmental criteria for supplier selection in the construction sector. Supplier selection is a multi-criterion process which includes both qualitative and quantitative factors (criteria). A trade-off between these tangible and intangible factors is very important in selecting the best supplier. In this report, a framework for integrating environmental criteria into the traditional supplier selection process is presented. Traditionally, organizations consider factors like costs, quality, delivery time, flexibility, and innovation when selecting or evaluating supplier’ performance. However, environmental pressures are becoming bigger in today’s business, resulting in many construction organizations beginning to consider measurement of their suppliers’ environmental performance.

The aim of this Master Thesis is to extend findings on the subject of environmental criteria for purchasing management in order to improve competitive advantage of construction companies. This should help purchasing managers of construction companies to integrate environmental criteria into their traditional supplier selection process.

Based on a case analysis at Dutch construction company Heijmans N.V, a set of environmental criteria (for example air emission, energy or waste consumption) are identified that can be linked to traditional purchasing management performance attributes. A qualitative research method has been used to provide several primary areas for change to increase purchasing’ environmental impact on supplier selection.

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REFACE AND

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CKNOWLEDGEMENTS

This Master Thesis is written for finalizing my study Master of Science in Technology and Operations Management at the University of Groningen. I have conducted this research at Heijmans N.V. (in the continuum of this paper referred to as Heijmans) in Rosmalen. This thesis is the result of a research project which started in September 2012 and was finalized in April 2013. Completing this thesis has been an interesting challenge. I gained a lot of new qualities, gathered new knowledge and learned a lot about myself. During these months I have done an explorative research to the suitability of environmental criteria for the selection of suppliers in the traditional purchasing policy of this construction organization.

Being a part of the organization during this research has been a great experience for me. Other than the previous projects which were part of my education I was highly involved in the activities of the organizations and this confronted me with other aspects than I had experienced before.

I would like to thank all the members of Heijmans who helped me during this project. Special thanks goes out to Mr. Hoekemeijer for giving me the opportunity to graduate at Heijmans. You guided me through the company, made always time for reviewing my work and you really helped me out with your creative thinking. I truly appreciate the confidence you showed in me by giving me this internship. I also want to thank Mr. Booij for support me during the project.

As my supervisor, Dr. W.M.C. van Wezel proved to be very helpful to complete my Master Thesis. His critical view challenged me to establish a quality result which benefits both Heijmans and myself. I would also like to thank my second assessor Drs. Ing. H.L. Faber for taking the time to judge my thesis.

Finally, I am grateful to those who supported me - intellectually, mentally and financially - during my graduation project and the rest of my study. These people include my family, who had so much patience with me, my girlfriend and my great friends, who were always there for distraction and memorable moments. Thank you all!

Rosmalen, November 2013

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ABLE OF CONTENTS

Abstract ... 2

Preface and Acknowledgements ... 3

Table of contents ... 4 1. Introduction ... 5 1.1 Theoretical Background ... 5 1.2 Research focus ... 6 1.3 Business Context ... 6 1.4 Research Design ... 7 1.5 Deliverables ... 7 1.6 Contributions to literature ... 8 1.7 Thesis Outline ... 8 2. Literature review ... 9

2.1 Sustainability and environmental management basics ... 9

2.2 Competitive advantage for environmental management ... 13

2.3 Traditional versus environmental criteria concerning supplier selection ... 14

2.4 Proposed framework for inclusion environmental criteria ... 21

3. Empirical research – Heijmans Case ... 23

3.1 Case context and data collection ... 23

3.2 Operational environmental purchasing ... 24

3.3 Insights at supplier’ side ... 29

4. Results ... 34

4.1 Theoretical model with empirical data ... 34

4.2 Gap between theory and practice ... 40

5. Discussion and implications ... 41

5.1 Overall conclusions ... 41

5.2 Managerial and theoretical implications ... 44

5.3 Limitations and future research areas ... 44

6. Bibliography ... 45

7. Appendices... 51

Appendix A List of abbreviations, figures and tables ... 51

Appendix B List of definitions ... 52

Appendix C Organization chart and revenue overview ... 54

Appendix D Systematic Review Architecture ... 55

Appendix E Interview protocol ... 56

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1. I

NTRODUCTION

This chapter describes an introduction of this Master Thesis next to the research focus and business context. This chapter also explains the contributions to literature and deliverables of the research, including the research questions that are to be answered throughout the paper. Research design as well as the methodology of the research are presented.

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The global environment has become a critical issue in business (Walton et al., 1998), and as one of the most important issues to business, environmental management is becoming a key strategic issue for organizational performance (Porter and Van der Linde, 1995; Zhu and Sarkis, 2006; Hassini et al., 2012). From a historical point of view, the construction industry has a long tradition of making irreversible tracks in nature (Gluch, 2005). It is not a surprise that the construction sector is intrinsically linked to the environment, and it found itself at the center of concerns about environmental impact (Ding, 2005; Gluch, 2005).

In today’s highly competitive environment, an effective supplier selection process is essential to the success of any organization. The main objective of supplier selection process is to reduce purchase risk, develop close and long-term relationships between buyers and suppliers, and maximize overall value to the purchaser (Li et al., 1997). Additionally, it is argued by some researchers that integrating sustainability and environmental management into business is an approach to achieve corporate competitive advantages (Porter and Van der Linde, 1995; Zhu and Sarkis, 2004; Menguc and Ozanne, 2005). In this context, supplier selection represents one of the most important functions to be performed by the purchasing department.

Previous research showed that the purchasing function of companies, as interface to the supply market, plays a superior role in the context of environmental management and sustainable development (Drumwright, 1994; Carter and Narasimhan, 1996; Preuss, 2001). Additionally, it is a necessary component to integrate environmental strategies into supply chain management (Walton et al., 1998). A policy of environmental purchasing may not be undertaken because of a desire to ‘save the world’, but because it reflects a way to gain competitive advantage; improving the financial performance of the firm (Porter and Van der Linde, 1995), and gaining market share (Rao and Holt, 2005). Companies are increasingly made accountable not only for their internal practices, but also for their suppliers’ behavior (Maignan et al., 2002; Seuring et al., 2008). As a result, companies have begun to integrate sustainable criteria into their purchasing policies and procedures.

