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Green Supply Chain Costing

Joint Cost Management in the
Polyester Linings Supply Chain*

Stefan A. Seuring
Carl-von-Ossietzky Universität Oldenburg, Germany

Due to required environmental criteria, green products cannot be purchased on ‘nor-

mal’ markets. Therefore, it is necessary to manage the whole supply chain from raw
materials to customer delivery and disposal. While these needs drive up costs, no
concept exists that allows cost management within the supply chain. Traditional cost
● Supply chain
accounting and cost management techniques look only at the internal costs of a management
company. ● Cost
Therefore, these systems have to be integrated with the concept of transaction management
costs, yielding a supply chain costing framework on three levels: direct costs, activity- ● Textile industry
based costs and transaction costs. After describing the supply chain for apparel, this ● Activity-based
costing
paper outlines a framework for supply chain costing. In the second part, a supply
● Transaction
chain for polyester linings will be used to discuss the environmental improvements costs
and their cost influences, including the measures taken in supply chain and cost ● Supply chain
management to optimise the cost situation and allow the market introduction of the costing
environmentally improved products. ● Polyester

Dr Stefan Seuring studied business administration, chemistry and

environmental management in Germany and the UK. From 1995 to 1998, he
u Chair of Production and the
Environment, Institute for Business
worked at the Department of Environmental Technology at the University of Administration, Faculty of Business,
Paderborn, Germany. Since 1998 he has been employed as lecturer, and since Economics and Law, Carl-von-
2001 as senior lecturer, at the Chair of Production and the Environment at the
Ossietzky Universität Oldenburg,
University of Oldenburg, Germany. His research focuses on supply chain and
cost management. 26111 Oldenburg, Germany
! stefan.seuring@uni-oldenburg.de

< www.uni-oldenburg.de/produktion

* This paper presents work carried out in the research project EcoMTex: Ecological Mass Textiles
(Project FKZ 07 OWI 14/0) carried out at the University of Oldenburg, other research institutions and
companies (see www.uni-oldenburg.de/ecomtex). I am thankful to the German Ministry of Research
(BMBF) for the funding and to the GSF for administrative support.
I would also like to express my thanks to an anonymous reviewer for his comments on an earlier
version of this paper.

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stefan a. seuring

O
ver the past few years, green products have been introduced into
various fields of consumption. While customers would prefer green products if their
prices were equal to those of ‘normal’ ones, they are not willing to pay considerably
more for green products. This has led to a situation where green products have regu-
larly remained within small niches mostly holding a market share below 5%. The
reasons for this are multiple, so various approaches are used to foster the further
development of these market niches towards mass markets. One of the most important
approaches centres on marketing activities that aim to find new ways to market the
products.1 A second approach attempts to improve cost management along the supply
chain; two issues are evident:
t The greening of products often drives up costs, as additional requirements have to
be met at each stage of the supply chain.
t No cost management is used in product design and manufacture.

Therefore, it is necessary to look at how the supply chain and, in particular, the costs
therein are managed.2
First, the paper examines the supply chain for polyester linings. The need to improve
the product ecologically beyond measures implemented at single production facilities
is emphasised. Even though the disposal of used textiles encounters enormous prob-
lems, only the supply chain from raw materials production to distribution will be covered
subsequently. This allows the design and production of the products to be addressed.
The description of the supply chain then leads to a short look at the issues covered in
supply chain management. The introduction of companies involved in the polyester
linings supply chain shows the measures used to lower the costs along the supply chain.
For this analysis, the framework of supply chain costing is used, where three cost
levels—single costs, activity-based costs and transaction costs—are analysed. Only the
three cost levels combined explain how the activities of one company influence costs of
other companies along the supply chain and how these costs can be managed jointly.

Traditional supply chain management

in the textile and fashion industry
In traditional market co-ordinated chains, the fashion industry does not usually take
into account the single production stages of its suppliers. Apparel is bought on spot
markets, where suppliers might change from part to part and even more from season
to season. Usually, activities are only carried out between two companies, while their
relationships can be characterised as arm’s length. Material and information flows are
co-ordinated in stages, as is typical for mass markets, where commodity-type products
are traded (Horstmann 1998: 5). Within the textile and fashion industry, there is intense
global competition at all stages of the supply chain (Magretta 1998: 104). Furthermore,
power concentrates in the companies selling and distributing the products to the
customers, who demand customised products (Pine et al. 1993) within shortening life-
cycles (Fisher et al. 1994: 83). Hence, within a time-span of six months or less the market
is mixed up completely.

