Sustainability Analysis - Case Study Example

1264062 Amazin Consultancy Project 0 Introduction The need for sustainability of the environment applies to construction of buildings from which businesses operate as well as how businesses carry out their daily operations. Sustainability arises not only from the need to reduce the use of scarce and non-renewable resources but also to reduce the negative impact of an organization’s operations on the environment. The issue of sustainability also applies to Amazin because they operate a warehouse and distribution business. The warehouse uses energy and there are sustainability guidelines for buildings. These guidelines are critical to reducing carbon footprints. A warehouse that requires little or no electric lighting during daylight hours reduces significantly the amount of energy it consumes. In relation to distribution, the items that Amazin supplies to customers are packaged and transported and both processes can have a negative impact on the environment. In order to facilitate a reduction in carbon footprint recycled material is recommended for packaging goods. Transport is also responsible for high levels of carbon footprints and so proper planning and improvements in distribution logistics are critical to the efficient and effective management for the transport and delivery of goods to Amazin’s customers. Planning transport logistics efficiently will help reduce transportation costs and carbon footprints significantly. In fact a number of companies including Tesco are finding ways to improve distribution logistics and thereby reduce carbon footprint. Gazeleys, is a business development officer who also offers consultancy services to companies in the area of sustainable warehousing and distribution. In fact, Gazeley’s provides solutions for warehousing and distribution of goods. This report details the potential costs and benefits that will accrue to Amazin if the company makes use of a sustainable distribution facility to carry out its operations. c 2.0 Baseline Facility There is a minimum standard for comparing items. The baseline facility is a basic facility which meets the requirements for environmental sustainability. This facility can be used as a starting point for Amazin and later it could be used to facilitate further improvements in the company’s sustainability efforts. 2.1 Elemental Capital Cost Estimate An elemental capital cost estimate has been prepared to facilitate the calculation of the cost of the building. The information is shown in Table 1 below. Elemental Capital Cost Estimate Area Description of Material Cost per unit (£) Amount Total Cost (£)           Roof Plastisol colour coated profiled metal cladding (3050mm) 77 16393500 983610000             Plastisol Powder-coated aluminium contrasting fascias, verges, soffits and gutters 77 500,000 30000000           Walls Plastisol colour coated profiled metal cladding (3050) 77   1475415000             Kingspan KS1000MR HPS200 colour coated composite horizontal cladding panels 87 24590250 1721317500             Polyester Powder-coated aluminium contrasting flashing trims 25 500,000 12500000             Main facing brickwork FC quality laid stretcher bond in gauged mortar with slight recessed pointing 40 500,000 20000000             String course to positions shown 16 500,000 8000000           Doors Polyester Powder-coated aluminium frames & double glazed units with anti-sun tinted glass 2100 1000 2100000             Plastisol colour-coated Insulated sectional doors 4200 100 420000             Painted Insulated Steel Door sets to Personnel/Fire exit doors 6300 100 630000           Glazing Polyester Powder coated aluminium double glazed units with anti-sun tinted glass 5300 1000 5300000             Total Cost     4,259,292,500 Table 1 The information in Table 1 indicates that the facility will cost approximately £4.3bn to develop. The figures for the various elements were derived from information from suppliers and include the cost of installation of roof, panels, doors and roof lights. The materials are of the highest quality and some of them have been purchased from companies that have received recognition for their efforts towards sustainability. These companies supply goods that meet Carbon Trust standards including Kingspan (Kingspan 2015). The information provided in the estimate will be used to prepare the cash flow for the company. 2.2 Net Cash Flow Analysis of Baseline Facility A net cash flow statement shows the outflow and inflow of funds and the net balance over a period of years. The net cash flow for the Baseline facility is provided in Table 2. Net Cash Flow of Baseline Facility Year Cash Flow Discount rate 6% 0 -4300000000 1 200000000 2 206000000 3 212180000 4 218545400 5 225101762 6 231854815 7 238810459 8 245974773 9 253354016 10 260954637 11 268783276 12 276846774 13 285152177 14 293706743 15 302517945 16 311593483 17 320941288 18 330569526 19 340486612 20 350701211 21 361222247 22 372058914 23 383220682 24 394717302 25 406558821 IRR 0 Table 2 The net cash flow for the Baseline facility was prepared by taking the total capital coat which was obtained in the elemental capital cost schedule (see table) as the outflow of funds. The income from the facility was then determined by trial and error to arrive at lease income per annum of £200,000,000 per annum adjusted by the general inflation rate of 3% per annum over the life of the lease, 25 years. A 6% IRR was used as the estimate. The NPV is zero (0) when IRR is 6%. 