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The supplier selection problem in a supply chain system is a group decision according to multiple criteria from which a number of criteria have been considered for supplier selection in previous and present frameworks (Chen et al., 2006). The purchasing manager of construction organization must know a suitable framework, then use the best strategy from the different types of methods to select the right supplier.

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The construction market seems to be willing to take its social responsibility to deal with challenges concerning global warming, depletion of raw materials, excessive energy use and other issues concerning the environment and sustainability (Dreschler, 2009). Customers, governments, communities and other parties are increasingly demanding long term lifecycle-oriented projects (Tsoulfas and Pappis, 2006). The consecutive value creation for customers provides them with competitive advantage (Seuring and Müller, 2008). This thesis reveals the real challenges that have to be faced within the supplier selection part of contractors in the procurement process to meet this market demand. In this context, the integration of environmental criteria into strategic supplier selection is the basis for environmental purchasing management.

The following main research question is formulated:

What changes are needed in construction companies in their traditional purchasing management policy to select suppliers on environmental criteria, to increase competitive advantage and meet changing market demand?

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C

This Master Thesis study is performed during a research internship at Heijmans in Rosmalen. This construction company is the second largest construction company in the Netherlands. The combination of the activities property development, (non)-residential building and infrastructure enables Heijmans to employ an integrated approach, which lead to synergy benefits and ultimately to constructions that better meet customer needs over a longer period of time. The company is primarily focused on the market in the Netherlands, but is also active in Belgium and Germany. Heijmans’ ambition is to become number one in terms of sustainability, quality and profitability by 2015 (Heijmans Annual Report, 2012). According to Noci (1997), this ambition can be referred to as a pro-active organizational strategy. As a large construction company with a market share of almost 40%, Heijmans has a major impact on sustainability and the environment because of its size and the nature of its activities. Within Heijmans, this research is limited to the Infrastructure (Connectivity) division. From 2011,the infrastructure market is servedby two sectors: Roads and CivilEngineering. Figure C.1 in Appendix C presents the organization chart of Heijmans. Figure C.2 in Appendix C includes an overview of the revenue distribution in 2011.

1.3.1 ASSIGNMENT AND OBJECTIVES

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1. Find today’s environmental management issues and their additional value to business performance and competitive advantage;

2. Find environmental criteria and their additional value to traditional purchasing management and supplier selection of construction companies;

3. Determine the current situation of construction companies environmental purchasing management and supplier selection criteria;

4. Find possibilities for construction companies and their suppliers to improve business performance with help of cooperative environmental (purchasing) management.

1.3.2 RESEARCH QUESTIONS

In order to provide an answer to the main research question (section 1.2) of this Master Thesis, three research questions are defined. These research questions will be used to find an answer to the main research question and meet the objectives. The first research question will suggest a proposed framework with a set of environmental criteria that can be used in the traditional supplier selection process in construction environments. In order to provide information about this theoretical framework in practice, the second research question will analyze and discuss the daily business practice of supplier selection process of construction companies. The third research question will discuss possible implications to construction companies’ current purchasing policy with input of key-suppliers.

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D

To answer the first research question, a literature review is performed. Literature on the triple-bottom-line concept, environmental management adoption in construction organizations, traditional and environmental purchasing and supplier selection criteria (in a construction environment), is synthesized into one theoretical framework. The systematic review architecture by Denyer et al. (2008) is used as presented in figure D.1 in Appendix D. This methodology can be described in the following steps: a preliminary search, a comprehensive search, selection, extraction, synthesis and at the end reporting the findings. To provide an answer to the second research question, an extensive case analysis is presented that presents the current situation of environmental supplier selection criteria in construction companies. Suppliers are needed to make environmental criteria practical applicable for a purchasing manager. Second, suppliers have to be able to meet these criteria. Based on a series of semi-structured interviews with six key-suppliers of Heijmans, perceptions and implications are discussed in order to provide an answer to the third research question and improve the theoretical model. The interview protocol is presented in Appendix E.

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Considering sustainable development in the Netherlands for solutions reducing the depletion of natural resources, one should look at the construction industry. A third of the domestic waste, a quarter of the total traffic, and half of the carbon footprint comes from this sector (Lichtenberg, 2009). This paper contributes to environmental purchasing research by providing empirical evidence for the changes that are needed in traditional purchasing management of construction organizations to select suppliers on environmental criteria for increase in competitive advantage and changing market demands. The proposed framework provides an instrument to select suppliers on environmental criteria and presents the additional value to traditional supplier selection criteria.

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The paper is organized as follows. Chapter 1 is used to introduce the theoretical background, business context, research focus, research questions and methodology, contributions to literature and the aim of this study. Chapter 2 presents a literature review on environmental and traditional supplier selection criteria to construct the theoretical framework. Chapter 3 presents empirical research with help of an extensive case analysis at the Infra business unit of Heijmans and input of key-suppliers. Chapter 4 analyses and discuses empirical data of the case. Finally, in Chapter 5 the overall conclusions and further research suggestions will be drawn of this Master Thesis. In order to complete this research Chapter 6 outlines the bibliography and Chapter 7 the appendices. Figure 1.0 presents an overview of the thesis outline.

Chapter 2 Theoretical framework

Chapter 3 Case analysis (Heijmans)

Chapter 5

Discussion and implications Chapter 4

Results

Chapter 6 + 7 Bibliography & Appendices

Figure 1.0: Thesis outline

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2. L

ITERATURE REVIEW

Based on literature and articles, this chapter reviews the concept of environmental purchasing management in a construction context. This chapter will introduce the basic theoretical concepts and models of this thesis work, after explaining the state-of-the-art in the fields of sustainability and environmental management, competitive advantage in relation to environmental management, traditional purchasing criteria and links between them from theory. This chapter also explicates environmental purchasing criteria in a proposed framework for supplier selection in the construction sector. A list of used concepts is presented in Appendix B. In the next chapter an extensive case analysis at the Infra business unit of Heijmans and input of six of their key-suppliers will be presented. Before the conclusions and further research suggestions will be presented, chapter 4 discusses the comparison of the theoretical framework with the case.