1 The marketing approaches taken are outside the scope of this paper (see e.g. Meyer and Hohmann
2000).
2 The discussion within this paper centres on supply chain issues. It should be mentioned that many
companies of the textile and clothing industry as well as their suppliers, which include diverse indus-
trial branches, have been and continue to be very active in the implementation of environmentally
improved production processes and products (see e.g. Myers and Stolton 1999).

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green supply chain costing: joint cost management in the polyester linings supply chain

The requirements outlined demand the introduction of supply chain management

ideas to the textile and fashion supply chain and explain why these industries are fre-
quently part of the existing supply chain literature.
Within this increasingly competitive environment, single companies are not able to
survive on their own, but only as part of a supply or value chain, a concept that has gained
importance since its introduction by Porter (1998). Together with recent developments
in logistics and information technology, it forms the basis for the concept of supply chain
management (SCM). A definition of supply chain management is given by Handfield
and Nichols (1999: 2):
The supply chain encompasses all activities associated with the flow and transformation
of goods from raw materials stage (extraction) through to the end user, as well as the
associated information flows. Material and information flow both up and down the
supply chain. Supply chain management (SCM) is the integration of these activities
through improved supply chain relationships, to achieve a sustainable competitive
advantage.
Therefore, all managerial and organisational aspects that evolve within the supply chain
are included, such as searching for and partnering with suppliers or customers.

Greening the polyester linings supply chain

Among the set of conditions outlined, the number of green products sold is limited.
‘Green’ fibres, both cotton and polyester, are not available on spot markets due to the
limited amount available worldwide (e.g. only about 0.05% of all cotton is produced
under organic standards; the proportion of environmentally friendly polyesters is even
smaller). Therefore, if a fashion company plans to offer products made of green fibres,
it has to search for partners along each stage of the supply chain. After finding the
partners, the company has to train them to meet the additional requirements. Several
apparel companies have set up special programmes to work with their suppliers (see
Hummel 1997; Myers and Stolton 1999).
These are only a few of the issues that highlight why green products are often more
expensive, but these examples provide sufficient evidence that a smaller amount of
output is not the only reason for the higher prices. To address these multiple reasons,
a cost management along the supply chain is needed. Such a concept has to take into
account all costs along the supply chain.
Below, a supply chain for polyester linings is used to explain the environmental
improvements, their cost influences and the measures taken in supply chain and cost
management to optimise the cost situation and allow the market introduction of the
environmentally improved product. While both fabrics and lining can be made of
polyester, the companies involved in the chain first turned to the lining. Polyester lining
is used in a wide range of fashion products and accounts for about 70% of all lining
used for apparel.
One important measure introduced was to shorten the supply chain, so that only three
companies were involved, as displayed in Figure 1.3 This reduces the number of inter-
faces involved to just two. Brief explanations for the activities carried out at each step of
the textile supply chain, and the environmental problems associated with them, are
provided susequently, as are the improvements made (Schmidt 1999; Myers and Stolton
1999).

3 Due to confidentiality reasons, the single companies are not named. Furthermore, all information
on costs has been modified for this reason.

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stefan a. seuring

Material flows
Fabric
Filament Clothing
weaving,
and yarn production
dyeing and
production and selling
finishing

Information flows

Figure 1 the polyester linings supply chain

Filament and yarn production

Polyester is a human-made fibre, produced from limited natural stocks of crude oil. The
processing of the crude oil applies to all product groups, so it will not be taken into
account further.
The raw material is polymerised and cleaned, producing polyester chips. For the
production of polyester chips heavy metal catalysts (mainly antimony trioxide) are used,
which cause problems in treating reaction residues and waste-water. An improved
catalyst, which contains non-toxic substances and yields a higher output rate, is available,
but rarely used so far. The smaller production batches and additional cleaning of the
production facilities during the polymerisation of eco-polyester result in higher prices,
which are pushed up the chain. Hence, the current costs exceed the process level target
costs set by ‘conventional’ polyester lining, which almost prohibit their further use
(Thier-Grebe and Rabe 2000). In the next step, filaments (one-dimensional) are
produced by melting the polyester chips and forcing them through spinneret holes. The
extruded filaments are collected into thread forms. Next, they are stretched and drawn
to yield polyester yarns.

