Integrating Environmental Factors into Life Cycle Costing - Essay Example

Integrating Environmental Factors into Life Cycle Costing Life cycle costing is a relatively new perspective that argues that organizations should consider a product’s costs over its entire lifetime when deciding whether to introduce a new product (Atkinson, 2001). Therefore life cycle costing is primarily a costing tool but one that has its important implications for costing after the product has been introduced. Product life cycle is a term used for the description of the stages that a product goes through in its lifetime. The term itself is used to interpret differences from the decision maker to decision maker as is evident from the literature. One in marketing would define the product life cycle in terms of four stages, namely, introduction, growth, maturity and decline (Emblemsvåg, 2003). Someone in charge of the operations in terms of the manufacture of the product on the other hand would view the product life cycle in operational terms namely: the product conception, design, product and process development, production and logistics. There is a consumer perspective as well-the purchase operation, support, maintenance and disposal.   Keeping these basic factors aside, one could define product life cycle in very basic terms- the various stages that a product, or parts of the product would undergo regardless of which decision-makers are involved. It may therefore involve all the perspectives that have been put above except the marketing perspective given the fact that the product life cycle is on the individual level of each product unit, whereas the marketing perspective is on the type level of the product.  By the same token therefore if one were to compare the product life cycle on identifies in operational terms one would find that the product life cycle consists of the processes and activities whereas the product life cycle consists of processes and activities whereas the market life cycles do not.   One of the most important components of the product life cycle is the component of product life cycle costing. The aim of the tabulation is so ensure that the company is able to work toward the optimization of the mechanized, preservation and maneuvering functions of the product (this would include things such as the equipment and the logistics) over a period that defines the product life cycle that is ultimately based on the establishment of the significant cost items covered over the period of the life cycle. This in turn helps in the facilitation of a more measured evaluation of the numerous alternatives that would be present in the context of a product design alternative. The idea in this case would therefore be to aim at the evaluation of links present within cost of process at the stages of the product development and consumption. This would also help one compare the varying stages aiming at the facilitation of the choice of best alternative.   The process of product life cycle costing itself is inclusive of the stages of:   Identification of items that are to be monitored Identification of the cost structure Definition of links to estimate costs Establishing of a method for formulating life cycle costs     The cost items that are to be included in the implementation of the process would be inclusive of that the company would incur with respect to the manufacture of its product through to the disposal of the product at the fag end of its life cycle. The objects need therefore to be prearranged so that one is allowed the liberty of carrying out identification steps in probable relations between the varieties of items keeping in mind the establishment of minimal life cycle costs. The point therefore would remain that costing needs to be structured in a manner that ensures that the company is able to derive maximum advantage at mammal costs. The basic aim of the estimation of these cost links is to express cost items as a function of one or more independent variables. The final stage of the calculation process is determination of a method for formulating life cycle costs.   There are three major drivers behind the costs of a product life cycle from its initiation until its termination: business costs, user costs and social costs (Prasad, 1999). It has been stated that the aim of the life cycle concept is the maximization of the value of the product while ensuring cost effectiveness in manufacturing, user and social costs. Costs of manufacturing are inclusive of the ones related to various corporate activities-such as the ones incurred during phases of preparation, design, expansion, manufacturing, assembly, allocation and repair and servicing of products. These are all costs incurred from the moment when a demand for delivery arises until dispatching the product to the customer. User costs are those related to activities carried out by the user. They cover the period from product delivery to its disposal where the ownership of the product ends. These costs may also include recycling and disposal at the expense of the user. Social costs are those which burden the society when the product is being used and, in particular, those related to its safe recycling or disposal.   