This shortened literature review consists of four sections to answer the first research question (section 1.3.2), in order to construct an environmental criteria framework for supplier selection in construction environments. Section 2.1 gives an indication about today’s sustainability and environmental management basics (in the construction sector). Section 2.2 is about competitive advantage in relation to organizational sustainability and environmental management. Section 2.3 presents traditional and environmental purchasing criteria for supplier selection. Finally, section 2.4 includes a proposed framework for inclusion of environmental criteria for supplier selection.

2.1 S

Within the last decade, the concepts of sustainability and the environment have become one of the most discussed issues for economic scientists as well as practitioners (Rao and Holt, 2005; Sharma and Henriques, 2005; Corbett and Klassen, 2006; Linton et al., 2007; Lu et al., 2007; Seuring and Müller, 2008). Communities, governments, businesses, international agencies, and non-government organizations are increasingly concerned with establishing a means to monitor performance and to assess progress toward sustainable development (Tsoulfas and Pappis, 2006). Sustainable development can been defined as: “meeting the needs of the presence without compromising the ability of future generations to meet their own needs” (WCDE, 1987). Major reasons for this deployment is the general social change and the enhanced sensitivity of the public for environmental and social issues (Beamon, 1999). Responsibility for sustainability cannot be given to a separate entity but it must be a part of every player in a sustainable supply chain, from the suppliers to the top management (Sharma and Henriques, 2005; Seuring and Müller, 2008). This section presents important sustainability and environmental management basics for organizations that want to adopt it.

2.1.1 TRIPLE BOTTOM LINE AND ORGANIZATIONAL SUSTAINABLE DEVELOPMENT

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environmental, social, and economic goals that organizations engage, in which not only positively affect the natural environment and society, but also result in long-term economic benefits and competitive advantage (Carter and Rogers, 2008; Hassini et al., 2012). Figure 2.1 presents a visual representation.

Figure 2.0: (left) Sustainability dimensions, the triple bottom line (based on Hassini et al., 2012) (right) The different planet sustainability themes (based on Elkington, 2004)

The three pillars of the famous TBL are the triple P’s: People, Planet, Profit. Within these three pillars People can be seen as the society, Planet as the natural environment, and Profit as the economic performance. A tool that can be used to express al the impacts during the life cycle of a project is the so called Life Cycle Assessment (LCA) model.

For the determination of planet sustainability, a total of six different subthemes will be introduced to get a better understanding of what planet sustainability consists. These include materials, energy, nature & environment, living environment, climate, water & soil. These themes will help categorizing the different aspects of “sustainability” within the construction sector. Although different initiatives use different themes to categorize the sustainability themes, this is one of the best categorization that can be distinguished (Elkington, 2004).

Environmental factors are fast growing as an essential issue for managers to take into consideration (Humphreys et al., 2003), and legal and public pressures on the attainment of good environmental practice are emerging. Additionally, a significant part of these pressures has been related at business which is normally described as a primary source of pollution, such as the construction business. Many organizations have attempted to respond by developing products or services which, for example, reduce pollution, decrease energy consumption, or use less packaging materials. Organizations must have environmental strategies that not have to be conceived and supported only by the top management, but deployed in every functional area of an organization to be meaningful (Walton et al., 1998). Subsequently, Walton et al. (1998) argue that a proactive organization will prosper and reap the biggest benefits from their environmental management only when it function as a complete system that includes not just executives and employees, but also customers, neighbors and especially suppliers.

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stakeholders, because companies do not want to risk being responsible for purposeful or accidental environmental damage (Hall, 2001; Preuss, 2005). Other important internal drivers are middle management and employees commitment (Bowen et al., 2002). Increasingly external pressures, such as government regulatory requirements, are also significant in this adoption (Porter and Van der Linde, 1995; Walton et al., 1998; Hall, 2001; Preuss, 2005). As a result this requires a shift towards simultaneously addressing environmental issues relating to finance, human, social, and environmental capital (Robinson et al, 2006). According to Ageron et al. (2012), other major reasons influencing sustainability or environmental management adoption include customer demand and competitor actions. This way of managing a company with a sustainability perspective is called Corporate Social Responsibility, (Myers, 2005), or corporate sustainability (Robinson et al, 2006). The company’s desire to become leader for sustainability or innovator for new environmental regulations can result in a motivation or positive driving force (Walton et al., 1998). Additionally, those companies that consider sustainability as an advantage for overcoming competitive barriers can benefit from their first competitor position (Porter and Van der Linde, 1995; Rao and Holt, 2005). Whatever are the major reasons influencing sustainability or environmental management adoption (internal or external), companies must be aware of the opportunities created by dealing with environmental issues (Bowen et al., 2002). These can results into major (non)-financial benefits which will be described in section 2.2.

2.1.2 SUSTAINABLE DEVELOPMENT IN THE CONSTRUCTION SECTOR

According to Pearce (2003), the contribution of the construction sector to sustainable development is the contribution by human (labor force), man-made (built), social (human well-being), and environmental capital to the capital stock and with technological change. However, the construction sector can be described as complex and fragmented and has, therefore, a tendency to resist changes leading towards sustainability (Myers, 2005). According to Myers (2005), clients and project managers are facing barriers to the implementation of sustainability in the form of lacking pro-active sustainability measures, inadequate implementation expertise, and conflicts in costs. As a result, progress towards sustainability is rather slow in the construction sector.

This research focuses on the Dutch construction industry and is characterized by many small firms and some large companies, by heterogeneity in the types of firms and by strong price competition in local markets (Bremer and Kok, 2000). This industry is heavily dependent on subcontractors and suppliers of building materials, because purchased materials and services account for about 80% of total costs in these firms (Bankvall et al., 2010). Therefore, an efficient framework for supplier selection (Khalfan, 2006), based on environmental criteria would be very welcome. The next section will argue the most important reasons for (construction) companies to integrate environmental practices into their (purchasing) strategies and operations.