Fabric production, dyeing and finishing

Weaving or knitting the yarn (one-dimensional) leads to the creation of fabrics (two-
dimensional). During these manufacturing steps, a number of often environmentally
harmful additives are used to allow for easier production. Furthermore, organic solvents
and/or polluted waste-water as well as dust and noise are side-effects of yarn and textile
production.
Textile finishing includes processes that improve the wearing properties of the fabric
or modify its look or feel. The environmental problems of these steps are similar to those
in yarn and fabric production. More expensive colours and additives are used to avoid
these problems during production, dyeing and finishing of the yarn and the fabric.
Additional storage and handling processes are required to separate the polyester fibres,
yarn or fabric from the ‘regular’ material.

Clothing production, selling and distribution

The next step is the manufacture of the apparel itself. The finished fabrics and lining
are combined with other materials, such as zippers or buttons. While this step creates
only a limited environmental burden, the work is regularly carried out in second or third
world countries where the workers, mainly women, work under enormous pressure and
humiliating labour conditions.

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green supply chain costing: joint cost management in the polyester linings supply chain

Selling and distribution are of great importance as they are carried out by the compa-
nies in the chain that decide which fashion is produced in which style and quality. Hence,
this step has a major influence on all previous steps since product variety and quality
are defined at this level. Apart from transport, only limited environmental problems
occur. Selling and distribution can be carried out by a single company or within a tier
supplier system of varying depth.

As the direct costs of eco-polyester production are higher during polymerisation and
filament production, measures have to be found to reduce the total costs along the supply
chain. This will improve products still offered at the same price.

Supply chain costing

Various SCM techniques and measures have been developed to help companies to
optimise their supply chain activities. As costs are considered an important factor, links
to cost management techniques have recently gained importance (see e.g. LaLonde and
Pohlen 1996; Cooper and Slagmulder 1999; Seuring and Schneidewind 2000).
Traditional cost accounting is not prepared to actively manage costs, which has led to
the development of cost management techniques that are used to support specific
decisions and the overall management of organisations (Hilton et al. 2000: 6). Still,
most cost management techniques look at the internal cost of companies, especially
direct and indirect costs. Activity-based costing (Kaplan and Cooper 1997: 79) provides
an alternative approach to the allocation of indirect costs among products. Strategic cost
management (Shank and Govindarajan 1993) has emphasised the importance of costs
within the value chain, but the discussion of cost drivers stays on a general level.
Therefore, a concept is needed to allow for the classification of costs within the supply
chain, one that combines the flows of material and information and the partnerships
within the supply chain. So far, no concepts have been developed to deal with this issue.
Such a supply chain costing has to take into account both production and transaction
costs.4 Building on the traditional separation of direct costs and indirect or activity-based
costs, this leads to a differentiation of three cost levels—direct costs, activity-based costs
and transaction costs—as Figure 2 shows.
The three terms are defined as follows:
t Direct costs are caused by the production of each single entity of a product and
include such costs as materials, labour and machine costs. Mainly, these costs are
controlled by prices for material and labour.
t Activity-based costs are caused by activities that cannot be directly related to
products, but are caused by administrative activities performed in order to deliver
products to customers. These costs arise from the organisational framework inside
the company.
t Transaction costs encompass all activities dealing with information and communi-
cation with suppliers and customers. Therefore, these costs arise from interactions
with other companies in the supply chain.

4 This terminology is taken from the concept of transaction costs, which plays an important part within
new institutional economics (Williamson 1988). Without referring to this concept in detail, the term
‘transaction costs’ within the concept of supply chain costing is applied in a simplistic way that
disregards the variables and explanations given by Williamson’s theoretical concept.