The pressure for implementation of principles of sustainable development in corporate decision-making processes is increasing continuously. Other aspects concerning product life cycle management are also subject to this pressure (Westkempfer, 2000). Life cycle cost management appears to be a useful approach to a comprehensive assessment of economic, environmental and social impacts of the life cycle of a product. It is necessary to realize the importance of costs throughout the full life cycle of a product in order to adopt measures to optimize the product value in relation to the financial resources used. Life cycle control, in essence has its basis in ensuring that costs of a given product cycle are managed so that the company is afforded maximum advantage. The measures of LCC, especially the ones that have their basis in the quantification of the environmental impacts in the context of money spent would therefore be viewed as useful idea in l inking environmental life cycle approaches and integrating these within the issues of product life cycle cost management. The idea would therefore be to have one set goal and follow it completely so that a single welfare goal could be highlighted vis-à-vis the high uncertainty that characterizes the evaluation of multiple environmental effects. An example in this case would be the impact of climatic changing emissions through climate change and further effect mechanisms are highly uncertain empirically, while their long time horizon would automatically lead to unresolved problems in costs evaluations especially with respect to cost accounting factors. Some of the suggested methods in literature to deal with the problem of integration of environment and welfare considerations within the life cycle costing include the development of well-organized environmental management systems, to aid the inclusion of hidden and unaccounted environmental costs. These would also consist of the attempt to ensure that companies begin to realize and to recognize the initiatives such as proper materials and waste management, efficient process & product design, energy efficiency, and recycling can be both profitable and environmentally preferable. One of the fundamental questions that need answering in this context is with respect to the usage of instruments of economic analysis more effectively so as to extend their scope to include the environmental aspects of activities (Woodward, 1997). It has been noted that an effective approach to the integrated economic-environmental analysis of a product’s life cycle requires the adoption of the product-system concept, wherein the product is considered integral with its life cycle and within the environmental, social and technological context in which this life cycle develops/ the implications for an economic analysis of products would that would also take environmental performance into account are evident in forms such as the analysis of costs, like those of environmental impacts would have to be extended to cover the entire life cycle from conception and design to retirement and disposal and the fact that such an analysis would also then require the problematic evaluation of the environmental costs incurred by all the actors affected by the life cycle, including the society as a whole. The full integrating of environmental aspects into cost analysis would essentially require an overcoming of the distinction between the different actors involved in a product’s life cycle (including the producer, consumer, society), which helps the creation of an ambiguity in how the environmental costs are perceived; and the introduction of a system of eco-costs, understood as a set of costs deterring damage to the environment, and of direct and indirect costs if the environmental impacts caused by a product over its entire life cycle (Barringer and Weber, 1996). Some of the aspects that one would have to make note of in the context of the integration of environmental issues to life cycle cost accounting would include facts such as economic flows are understood as internal costs (i.e. attributable to a precise economic factor and therefore quantifiable on monetary flows of cost or revenue). Externality flows are understood as external costs, quantifying the monetary aspects of impacts on environment and society are not direct ascribable to economic actors (Guidice, Rosa and Risitano, 2006). Each phase of the life cycle traversed by the product would involve one or more actors. In particular the first two phases of design and development and production and distribution involve the producer; use involves both producer and the user; retirement involves an actor to be defined (end-of-life actor) who may be the producer and/ or the user. Each actor interacts with the two systems (economic and natural) through the cost outflows internal and external to the economic system. The field of application where LCCA is concerned is automatically limited to the economic system; therefore to take account of external costs they must be internalized within this system and translated into monetary flows. The idea in essence would therefore need to be that the LCCA be perceived as a clear evolution from the first limited vision of the economic life of a product whereon the costs of the product’s life cycle is the sum of the economic resources expended on it from conception and manufacture until the end of its useful life (Woodward, 1997). LCCA itself is the systematic analytical process for the evaluation of various designs or alternative courses of actions with the objective of choosing the best to employ scare resources (Kumaran et. Al., 2001). The idea here would be to provide a framework for finding the total costs of design/development production, sue and disposal of the product with an intention of reducing total cost (Kumaran et. Al., 2001). The first step in the successful management of this process would be correct cost effective management decisions on processes such as management of the costs of the effluent control, treatment, and disposal. There are effective environmental management systems that are available which could be used. There is also the option of ensuring that the costs of eco-taxes and rehabilitation due to new project and product development are paid attention to. Finally integration of the cost savings of recycling and reuse is an effective