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JOSCM - Journal of Operations and Supply Chain Management – Vol. 10, n. 1 - Jan/Jun 2017

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In this issue of Journal of Operations and Supply Chain Management
(JOSCM), we bring to you the outcomes of our special issue on Advances in
Supply Chain and Logistics Management for a more Sustainable Society. This
special issue is edited by Ernesto DR Santibanez Gonzalez (Universidad de
Talca, Chile), and Charbel José Chiappetta Jabbour (University of Stirling,
UK). In the introduction of the special issue, the editors describe the
importance of the theme and the topics covered. In addition to the papers of
the special issue, JOSCM also presents two papers on logistics and purchasing
from our continuous flow.

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JOSCM - Journal of Operations and Supply Chain Management – Vol. 10, n. 1 - Jan/Jun 2017

  1. 1. 1 JOSCM | Journal of Operations and Supply Chain Management | FGV EAESP SPECIAL ISSUE Invited article DOI: http:///dx.doi/10.12660/joscmv10n1p01-02 ADVANCES IN SUPPLY CHAIN AND LOGISTICS MANAGEMENT FOR A MORE SUSTAINABLE SO- CIETY: AN INTRODUCTION Ernesto DR Santibanez Gonzalez santibanez.ernesto@gmail.com Professor at Universidad de Talca, Facultad de Ingeniería – Talca, Chile Charbel J. C. Jabbour c.j.chiappettajabbour@stir.ac.uk Professor at University of Stirling, Stirling Management School – Stirling – Scotland, UK ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 01-02
  2. 2. ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 01-02 2 AUTHORS | Ernesto DR Santibanez Gonzalez | Charbel J. C. Jabbour As part of the concern for achieving a more sustain- able society, to effectively adopt the triple bottom line (TBL) approach has become one of the major chal- lenges that organizations have been facing. Increas- ing customer’s awareness and stronger regulations have been pressing organizations to balance econom- ics objectives, with social and environmental (TBL) concerns in order to effectively contribute to a more equitable and carbon neutral society. Researchers and practitioners are looking for solutions that can sup- port decision makers in the complex task of address- ing sustainable issues. In the recent past, an increas- ing number of papers had focused in the sustainability domain, proposing assessment tools, analytical mod- els and solution tools to support decision makers. A real integration of the three TBL’s dimensions is a necessity in the contemporary society, however there is an evident lack of research on how products, pro- cess and business models need to be re-shaped in this challenging sustainability setting, as well as how de- scriptive models and quantitative approaches have to be re-build or enhanced to tackle the aforementioned challenges. Supply chain and logistics management are areas that have an inevitable huge potential to contribute with cutting-edge solutions in order to tackle the myriad of complex problems that organiza- tions have been facing when pursuing sustainability and low-carbon strategies. Analytical models, empirical studies, case-based stud- ies, and solution approaches that can effectively man- age the balances, and synergies associated with the integration of economics, environment and social perspectives into traditional decision making pro- cesses are the focus of this special issue. The aim of this special issue was to publish cutting- edge research capable of dealing with key topics in supply chain and logistics management for sustain- ability, by proposing tools so that managers and deci- sion-makers will be able to build up a more equitable, sustainable, and carbon zero society. The special is- sue offers a unique opportunity to be in contact with recent developments in sustainable operations. The manuscripts that are part of the Special Issue are: • Locating operations in high labor cost countries – Eevidence from Spain, by Angel Diaz and Elcio Mendoça-Tachizawa, which provides empirical evidence of the location of manufacturing and services in the context of a European country (Spain), exploring the drivers, social implications and organizational theories that can explain it. Based on four Spanish companies, this paper analyzes possible operational responses that can incentive job creation and bringing back jobs lost to offshoring. • Comparing Madrid and Salvador GHG emission inventories: Implications for future researches, by José Celio Silveira Andrade, Andrea Dameno, Javier Pérez, Juan Manuel de Andrés, and Julio Lumbreras. The research aimed at comparing the Greenhouse Gas (GHG) emission inventories of Madrid and Salvador, with implications for mul- tiple stakeholders. • Scanning insights on sustainability and supply chain management in Brazil, by Minelle E. Silva, Morgane M. C. Fritz, and Breno Nunes, aims at analysing how the publications in Brazil are con- sidering the relationship between sustainability and supply chain management. • Sustainable operations management and bench- marking in brewing: A factor weighting approach, by Dan P. Bumblauskas, sheds light on sustain- able brewery performance and establish com- mon metrics for sustainability in the beer sup- ply chain. Ten criteria are proposed to assess environmental and sustainable practices in four brewery companies. Criteria include donations to environmental/social causes and community involvement, transparency, employee sustain- ability culture/benefits to employees for ‘green’ behaviour, greenhouse gas (GHG) emissions, water conservation and reuse, energy consump- tion, energy intensity, and waste diversion rates, among others.