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stefan a. seuring

Company A Company B
Activity-based costs Activity-based costs

Direct costs Direct costs

Production
unit

Transaction costs
Supply chain

Figure 2 cost levels in supply chain costing

An analysis of the cost changes on the single steps of the supply chain is presented
below.

Cost driver analysis and cost management in the supply chain

Some details of the production processes at the single steps of the supply chain have
been given already. These are now supplemented by explanations of why costs are higher
at the single production stages and which drivers for the additional cost can be found.
To analyse all three cost levels, the production costs at the single stages of the supply
chain as well as the interfaces between the single companies have to be taken into
account. Therefore, the analysis is carried out in two steps: first, by looking at the produc-
tion of the polyester and the interface to the weaver, dyer and finisher; and second by
assessing cost during weaving, dyeing and finishing and the related costs of dealing with
the clothing producer. The second interface will be explained in greater detail.
The production processes during clothing production, selling and distribution are
not influenced by the use of eco-polyester. Still, the introduction of environmentally
improved polyester to the market is limited by its use. So far, less than 1% of the world
polyester production is produced with the new catalyst, which leads to another important
issue that can only be analysed by taking all stages of the supply chain into account. The
supplier that runs the production facilities for polyester produces about 100,000 tonnes
per year, while the company selling the final products uses about 4 million metres of
polyester linings per year, which is equal to about 400 tonnes. The capacity of the fabric
producer lies in between these two limits. Hence, the capacity of only about one week’s
production at the polyester polymerisation facility supplies the polyester needed all year
long at the clothing company. The problems addressed pinpoint why a joint supply chain
costing between the three companies was implemented as explained below.

Interface 1: polyester and yarn production to fabric weaving, dyeing and finishing
Polyester can be produced either in batch or in continuous production lines. Continuous
flow production dominates the world market; it is cheaper because of the use of highly
specialised machinery, which can only be used for this single kind of production. As
very limited quantities of eco-polyester are needed so far, these are produced in batch

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green supply chain costing: joint cost management in the polyester linings supply chain

facilities, where the production conditions can be altered almost from batch to batch.
The change in the production line between the conventional and the ecologically
improved catalyst creates additional direct costs, as the machinery has to be cleaned to
avoid spillages of antimony at the start of a new production run that is made up of various
batches. This switch between production modes increases costs. Furthermore, the eco-
polyester has to be stored in separate tanks. Hence, the major cost driver found is the
batch size for a single production run, which is a typical measure for cost allocation in
activity-based costing (Kaplan and Cooper 1997: 89). Still, the need for running the
batches to produce eco-polyester depends on the orders placed by the customers and the
amount of such polyester stored. If the orders placed can be controlled, the transaction
costs of dealing with customers might be reduced as well as the activity-based and direct
costs generated on-site. As a result, the company that runs the polymerisation has to
co-operate with the weaver to optimise the order quantities to allow the production of
cost-minimal batches. However, the eco-polyester yarn remains slightly more expensive
than conventional yarn.

Interface 2: fabric weaving, dyeing, finishing to

clothing production, selling and distribution
The filament production and the finishing processes mainly stay the same. The major
cost increases are derived from the dyeing of the fabrics, as the catalyst has some
influence on the chemical process that occurs during the dyeing. The eco-polyester
linings pick up the colour faster, but, to yield an even dyeing across all of the fabric, the
process takes more time. The temperature control of the whole process has to be
adjusted to assure high-quality coloured fabrics. Therefore, direct costs of the machinery
used rise.
An important cost driver found was the number of colours ordered by the clothing
company. For each colour, a set-up process is necessary, in which colour metrics are
defined, so that the colour is mixed correctly. Each colour introduced to the production
causes a cost of about 4 350 for the preparatory activities carried out. Before a project
was implemented between the companies that aimed to reduce the number of colours
used, the clothing company ordered about 300 different colours from just one producer
of polyester linings, besides further linings from other suppliers. These costs mainly
drive the production costs up during the dyeing, while they have only a limited influence
on the costs of the clothing production. This is limited to storage costs of the different
colours and the danger of having obsolete quantities in stock at the end of the season.
Compared with the rising costs at dyeing these costs are rather marginal. But the costs
of the company carrying out the dyeing would be reduced if their customer agreed to
co-operate. Hence, the shared aim of being willing to introduce eco-polyester linings led
to an initiative that helped to reduce costs for the supplier.
Across all purchasing departments of the clothing company, a joint project was set
up to define the minimum number of colours possible. This led to a basic set of about
50 colours in three categories, which were equivalent to an ABC classification.
In category A, only black was listed as it accounts for about half of the polyester linings
ordered in each year. About 20 further colours were classified as B, as they were ordered
in higher quantities for several seasons. Various grey and blue fabrics belong to this
category. The remaining colours ordered were dependent on the seasonal variations in
colours and style; they were placed in category C. The project can be seen as an invest-
ment in transaction costs by the clothing producer that limits the activity-based costs
occurring during the dyeing process. The project took about six months and about
4 50,000 was spent to complete it (Table 1).

