Extending Environmental Cost Accounting to the Supply Chain
Recent changes from the International Organization for Standardization to extend material flow cost accounting (MFCA) to include supply chain management is a welcome step and a further development since IFAC published International Guidance Document: Environmental Management Accounting. Supplier efficiency is an important concern, both nationally and in global trade operations that have supply chain inefficiencies with a cumulative effect on the corporate purchaser. Collaboration with suppliers in an environmental cost accounting setting can help reduce waste and the cost associated with purchasing raw materials, improving productivity, and increasing savings from waste reduction caused by poor practices. As accountants in business seek to extend their influence, the impact of developments in this area is well worth consideration.
International MFCA Standards
Two voluntary international standards in environmental management accounting have been developed to address MFCA and the need to reduce resource waste and the monetary losses associated with such waste. The first standard, ISO 14051 published in 2011, established a general accounting framework for MFCA. The framework was developed to evaluate material flows, including water and energy, within the context of improving corporate economic and environmental efficiency. While ISO 14051 acknowledges the potential to extend MFCA to include management of both up and downstream supply chain collaborations, specific guidance for practical implementation in broader supply chain settings is only provided in the more recent standard, ISO 14052. Both standards are practical and can apply to companies of all shapes and sizes, locations, and levels of accounting system sophistication. Unlike many other waste management techniques (e.g., carbon footprints) the MFCA process can start as a relatively simple exercise, which will appeal to practitioners seeking to save money and help the environment at the same time.
MFCA was developed in Germany and refined by the Japanese in the 1990s. In “Material Flow Cost Accounting: Significance and Practical Approach,” Katsuhiko Kokubu and Hiroshi Tachikawa explain how the Japanese Ministry of Economy, Trade, and Industry conducted a project introducing MFCA into 50 supply chains between 2008 and 2011. The project illustrated how significant material waste in supplier operations is often transferred to purchasers. By quantifying the flows and stocks of materials in processes or production lines in both physical and monetary units, the two ISO standards highlight numerous benefits from extending environmental cost accounting to supply chain settings.
MFCA Application to Suppliers: Gains and Challenges
Evidence shows that when applied in supply chains, MFCA has enormous potential to bring about shared economic and environmental wins for both suppliers and focal companies. Such benefits are made possible via identification of avoidable material losses, waste reduction opportunities, and a fair distribution of financial benefits between the parties. MFCA also provides a setting that facilitates information sharing, which can help establish a dialogue for improved efficiency and waste reduction. Over time, this should build trust between different supply chain participants. As the level of trust continues to build, opportunities to engage with more advanced environmental accounting tools, like life cycle assessment and product life cycle costing, should be made possible. As consumer sentiment shifts toward products that are both environmentally friendly and economically viable, this will provide a competitive advantage.
Once established, MFCA can provide a foundation upon which to build strategy and management control systems for addressing material waste within the supply chain that incorporates both inside-out (management) and outside-in (stakeholder) perspectives. Finally, evidence suggests the benefits from MFCA are easy to obtain. Compared to other environmental accounting methods, MFCA is easy to understand and simple to apply with ease of extension through existing cost accounting systems—limiting the need for new and potentially costly software.
Notwithstanding the myriad benefits, MFCA is not without its challenges, especially when extended beyond the corporate boundary to take in supply chains incorporating multiple parties. As with any supply chain collaboration, the need to identify trusted, collaboration-minded suppliers to collaborate to secure potential material flow efficiencies is likely to prove challenging. The desire for confidentiality, on matters such as production schedules and costs, can lead to a lack of transparency, which may also be difficult to overcome, especially in more secretive cultures and within global settings. Similar concerns apply to suppliers from emerging economies that may lack data systems and expertise needed to engage with the MFCA initiatives proposed by more advanced companies. Finally, care is needed to ensure companies’ relative strength and political bargaining power in procurement decisions do not lead to unfair distribution of gains from supply chain waste reduction and discourage cooperation. To realize its full potential and overcome these challenges, MFCA must be driven by a desire for simultaneous economic and environmental improvement, as well as mutual benefit for all participants.
At a time when the fruits of globalization are being challenged by protectionism in some countries, such as the USA and UK, the benefits of using ISO 14052 as a foundation for collaborating with overseas suppliers are at a premium. MFCA for supply chains can help inform companies about the potential for taking direct action to stamp out material inefficiencies, whether in a domestic or global setting. It can also help companies build their reputation by demonstrating their contribution toward the UN Sustainable Development Goals, an initiative to which the role of accountancy and accountants is vital.