  3. 3. 3 JOSCM | Journal of Operations and Supply Chain Management | FGV EAESP SPECIAL ISSUE Submitted 20.07.2016. Approved 07.03.2017. Evaluated by double blind review process. Scientific Editors: Ernesto Santibanez Gonzalez and Charbel Jabbour DOI: http:///dx.doi/10.12660/joscmv10n1p03-16 LOCATING OPERATIONS IN HIGH LABOR COST COUNTRIES – EVIDENCE FROM SPAIN ABSTRACT The location of operations in high labor cost countries is increasingly discussed in the media, in part for recent declarations and actions from the president of USA, Donald Trump. While this particular instance can be labeled as populist or protec- tionist, the factors underlying the debate are extremely important: advances in sys- tematic increases in productivity, low population growth, and the transfer of jobs to countries with lower labor costs are creating unemployment and underemploy- ment in developed countries that could eventually result in protectionism and re- strictions to free trade. This phenomenon has enormous social and economic impli- cations, and has attracted considerable interest from researchers. In particular, this study provides empirical evidence of the location of manufacturing and services in the context of a European country (Spain), exploring the drivers, social implications and organizational theories that can explain it. KEYWORDS | Outsourcing, location decision, reshoring, offshoring, inshoring. Angel Diaz angel.diaz@ie.edu Professor at IE Business School – Madrid, Spain Elcio Mendonça Tachizawa elcio.mendonca@uc3m.es Professor at Universidad Carlos III de Madrid – Madrid, Spain ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 03-16
  4. 4. ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 03-16 4 AUTHORS | Angel Diaz | Elcio Mendonça Tachizawa INTRODUCTION In this study, we provide empirical evidence drawn from multiple industries in Spain on the factors that affect the decision of locating operations in high labor cost countries (HLCC, defined in this study as coun- tries belonging to the OECD - Organisation for Eco- nomic Co-operation and Development). Moreover, we present some enablers of the decision of locating operations in HLCC, i.e. factors that allow that such location to have an impact on firm performance. The literature on industrial location has tradition- ally focused on reducing production costs, especially those related to labor. However, recent localizations in HLCC’s contradict such paradigm. For example, labor costs in the auto sector in Spain are around 25 Euros per hour, 5 times higher than Romania and almost 8 times higher than China (Expansión 2013). Nevertheless, the Almussafes industrial park of Ford, in Spain, has become a role model for other factories of Ford, soon to become its largest factory in Europe and a global innovation hub of the firm (El País, 2015). How can we explain that? The economic recession, an increased emphasis on sustainability, and higher customer expectations for flexibility and cost performance drove firms to reconsider their location decisions. Recently, a Bos- ton Consulting Group study concluded that over one third of large manufacturers are considering relocat- ing their manufacturing activities in HLCC (Sirkin et al., 2011). High oil prices, increased transportation costs and the perception of global supply chain risk have contributed to move production to HLCC (Tate, 2014). The trend encompasses not only big firms, or cost-focused ones; it also is being perceived by small firms and technological-focused ones (Gray et al., 2013). Firms have moved activities to low-wage countries based on easily measured costs, and have returned to their home countries after experiencing the risks associated e.g. delivery delays, communica- tion problems, intellectual property issues, etc (Gray et al, 2013). In a nutshell, the key premise behind bringing operations to HLCC’s is that closeness to product design, reduced order cycles and lower costs of carrying inventory in the pipeline should offset higher absolute production costs (Shih, 2014). The location of operations in HLCC’s has been as- suming increasing importance also for national gov- ernments. For instance, the new Trump administra- tion in US is focusing on mechanisms to stimulate firms to locate their operations in the US rather than low-cost countries. France has developed spe- cific software (Colbert 2.0 -Direction Générale des Enterprises, 2015), that allows companies to assess whether they are better off producing in France. However, while the literature on locations decisions in specific countries or regions is large and diverse (Ketokivi et al. 2017), empirical evidence is less common in the academic literature. This may occur because firms are reluctant to make their mistakes public, and the fact that location decisions do not constitute an item that has to be registered in of- ficial data bases (Martinez-Mora & Merino, 2014). Tate (2014) argues that research lacks empirical evi- dence that allows analyzing the factors explaining HLCC location. Actually, the trend is so recent that there is little empirical evidence on the factors that