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stefan a. seuring

before number of after number of

colours was reduced colours was reduced

Number of colours 300 50

Costs per colour (4) 350 350
Total costs for colours (4) 105,000 17,500
Cost savings for dyer (4) 87,500
Project cost clothing (4) 50,000
Cost of contracting (4) 2,500
Cost savings of joint project (3) 35,000

Table 1 example of costs increases and savings

This ABC classification and the total amount of about 4 million metres ordered per
year formed the basis for a new contract between the two companies: namely, the weaver,
dyer and finisher and the clothing producer.
Some important issues in the contract are:
t All polyester linings in the eco-quality are ordered by the clothing producer from
one supplier only.
t For A and B colours, the supplier guarantees a delivery time of two days. This was
made possible by reviewing and forecasting the amounts needed each season (a six-
month period), which allows the supplier to produce the polyester linings in advance
and hold them in stock. Applying a ‘push’ approach in production scheduling and
knowing that the clothing company will buy the linings, these agreed amounts form
the basis of smoothing the production capacity used.
t The C colours are produced after an order is placed and stay at the typical delivery
time of about two weeks. This is comparable to the usual ‘pull’ production in the
industry. As a result, the target price of conventional polyester linings was almost
met for the eco-polyester linings.
Table 2 provides an overview of the cost savings at the different cost levels. The figures
in Table 1 are only representative due to the confidentiality requirements of the compa-
nies, but provide evidence of the effects of joint cost optimisation across partners in a

Table 2 cost savings at the three cost levels of supply chain costing

cost effects at
cost level cost effect at step of the supply chain

Direct costs Reduced number of colours Reduced price for eco-polyester

needed; reduced number of
production batches with higher
single quantities

Activity-based costs Higher usage of capacity; lower Lower stocks; fewer deliveries;
stocks; reduced set-ups for colours; shortened delivery times; reduced
lower number of batches run risk of stock obsolescence

Transaction costs No search costs for new customer; No search costs for new supplier;
reduced contracting costs reduced contracting costs

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green supply chain costing: joint cost management in the polyester linings supply chain

supply chain. However, this addresses only part of the costs; for example, the costs of
dealing with a certain number of suppliers or the risks of being dependent on just one
supplier are not included. Further investigations are necessary to incorporate these
costs.

Conclusion
SCM strives for a new method of co-operation for joint benefit along the supply chain.
The definition of SCM addresses this by taking into account both the management of
material and information flows and the management of the partnerships along the
supply chain. These definitions question traditional cost management techniques that
focus on only one company. Hence, the framework of supply chain costing introduces
a third cost level— namely, transaction costs—which allows the assessment of cost
drivers that can only be influenced within the supply chain.
The example of a new eco-polyester is used to explain how costs can be influenced
across a supply chain. The analysis of both the cost drivers at the production facilities
for polyester polymerisation and the cost of co-operation with suppliers and customers
provides the chance to look at cost savings beyond the influence of a single company.
The co-operation between the company that weaves, dyes and finishes the linings made
from the eco-polyester and the clothing producer that uses the eco-polyester linings in
its fashion products shows that measures at one company (i.e. the reduction of lining
colour ordered) can lead to reduced production (direct and activity-based) costs for the
supplier. These joint measures provided the basis to be able to introduce an ecologically
optimised product to the market.

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