2.1.3 SUSTAINABILITY WITHIN THE PROCUREMENT PROCESS

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Figure 2.1: The procurement process (adopted from Dreschler, 2009)

For each project that needs to be outsourced, the client needs to find a partner, otherwise his or her objectives and requirements will not be fulfilled. In principle this process consists of two sub-processes: selection, and the award of the contract. For all procedures, candidates (contractors, suppliers, consultancy) should first be checked on the minimum standards. Noncompliance to these standards will provide ground for exclusion. Besides checking on minimum standards, the competitive dialogue, the restricted procedure, and negotiated procedures make use of selection criteria (to prove economic and financial standing of the candidates) as well (Dreschler, 2009).

In today’s construction business it is often usual to select a contractor on the basis of the most economically advantageous tender, also known as MEAT. A more traditional way of tendering is to award on the basis of the lowest tender price (van Ree & van Meel, 2007). It is essential that there can be substantiated that the (sustainability) criteria contributes to the degree of which the final assessment will be reached, with great importance to keep selection transparency and objectivity (Dreschler, 2009; van Ree van Meel, 2007).

In general the client’s organization and structure are causing barriers and contradictions. On top of the solution for the client’s demand there is a ‘level of knowledge’ which concerns lifecycle thinking in general and guidelines and rules to deal with procurement laws and contract models.

Tender specific, a client has to formulate his demands and has to be able to select and award a capable contractor. Tender specific the contractor has to be able to offer a solution to client’s demand, and in order to do so, he has to find subcontractors to form a partnership. The purchasing function is in a critical position to influence an organization's response to concerns about the natural environment, also see figure 2.2 (van Ree van Meel, 2007, RWS 2002).

Figure 2.2: The procurement process and influence of purchasing on sustainable advantages (based on van Ree & van Meel, 2007; RWS, 2002)

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(van Ree & van Meel, 2007). Reason for this is partly because of the solution space and possibilities to integrate sustainable and innovative solutions. The further the solution is determined, the more difficult it becomes to integrate sustainability (criteria) within the design (van Ree & van Meel, 2007). When looking at the selection phase, the party will be selected who will fulfill the project of the client. As mentioned before, it is possible to select the contractor on the basis of the (modern) MEAT or the lowest tender price. Both options provide opportunities to steer on sustainability. In case of the lowest price, sustainability aspects usually are stated as a knock-out requirements. The sustainability will be translated into (minimum) requirements within the assignment. Practical examples of sustainable requirements are the prescription of diesel filters and sustainable materials. In case of the MEAT, requirements are more functional specified and could be assessed on the basis of contractors' performance. This modern method stimulates the market to improve the quality of their design (performance). Sustainability is one of the possible factors that can be expressed in the formulation of MEAT conditions. By weighting the sustainability factor, the relative importance of sustainability will be enlarged in relation to the other award criteria. A (non-practical) example is contractor’s selection of key-suppliers on sustainability ( environmentally-friendly) criteria(Dreschler, 2009; van Ree van Meel, 2007).

The shift from the traditional to the modern integrated contract in constructions industries is a large advantage because more freedom in the design is created. Technical prescriptions are reduced which means that more freedom will be created for the market to integrate new sustainable, environmentally-friendly innovative solutions. A second advantage of the modern integrated contract in the field of sustainability and the environment is that contractors become (more) responsible for the up following phases of projects. This means for example that the contractor will give more attention to the energy consumption or durability of materials (Dreschler, 2009; van Ree van Meel, 2007; RWS, 2002).

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Previous research found that excellence in protecting the environment created opportunities to achieve competitive advantage (Walton et al., 1998; Starik and Marcus, 2000). Starik and Marcus (2000) reviewed integrating environmental management with the day to day processes of organizations and concluded that managers can have a major impact on the ability of a company to establish and maintain competitive advantage though environmentally-friendly practices. This section presents several (non)-financial benefits that can function as a source for competitive advantage for companies that want to conduct environmental management practices. Furthermore, these sources will be used to link traditional to environmental purchasing.

2.2.1 SOURCES FOR COMPETITIVE ADVANTAGE

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Management Systems, such as the ISO 14001 standards. It can also lead to a reduction of labor costs. Additionally, protection and enhancement of the brand reputation of a company associated with the engagement in environmentally-friendly behavior can make a company a lot more attractive to suppliers and customers, shareholders and potential employees. Financial benefits can also be achieved through the development of new products that have less environmental impact and, as a result, the company can take advantage of the growing market for environmentally-friendly or sustainable products and services (Banerjee, 2002). Proactively shaping future regulation, for instance, companies that proactively address environmental concerns have the ability to influence government regulation when this regulation is modeled after a firms’ existing production and supply chain process, could leads to a difficult-to-replicate competitive advantage for the company and their suppliers (Carter and Rogers, 2008; Zailani et al., 2010). Maignan et al. (2002) and Buter et al. (2004) mentioned two negative effects that can be prevented with corporate sustainability and environmental management: it helps companies to prevent reputation damage because the society only judges the end-supplier, who is taking a total responsibility for the chain. Companies also can improve their risk management to avoid legal difficulties in the future. For these reasons it is important to pay attention to environmental (purchasing) management practices and corporate sustainability.

McWilliams and Siegel (2001) argued that, if companies pay attention to sustainability or environmental management adoption, profit will remain the same. The costs will rise, but the customers who are consciously engaged with sustainability are prepared to pay a higher price for the product. According to Banerjee (2002), the cost problem of ‘sustainability’ is caused by ‘normal products’, wherein environmental costs are considered as externalities caused by economic activities. Additionally, environmental costs are almost never paid by the manufacturer, which results in these costs are not included in the market transaction. Governments try to compensate this problem with help of pollution taxes. Based on the research of Menguc & Ozanne (2005), it can be concluded that a good “Natural Environmental Orientation”, is based on corporate sustainability, entrepreneurship and commitment to the environment. These three conditions are (1) rare, (2) valuable, and (3) difficult to imitate, since they are based on unique knowledge, skills and resources. A successful implementation of environmental management with help of these three conditions should lead to competitive advantage: gaining higher profits and market share in general. In order to understand environmental criteria for supplier selection, the next section will present traditional purchasing criteria for supplier selection at first. Second, environmental purchasing criteria for supplier selection as an addition to traditional purchasing will be discussed. Third, a theoretical framework will be presented.