enable such decisions to effectively generate an in- crease in firm performance (Martinez-Mora and Me- rino, 2014). Furthermore, most of research on this area has a US-centric perspective, lacking data from other countries (Tate, 2014). One of the objectives of this study is to help fill this gap in empirical re- search, particularly because recent research suggests that there may be changes in the importance of vari- ous factors affecting the manufacturing location de- cision (Ellram et al, 2013). Thus, the main academic contribution of this study is to provide empirical evidence of decisions on the location of operations in the context of a European country (Spain), exploring its drivers and enablers. The theoretical framework used in the study is de- picted in Figure 1. Figure 1. Theoretical framework DRIVERS HLCC LOCATION PERFORMANCE ENABLERS The paper is structured in the following way: First, we provide a brief literature review on location decisions, with special emphasis in HLCC’s. Then, we present a case analysis of location decisions in four Spanish and multinational firms, contrasting them under the theoretical lens of organizational theories. Finally, in the last part of the paper we discuss the social conse-
  5. 5. 5ARTICLES |Locating Operations in High Labor Cost Countries – Evidence from Spain ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 03-16 quences of location decisions in the context of devel- oped countries, and provide some policy implications. RESEARCH BACKGROUND There are many theories that have been used to ex- plain manufacturing location decisions, such as Transaction Cost Economics (Williamson, 2008) or the Internalization theory in the make-or-buy deci- sion (Coase, 1937). The classical theory of interna- tional trade bases this decision on the differences of production costs between countries, factor endow- ment, or transportation costs. Other factors include the “economies of agglomeration”, where firms clus- ter together to enjoy advantages of skilled labor, favorable climate, etc (Martinez-Mora and Merino, 2014). However, previous studies generally focused on Western nations establishing subsidiaries in low-wage countries (Gray et al, 2013), thus neglect- ing the manufacturing location in HLCC’s. After a diminishing interest in the manufacturing location decision literature in the last decades, this area has re-emerged with a new focus. Whereas previous re- search focused on low labor cost, today it is focused on value creation (Ellram et al, 2013). In this study, we use the eclectic theory of interna- tional production (Dunning, 1988, 1998), because, differently from previous theories, it is focused on international location decisions. More specifically, it investigates “whether a firm should internalize its intermediate product markets within its home country or in a foreign country, and the outcome of this choice is primarily determined by the costs and benefits of adding value to these products in the two locations” (Dunning, 1988, p. 45). In his theory, Dunning categorizes the location factors in four types: resource seeking advantage (availabil- ity of raw materials and infrastructure), marketing seeking advantage (access to domestic markets), efficiency seeking (production cost-related factors, industry clusters and removal of trade barriers), and strategic asset seeking advantage (knowledge- related assets and synergies). Why to locate operations in HLCC? Contrary to the commonly studied location in low- cost countries, several examples of location in HLCC have attracted the interest of the media recently. For example, the repatriation of textile and footwear in- dustry in Spain, as well as the call centers of main Telecom firms from Latin America (Martinez-Mora and Merino, 2014); General Electric (Tate, 2014); and some Macintosh lines of Apple (Gray et al, 2013). Grayetal.(2013)identifiedtwomainresearchstreams that deal with location decisions of operations: the In- ternational Business literature (Dunning, 1980), and the make-or-buy decision (Williamson, 1991). In both cases, there is vast literature analyzing the multiple factors that affect such decisions. Location decisions are usually justified by labor costs (Tondolo, Kaynak, de Souza, & Bitencourt, 2011). However, increases in transportation costs, stagna- tion of infrastructure, and labor cost differential changes could hinder decisions of location purely based on the low cost of labor. Moreover, most of the literature focuses on a few elements of cost (e.g. trans- portation and manufacturing costs in García & Díaz (2012)), but actual costs of location decisions can be much higher than imagined by managers. For exam- ple, Platts & Song (2010) performed an extensive cost analysis of sourcing from China that included set-up costs, extended price, administrative, logistics, inven- tory, quality and supplier management costs. These trends are motivating firms to redesign their supply chains in the developed world, in order to remain cost competitive and in this way avoid offshoring. In addition, proximity to local production networks provides