2.3 Project Operating Profit Statement for Gazeley The project operating profit statement for Gazeley indicates that the consultancy practice would be profitable in the first year of operations. Project Operating Profit Statement for Gazeley Year 1 Revenue: Lease income 200,000,000 Expenses: Energy costs 290 Maintenance 4,300,000 Depreciation of Plant 86,000,000 Depreciation of Machinery 20,000 Carbon Tax 14,400 90,334,690 Profit before tax 109,665,310 Corporation tax 19,518,531 Profit after tax 90,146,779 Corporaton Tax Calculation Profit before tax 109,665,310 Add Depreciation 86,020,000 195,685,310 Less capital Allowance 500000 195,185,310 Tax amount (10%) 19518531 Table 3 – Income without FITs Savings The return on capital employed ROCE for the year was 186%. ROCE is calculated as follows ROCE = Net Profit/Capital employed = 90,146,779/4,300,500,000 = 2% The ROCE is very low and so action is necessary to improve the returns to make the change worthwhile. A more sustainable facility would facilitate higher earnings 3.0 Sustainable Facility Energy conservation is one of the main ways in which corporate social responsibility is demonstrated (Dahlsrud 2008). Energy use impacts the organization significantly and businesses are encouraged to find ways to utilize renewable resources while reducing their use of non-renewable sources. However, this is not the only way in which organizations exercise social responsibility. In fact, there are a wide range of issues to which social responsibility can be applied (Engle 2006; Welford and Frost 2006). The sustainable facility will generate savings as well as earnings from the supply of energy to the grid. The effect is that Gazeley will be a net earner since the business will sell more electricity to the grid than it will purchase. The effect of this is a reduction in carbon emissions from Amazin’s operations and savings in energy costs. The net effect is savings in energy of over $6,800 and income from supply to the grid of by way of FITs $7,500 and $300,000 by way of solar energy. Project Operating Profit Statement for Gazeley Year 1 Revenue: Lease income 200,000,000 Revenue from sale of Energy to the Grid 300,000 Feed-in Tariffs (FITs) on Generation 5,000 FITs on Export 2,500 307,500 Gross Profit 200,307,500 Expenses: Energy costs 290 Maintenance 4,300,000 Depreciation of Plant 86,000,000 Depreciation of Machinery 20,000 Carbon Tax 14,400 90,334,690 Profit before tax 109,972,810 Corporation tax 19,549,281 Profit after tax 90,423,529 Corporation Tax Calculation Profit before tax 109,972,810 Add Depreciation 86,020,000 195,992,810 Less capital Allowance 500000 195,492,810 tax amount (10%) 19549281 Electricity Gas Total carbon tax Emission (tonnes CO2) 960 240 1200 tax per ton 12 Tax 14400 KWh Electricity generated 50,000 FIT on Generation 0.1 5000 FITs Export 0.05 2500 Table 4 - Gazeley’s ROCE would still be 2%. However, the company could make further use of the roof of the building by placing additional solar panels. Currently the solar panels cover only 500 square metres. That could change by up to 9 fold. Increasing the panels by only ten times would increase income from energy sold to the grid to £3,000,000. 4.0 Analysis of Findings and Conclusion Gazeley has the ability to develop a facility that would provide benefits to Amazin. The company’s energy cost would be reduced to a mere $290 per annum while Gazeley would also be earning income from supplying electricity to the grid. This suggests that sustainable practices may be costly in the initial stages but the benefits are significant. Amazin could achieve tremendous savings by moving from its current facility. The cost saved in terms of distribution logistics and energy will allow the company to increase its returns to shareholders and hopefully increase its customer base to include customers who only support businesses that employ sustainable business practices. References Commercial Cladding Services (2015). Profile 6 Plastisol Coated Sheets. http://www.commercialcladdingservices.co.uk/trade-counter/metal-profiled-sheets/profile-6-plastisol-coated-sheets.html Dahlsrud, A. (2008). How Corporate Social Responsibility is Defined: An Analysis of 37 Definitions. Corporate Social Responsibility and Environmental Management, www.interscience.wiley.com DOI: 10.1002/csr.132 Engle RL. 2006. Corporate social responsibility in host countries: a perspective from American managers. Corporate Social Responsibility and Environmental Management, www.interscience.wiley.com DOI: 10.1002/csr.114. Kingspan (2015). Energy & Carbon. http://www.kingspan.com/our-responsibilities/environment/energy-and-carbon.aspx Welford R, Frost S. 2006. Corporate social responsibility in Asian supply chains. Corporate Social Responsibility and Environmental Management 13(3), p. 166 – 176. Read More