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clear (Kruase et al., 2009), and require consideration of a number of attributes beyond those used in operational decisions (Carter and Narasimhan, 1996). This section will start with a review of traditional purchasing performance criteria. Next to some tensions and barriers, the additional value of environmental purchasing in relation to traditional purchasing is described. This section also explicates a set of environmental criteria in a proposed framework for supplier selection in a construction field.

2.3.1 TRADITIONAL PURCHASING CRITERIA

Purchasing is not a single activity in Supply Chain Management but a function encompasses series of activities. The traditional purchasing process exists of three main processes (Schmidt and Ulli, 2010). At its core there is the ‘make-or-buy’ decision. After the make-or buy decision has been made by a purchaser, decisions about the ‘market-product-positioning’ arise. Besides decisions of the purchasing controlling and strategic supplier management, the ‘combination of sourcing dimensions’ has finally to be determined. In the research the focus lies on the strategic supplier management and a detailed description of this traditional purchasing process is presented in Figure 2.3.

The (strategic) supplier selection process is a multi-objective decision, encompassing many tangible and intangible factors in a hierarchical manner. Traditionally, supplier selection in supply chain management was based on supplier ability to meet price, quality, delivery schedule, and service requirements (Kruase et al., 2009). Generally, these traditional competitive priorities for purchasing can be generalized into: (1) Cost, (2) Quality, (3) Delivery (or Time), (4) Flexibility, and (5) Innovation.

Figure 2.3: Traditional strategic purchasing process (adapted from Schmidt and Ulli, 2010)

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Table 2.0: Traditional business and economic s upplier selection attributes (adopted from Bai and Sarkis, 2010)

Strategic performance measures

Cost Flexibility

Low initial price Product volume changes

Compliance with cost analysis system Short set-up time

Cost reduction activities Conflict resolution

Compliance with sectoral price behavior Service capability

Quality Innovation

Conformance quality New launch of products

Consistent delivery New use of technologies

Quality philosophy Prompt response

Delivery (Time)

Delivery speed

Product development time Partnership formation time

2.3.2 ADDITIONAL VALUE FOR ENVIRONMENTAL PURCHASING

Buter et al. (2004) argue that there are always tensions included with the introduction of environmental purchasing in practice. However, this can be reduced by putting the obviousness of environmental purchasing on the company agenda centrally. This tension arises because pressure on prices, delivery times and quality can be high in practice, or there is little or no commitment to environmental purchasing. The purchaser will be assessed on price, delivery and quality, and thus not necessarily on environmental or sustainability aspects. For many purchasers the environmental management aspect is still a new topic and they are not familiar with taking environmental criteria systematically into their daily way of working.

Some of the major barriers from the supply side can include financial costs, top management commitment, organizational culture of suppliers’ firms, production capacity, human resources, supply chain configuration, return on investment (ROI), product price, location and size of suppliers (Ageron et al., 2012). It is important to identify organizational barriers to environmental purchasing, so companies can develop suitable strategies and action plans for reducing the effect of these barriers on successfully achieving environmental purchasing and supply management. Bowen et al. (2002) argued the difficulties that organizations are facing when they want to assess the economic gains coming from their environmental practices. According to Carter and Dresner (2001), this difficulty can be overcome when organizations develop green practices in the long-term.

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Table 2.1: Additional value of ‘environmental management ’ (EM) to traditional purchasing criteria (based on Buter et al., 2004; Maignan et al., 2004, Banerjee 2002 )

Quality and EM Environmental management quality programs such as superior waste management can be related to product quality because it can provide an decrease in production stopovers and failings resulting in less defective or more suitable products. As a result, better working conditions can arise with product quality because it can reduce the level of absenteeism or increase motivation and productivity of personnel. It also can connect organizational quality values that wants to be achieved, attract new customers, or reinforce the corporate identity that is linked to difficult-to-replicate skills, knowledge and ‘green’ product quality.

Costs and EM Aspects such as waste and energy reduction programs are related to a rapid payback period, and can deliver financial benefits almost immediately because both give a reduction in production, operation and labor costs. Those significant financial benefits resulting from improvements such as superior waste management; using less expensive and recycled raw materials, or using sources for pollution prevention, that reduces costs of environmental taxes. Costs that arises from the development of an environmental management system, management training, and meeting (governmental) requirements of eco-labels, are related to a longer payback period but can companies can take advantage of the growing market for sustainable products and services, prevention of (governmental) pollution taxes/fines or damage to their brand reputation, and it develops a long-term increase in customer loyalty and customer satisfaction. Also an increase in the context of risk management can arise to avoid legal and expensive difficulties in the future

Delivery and EM Delivery and reliability could conflict with sustainability and environmental management when sustainable or environmentally-friendly products are faced with a longer lead-time. However, shorter lead times can be achieved with the implementation of an environmental management system.

Flexibility and EM Environmental management can come into conflict with flexibility, because there are ‘special’ requirements for production and design, or volume, that decreases the (organizational) flexibility level. However, an organization can attract new customers because those customers get a special connection with the organization and their product(s). Those customers are not just buying a product, but also help themselves to reduce, for example, child labor. Companies can anticipate in an early stadium to future problems in the supply chain, such as environmental problems or increasing scarcity of resources (timber).