measure of achievement of these task goals. The variables that are to be considered in this context would signify that relationships between the total cost of the product and all eight eco-costs are found and the significance of each category of the eco-cost has been understood. It is also important here that similar relationships are available with suitable alternatives so that comparison can be made and that probable alternates are suitably combined to provide less eco-cost and more eco-friendly product. What one proposes at this juncture is the implementation of the lifecycle design in the manufacture and operations, distribution and supply and finally at the disposal levels. Lifecycle designs go further than traditional concurrent engineering by incorporating disposal and recycling issues at the early stages of product development. All of these issues related to a product’s useful life are considered at the very outset of the process and so are those involving the product once its useful life is over (Stark, 2005). Lifecycle design would therefore be inclusive of an evaluation of environmental protection. Working conditions, resource optimization, company policies, lifecycle costs, product properties and ease of manufacture. The goals of lifecycle design include ease of disassembly, ease of assembly, fast and safe decomposition, lowest cost to find/recover and lowest cost to recycle. Lifecycle assessment would thus involve the calculation and evaluation of the environmentally relevant inputs such as energy and minerals and outputs such as energy savings along with the potential environmental impacts such as emissions and solid waste from the lifecycle of the product, material or service. It therefore has its intrinsic aim as the increase of the efficiency of the use of resources and the reduction of waste and liabilities. One of the better known methods of incorporating the goals of environment issue integration within the process of manufacture and distribution is the green supply chain management model adopted by many multinational companies in a bid to revolutions their supply chains giving them a competitive edge. It has emerged mostly as a key approach that aids enterprises seeking to make their businesses environmentally friendly (Emmet and Sood, 2010). The idea essentially implies the insertion of the environmental criteria within the decision-making context of the traditional process of supply chain management. GSCM has become a key strategic issue for organizational of all sizes and types rather than just a talking point for lobbyists and hobbyist do-gooders, given the fact that the notion of CSR is now one of the few ideas that now find complete and total integration within the concept of the GSCM. It also needs to be understood that green supply chain management is important in the case of most enterprises that are looking to work towards the achievement of being environmentally sustainable (Gunther, 2005). Green Supply chain refer to the buyer companies requiring a certain level of environmental responsibility in core business practice of their suppliers and vendors. GSCM concepts are useful in the management of environmental impacts where their occur, ideally before they occur (Basu and Wright, 2008). These are also inclusive of the government, regulatory bodies, non-profit and also the consumers. The principles of GSCM are similar to lifecycle of product (Khiewnavawongsa and Schmidt, 2008) It needs to be understood in this context that coming up with specifications and discounting long term environmental effects could never be a possibility in a well founded manner, given the fact that discounting in itself would easily be at variance with well accepted intergenerational ethical principles (Huppes, et. Al., 2004). It also has to be noted here that fundamental dissimilarities in treatment of time in modeling techniques divide methods two groups: the ones that are based on time specification ns and discounting, as with the quasi-dynamic and dynamic modeling as with budget LCC and LCCA and those based on steady state modeling or more general comparative static equilibrium modeling as is evident in the case of LCCA-LCA. References: Atkinson, A. A., (2001). Product Life Cycle Costing. A1 Books. p97 Emblemsvåg, J. (2003). Life-cycle costing: using activity-based costing and Monte Carlo methods. Wiley Books. Pp12-21   Prasad, B., (1999). ‘A Model for Optimizing Performance based on Reliability, Life Cycle Cost and other Measurements;. Production Planning & Control. 10(3). Pp286-300. Westkempfer, E., (2000). ‘Economic and Ecological Aspects in Product Life Cycle Evaluation. Keynote paper, CIRP General Assembly, Sydney, Proc Instn Mech Engrs. 215(Part B). pp599-612.   Woodward, D. G., (1997). ‘Life Cycle Costing – Theory, Information Acquisition and Application’. International Journal of Project Management. 15(6). pp.335- 344. Giudice, F., Rosa, G. L., and Risitano, A., (2006). Product design for the environment: a life cycle approach. CRC Press. p138 Barringer, H. P., and Weber, D. P., (1996).“Life Cycle Cost Tutorial. Fifth International Conference on Process Plant. Reliability, Gulf Publishing Company, Houston, TX. Emmet, S. and Sood, V., (2010). Green Supply Chains: An Action Manifesto. Wiley Books, pp3-5  Gunther, M. (2006, August 7). The Green Machine. Fortune Magazine. Basu, R. and Wright, N., (2008). Total supply chain management. Elsevier Publishing. pp253-255  Khiewnavawongs, S., and Schmidt, E., K., (2008). Green Power to Supply Chains. Retrieved April 5, 2010, Huppes, et. Al., (2004). Life cycle costing and the environment. Report on project commissioned by Ministry of VROm-DGM Stark, J., (2005). Product lifecycle management: 21st century paradigm for product realization. Springer Books. Pp 68-70   Read More