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A proposed framework with environmental criteria for supplier selection and the additional value of environmental (purchasing) management to traditional purchasing is presented in section 2.4. This provides insights in environmental supplier selection criteria for purchasing managers. According to literature, environmental (criteria) categories can be linked to traditional purchasing criteria so the additional value of environmental purchasing management became clear. It is a first step for a complete environmental supplier selection system for the construction sector. An overview is presented on in table 2.2

Table 2.2: Overview additional value environmental criteria to traditional criteria (based on Buter et al., 2004; Maignan et al., 2004, Banerjee 2002)

Environmental criteria categories

Related traditional criteria (categories)

Additional value of environmental management to traditional criteria

Quantitative:

Environmental cost (pollution effects and improvements)

Costs Rapid payback period, reduction in production, operation and labour costs, reduction of environmental taxes

Qualitative:

Management competencies

Costs _{Long-term increase in customer loyalty and}

customer satisfaction, increase in risk management capabilities

Green corporate image Quality Better working conditions, connecting organizational values, attract new customers, reinforce corporate identity in combination with difficult-to-replicate skills and knowledge Design for environment Costs, Flexibility,

Innovation

(See costs above), attract new customers,

anticipation on problems in supply chain in early stadium

Environmental Management System

Costs, Quality, Flexibility, Delivery

(See costs, quality, flexibility above), shorter lead

times Environmental

competencies

Innovation Opportunity for organizational innovation, select environmentally-friendly alternatives for innovation stimulus

A lack of knowledge about actual benefits and motivations can result in not giving attention to environmental efforts for enhancing organizational sustainability over the long term (Ageron et al., 2012). Essential is the recognition that environmental initiatives may start as operational initiatives to reduce emissions and waste. However, it will not be effective if these initiatives do not grow to a point where the vision and strategy the company incorporates environmental issues (Walton et. al, 1998). Zhu & Sarkis (2004) concluded in their research that quality is a major driver for 'green' purchasing. They even suggests that investments in quality is necessary for ‘early adoption' success in terms of sustainable and economic performance.

2.3.3 ENVIRONMENTAL METRICS AND SUPPLIER COLLABORATION

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are not realizing the competitive implications of environmentally-friendly supply chain practices; they merely experience penalty avoidance (Walton et. al, 1998). Environmental metrics or criteria can be categorized into multiple categories such as environmental performance and environmental practices adopted by organizations. Environmental practices may refer to policies and procedures, such as monitoring discharges and periodical audits, while environmental performance is in reference to resource consumption and pollution production (Gauthier, 2005). Given the complexity and quantity of environmental metrics or criteria, identifying which attributes to utilize and their relative influences on management decisions will be a great aid to (purchasing) managers in their decision-making (Gauthier, 2005). An overview of those environmental metrics is summarized in table 2.3.

Table 2.3: Environmental metrics in supplier selection decision (adopted from Bai and Sarkis, 2010)

Categories Factors Sub-factors

Environmental practices Pollution controls Remediation End-of-pipe controls

Pollution prevention Product adaptation Process adaptation

Environmental management system Establishment of environmental (EMS) commitment and policy

Identification of environmental aspects Planning of environmental objectives Assignment of environmental responsibility

Checking and evaluation of environmental activities

Environmental performance Resource consumption Consumption of energy Consumption of raw material Consumption of water

Pollution production Production of polluting agents Production of toxic products Production of waste

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rich collaborative atmosphere. For these reasons, organizations are compelled to develop environmental collaborations with their suppliers in order to receive better greening supply chains (Handfield et al., 1997; Walton et. al, 1998), in the form of developing environmentally conscious business practices (such as reduction, reuse, remanufacture, recycling, etc.. Srivastava (2007), set up environmental performance metrics, and identified green supply chain alternatives (Zhu and Sarkis, 2004).

2.3.4 IDENTIFICATION OF ENVIRONMENTAL CRITERIA

In the last few decades, several methodologies have been developed for selecting, evaluating, and monitoring potential suppliers of organizations (Ellram, 1987). However, none of those methodologies has discussed the relevance of environmental factors in the decision-making process in a construction environment. Additionally, an increasing realization of the importance of integrating environmental factors into assessing supplier’s performance, has led to an identification of some possible environmental indicators and criteria by researchers. Construction company BAM in the Netherlands did a first research in 2006 to important ‘sustainability criteria’ for performance measurement of construction companies in general. According to this research general environmental performance must be measured in waste, energy use, packaging, responsible materials, and pollution of air (CO2 footprint), soil and water. Environmental management system

(ISO 14001) are essential to use in construction organizations (BAM , 2006). Noci (1997) argued a preliminary framework that identifies measures for assessing environmental performance but little attention was paid to environmental cost data. Lamming and Hampson (1996) argued that companies have to provide temporary guidelines for evaluating suppliers according to different environmental management issues. They concluded that there was no coordinated approach for dealing with the environment. Walton et. al (1998) argued a top ten of environmental supplier selection criteria. However, some of those criteria are not relevant for the construction sector or are still reactive in nature. Buter et. Al (2004) and Zhu & Sarkis (2006) argued the control on environmental management systems with help of the use of the ISO 14001 standard and checklist of ‘banned products’. After a detailed review of the literature (Lamming and Hamspson, 1996; Noci, 1997; Walton et. al, 1998; BAM, 2006; Buter et. al, 2004; Zhu and Sarkis, 2006; Bai and Sarkis, 2010; Ageron et al., 2012), several environmental criteria were identified. These criteria are viewed as important to consider during the ‘green’ supplier selection process in an construction environment and are illustrated in the following section.

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criteria can play a major role in influencing supplier behavior. Additionally, this becomes especially a challenge when companies have a very large supply base (Walton et. al, 1998).

2.4 P

By integrating criteria identified from literature, an “environmental framework” was developed for the inclusion of environmental selection criteria into the supplier selection process in manufacturing companies (Humphreys, 2003). A systematic model of this environmental framework is presented in figure 2.3. From this figure, seven environmental criteria and five traditional criteria categories were identified. The environmental criteria categories are further classified into two groups. In the ‘quantitative environmental criteria’ are ‘environmental costs (pollutant effects)’ and ‘environmental costs (improvements)’ grouped together. The ‘qualitative environmental criteria’ include the other five environmental categories. Several sub-criteria were identified for each of these seven environmental criteria categories. Additionally, the environmental criteria categories are linked to the five traditional purchasing categories. This is based on the outcome of the literature research on the addition of environmental management to traditional purchasing criteria in table 2.2 en 2.3. Criteria under the heading ‘environmental costs (pollutant effects)’ can be described as costs due to treatment of pollutants such as costs for solid waste disposal. Additionally, criteria under the heading ‘environmental cost (improvement)’ are costs referred to improving suppliers environmental performance.

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Environmental categories

Figure 2.4: Proposed environmental criteria framework for the general supplier selection process including relations with traditional purchasing categories

Quantitative Environmental Criteria

Solid waste Air emission Energy usage Waste water disposal Chemical waste Environmental costs (pollution effects) Environmental costs (improvements)

Qualitative Environmental Criteria

Buying env. friendly materials Applying new env. friendly technologies Management training Waste recycling Redesign of product CEO support Information exchange Env. colla-boration (partners) Training partners Recycle Reuse Remanu-facture Disassem -bly Disposal Stakeholder relations Green market share Customer’s purchasing retention Env. Policies Env. Planning ISO 14001 certifica-tion Implement + operation Use of env. friendly materials Pollution reduction capability Clean technology availability Returns handling capability Management competencies ‘Green’ corporate image Design for environ-ment

Supplier A Supplier B Supplier N

Environmental Management System Environmental competencies

Supplier

selection

process

Costs Quality Flexibility Delivery

(Time)

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3. E

MPIRICAL RESEARCH

–

H

EIJMANS

C

ASE

This chapter describes the case study at construction company Heijmans on their environmental purchasing management and supplier selection system, and environmental purchasing management efforts on operational level. This chapter also describes insights in environmental management at supplier’s side. A list of used concepts is presented in Appendix B. In the next chapter results will be presented which includes a comparison of the theoretical framework with the Heijmans case.

Section 3.1 presents the context of the case study, research design and data collection. Section 3.2 presents the analysis of Heijmans’ operational environmental purchasing policy, according to (environmental) purchasing and sustainability managers. Daily business practices and implications in environmental purchasing practices will be analyzed. Second, several currently used environmental criteria and practices will be described so the operational environmental management part becomes clear. Section 3.3 includes the outcome of semi-structured interviews that were held under six different key-suppliers to find implications and possibilities in the relation to Heijmans’ on environmental purchasing and supplier selection criteria. Outcomes will be used to describe the level of environmental management integration within the supplier selection process of Heijmans. Figure 3.0 presents an overview of the empirical research structure.

Figure 3.0: Emperical research structure

3.1

C

An important motivation for the development of the earliest environmental criteria is the CO

2-Performance Ladder, a concept already developed by a major client of the construction sector, Prorail. This concept indicates requirements with an important role for environmental management (ProRail, 2010; SKAO, 2012). The CO₂-Performance Ladder can be used by a tender as a selection instrument. In that case, a (minimum) score or level on the CO₂-Performance Ladder is required.

3.1 Environmental purchasing practices and criteria on operational level

3.2 Environmental purchasing practices and criteria from supplier’s side

level “What is the perception of

purchasing managers about implications in operational environmental purchasing

management?”

“What is the perception of suppliers in relation to Heijmans on environmental

management practices and criteria?”

“Which environmental purchasing criteria and practices are currently used

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Construction companies such as Heijmans want to achieve a higher level on this ladder with help of sustainable, environmentally-friendly innovations, such as an effective environmental purchasing and supplier selection process.

The case company deals with several suppliers in a project. The purchasing department, sustainability department and innovation department are involved in the development of environmental criteria for supplier selection. Several purchasers, an environmental purchaser and a sustainability program manager are responsible for managing the daily supplier selection process and the development of the supplier selection system.

To provide an answer to the second and third research question (section 1.3.2), empirical data are collected with the use of semi-structured interviews and company documents. Given the limited research to environmental criteria for supplier selection in the construction sector this is considered to be an appropriate method to receive in-depth understanding of characteristics of Heijmans’ environmental purchasing system. The theoretical framework as developed in the Chapter 2 will be used to analyze environmental criteria in the supplier selection process of Heijmans. Additionally, a recent research on the current situation of used environmental purchasing criteria at Heijmans will be used as input (Schotman, 2013). According to Walton et al. (1998) it is important to remember that when conducting case-based research, “sampling involves not only decisions about which people to interview, but also about events, settings, and social processes”.

3.2

O

This section will provide an answer on the first research sub-question: “What is the perception of purchasing managers about the implications in operational environmental purchasing management?”. Several (environmental) purchasing managers of Heijmans, that were active at different stages of environmental management and supplier selection practices have been interviewed to describe contemporary operational issues and possible implications. In addition, currently used environmental criteria are described to provide insights in what the company already does to environmental purchasing. This section will start with a summary of the interview that was held with the program manager sustainability. Next, interviews with three purchasing managers are summarized. After this step an overview of currently used environmental criteria is presented. 3.2.1 IMPLICATIONS ON ENVIRONMENTAL PURCHASING

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product group versus the level of purchasers’ influence. With this approach purchasers can determine strategic products groups and related suppliers can be compared and selected on environmental criteria. According to manager, all employees and divisions have to believe in environmental management, including strategic cooperation, bearing risk together, and cooperative planning with suppliers. Next, environmental management should be measured on three variables at suppliers’ side: (1) the product (or service), (2) business itself, (3) chain responsibility. In the future it is essential for purchasers to decide for which products groups and key-suppliers a large construction company such as Heijmans wants to set up environmental criteria because not all product groups and suppliers are even important. Table 3.1 presents an overview of the environmental purchasing management key issues, according to the program manager sustainability.

Table 3.0: Summary environmental purchasing management key issues, according to program manager sustainability Heijmans

Three different purchasing managers also have been interviewed for new insight in implications in operational environmental purchasing management. According to the purchasing manager of Roads, ideas for improvements of the sustainability department are not communicated effectively. Improvements in the supplier selection system could be realized if those ideas will be communicated and presented better, and made more smartly to understand how these improvements can fit within Heijmans’ environmental purchasing policy and supplier selection process. According to this purchasing manager, certificates are essential in a purchasing policy because those certificates can differentiate the company by a tender. If Heijmans can differentiate itself though an environmental supplier selection system then will that be a big trigger. Another important issue is that all big contractors have the same score on the CO2-Performance Ladder at this moment, and everybody is

searching for new sustainable, environmentally-friendly solutions. A good CO2 footprint registration

system for the whole chain can be achieved when measuring CO2 footprints per product (group),

instead of per supplier’ business and operations, because this will represents fair, transparent and (more) measurable results. As said before, Heijmans wants to work with fixed proactive key-suppliers instead of selecting suppliers on the lowest price. However, this cooperation process is far below the wished situation at this moment. The solution for such a cooperation is to find innovative and pro-active (key)-suppliers. According to this purchasing manager, such an environmentally-friendly supplier selection process would be a large innovation which can deliver lots of (non)-financial benefits for Heijmans such as cost reduction and competitive advantage.

According to the purchasing manager of Civil, environmental criteria for supplier selection should be measurable and implementable for purchasing managers in a contract with a (key)-supplier. Additionally, there are a lot of different parties involved in the setup of an environmental supplier

1. No CEO support for (all) environmental (purchasing) management targets;

2. Selecting suppliers on lowest (product) price instead of environmental criteria;

3. No consequences for suppliers who do not sign Code of Conduct;

4. No control on strategic partnerships with fixed key-suppliers per strategic product group;

5. No requirements for ISO 14001 certification of suppliers;

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selection system, and finding the solution for connecting those parties will be difficult and costs lots of time and energy. This purchasing manager also argued that certifications for suppliers only (such as ISO 14001 and CO2 footprint) is not enough because those certifications function more as an

instrument to achieve environmental management goals. Construction companies have to create value with an ISO 14001 certificate, though, for example, cooperation in waste management with key-suppliers. This manager also adds that Heijmans should select suppliers on more expensive, but environmentally-friendly criteria. This can be seen as a contradiction, because Heijmans wants to be a proactive, sustainable, and environmentally-friendly company. According to this purchasing manager the implementation of an environmental supplier selection system is a step too far and not realizable at this moment. This purchasing manager also adds that a condition for environmental purchasing management and supplier selection is that the customer has to ask for it, because if else, purchasers will not pay attention to it. Through the economic crisis, selecting suppliers on the lowest price is very important for purchasers at this moment, even as purchasers’ focus on the short term. In addition, benefits for environmental purchasing management are not clear for purchasing managers. For suppliers environmental goals also have to be realizable but a first start is to make a distinction in those suppliers who are proactive in environmental management, and those who have a reactive pose. With help of Heijmans’ integral approach of doing business, environmental management can, together with innovation and purchasing, play an very important role. Next, environmentally-friendly suppliers can be an important source for the design of a new, integral, environmentally-friendly product.

According to the environmental purchasing manager, customers are asking for sustainable, environmentally-friendly innovations and solutions more and more. Heijmans can be seen as a leading company on ‘environmental management’, but the company does not have to overreact their proactive vision and ambition. Improvements in environmental management are always possible because environmental management in the whole chain is still vague. Pilot projects could help to present successes of innovations in practice. Additionally, the current competitive economic ‘price war’ plays an important role in the development of environmental solutions and innovations. This purchasing managers adds that the control on the Code of Conduct can be seen as an important starting point of Heijmans’ environmental management policy. Another example is the CO2 footprint

in relation to the CO2 Performance Ladder: this instrument became important for the business and

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Table 3.1: Summary environmental purchasing management key issues, according to purchasing managers

1. Environmental purchasing and supplier selection only when customer ask for it. Purchasers only focused on the short term. No attention for total cost price when buying environmental products; 2. Achieving certifications only such as ISO 14001 and CO2 footprint is not enough. These certifications

must be seen as instruments for achieving competitive advantage;

3. No control on Code of Conduct and ISO 14001 for (key)-suppliers;

4. No (developed) fixed group of proactive key-suppliers but selecting key-suppliers on lowest price; 5. Environmental, proactive suppliers should be seen as important source for design of new, integral, environmental products and solutions; 6. Provide insights in the environmental management at key-suppliers and discuss what is achievable with each supplier because, if else, implementation and/or improvements will not work;

7. No CO2 footprint measurement per product

(group) for more transparent and measurable results but per supplier’ business and operations;

8. Ideas for environmental improvements not communicated and presented in an effective way. Benefits for environmental purchasing management are not clear. Environmental management in the chain is still vague;

9. (New) environmental criteria have to be measurable and implementable in contract with (key)-supplier;

10. Too less commitment for Heijmans’ integral approach, wherein environmental management can, together with innovation and purchasing, play an important role;

11. Right timing and CEO support for improvements or implementation of (new) environmental criteria. Pilot projects could present successes of environmental management in practice;

12. Measurability and transparency should be seen as important variables in environmental management. 3.2.2 DAILY BUSINESS PRACTICE OF ENVIRONMENTAL CRITERIA AND INITIATIVES

This section will provide an answer to the second sub research question: “Which environmental purchasing practices and criteria are currently in use at Heijmans?”. In the previous section, implications and key issues for Heijmans’ operational environmental purchasing management have been described. In this section, a distinction is made between environmental criteria that are in use for supplier selection at Heijmans, and environmental initiatives in cooperation with a single supplier or on project level only.

Environmental criteria in use for supplier selection

There are environmental criteria which are in use as supplier selection criteria (Schotman, 2013). (1) According to several purchasing managers and the report, the Code of Conduct for guiding

supplier’s behavior is an important criteria for supplier selection. This code argues that suppliers have to handle responsible and environmentally-friendly with nature, safety and employees when they are doing business with Heijmans.

(2) Purchasing managers also using the import of sustainable (construction) timber as criterion for supplier selection. Purchasers are selecting suppliers who delivering 100% sustainable (construction) timber . This process is realized for almost 100%.

(3) The CO2 footprint certificate is also an essential criteria in supplier selection and is based on

the amount of CO2 gas emission. Within this certificate, the amount of CO2 can be related to