important operational advantages. For example, it favors logistics responsiveness, reduc- ing on-transit inventory and transportation costs and improving lead times. Being close to suppliers reduces the length of ordering cycles, enabling com- panies to respond more quickly to market changes (Shih, 2014). Furthermore, Jain, Girotra & Netess- ine (2013) found that a 10% shift in sourcing from domestic to global suppliers increases the inventory investment by 8.8%. Having a supply chain close to the final consumer also favors communication and reduces complexities associated with global net- works. For example, Lenovo, formerly a subcontrac- tor of IBM, surprised the business world when it acquired in 2005 the laptop unit of IBM (The Wall Street Journal, 2012b). Facing a declining and quick- ly changing market, the company has decided to fol- low a contrary path to most electronic producers by increasing vertical integration to 50% (from around 30%) to reduce lead times. In a striking similar com- ment to those of the founder of Inditex, Amancio Ortega (case analyzed below), CEO Yuanquin has declared that “selling PCs is like selling fresh food”. Location in HLCC’s also favors flexibility, because it
  6. 6. ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 03-16 6 AUTHORS | Angel Diaz | Elcio Mendonça Tachizawa is associated with proximity to consumer markets and lower lead times. The results reveal that this phenomenon is a response to changes in the market, which is demanding smaller batches in shorter time frames (Martinez-Mora and Merino, 2014). Such constraints limit production in low-wage countries, because firms in these countries often require large production lots, in order to obtain economies of scale. Also, local operations facilitate access to local markets, and the prompt identification of consumer trends that would be hard to identify if production was in other countries (Gray et al, 2013). Other factors in HLCC location decisions include more intangible factors. For example, supply chain risks. Risk and vulnerability are implicit in all operations, but are particularly critical when they extend beyond the borders of the firm. According to Wagner & Bode (2008), “modern supply chains seem more vulnerable than ever”, citing recent crisis and catastrophes that have impacted supply chains world-wide, both man- made (e.g. terrorist attacks) and natural (e.g. hurricane Katrina). Kumar et al. (2009) have analyzed supply chain risks, proposing a classification of causes that include country risks (e.g. political instability), repu- tation (as in the Corporate Social Responsibility cases mentioned below), strategic, operational, credit (recov- ery of accounts receivable) and of compliance (laws and regulations). Moreover, by locating in HLCC’s, firms can decrease the risks related to losing control of intel- lectual property, or positively affecting product quality and brand image (Tate, 2014). We can add to these the cultural risks. Cultural differences among countries and groups have been considered by some authors as an argument against placing operations away from consumer markets, culture being here defined as “the collective programming of the mind distinguishing the members of one group or category of people from oth- ers” (Hofstede, 2010). Likewise, Metters (2008) cites studies reporting cultural differences as a major prob- lem in manufacturing location. Moreover, productivity and innovation can be im- proved by locating operations in HLCC’s. A common thread of research on the formation of networks (Brito & Carvalho, 2014) is related to knowledge diffusion, firstly proposed by Marshall over a century ago. The effect can be both positive and negative. For example, Fischer, Scherngell & Jansenberger (2009) reported a disproportional co-location of patent citations, as evi- dence of localized knowledge spillovers, and Christoph (2005) analyzed labor poaching in the German high tech industry. The effect of governmental policy and proximity to higher education institutions on the cre- ation of high-tech clusters is another example (Breto- nès & Scheel 2011; Frenkel, Shefer & Roper, 2003; Woodward, Figueiredo & Guimarães, 2006). Finally, new trends such as sustainability are encour- aging location in HLCC. One factor is related to the increasing standardization of sustainability regu- lation over global supply chains, which dissuades firms from seeking less restrictive legal environ- ments (Gray et al, 2013). More importantly, loca- tion in countries with low labor costs can increase reputation risks (and implicit customer backlash) due to unethical practices at remote suppliers, as the recent case of the tragic death of over 100 workers at a supplier factory in Bangladesh of garments for Walmart and others dramatically show (The Wall Street Journal, 2012c). Also, it can increase the risks of indirectly supporting slave or child labor in oth- er supplier countries, together with environmental degradation, or support of dictatorships, with sig- nificant damages to corporate image. Thus, firms are encouraged to avoid offshoring and engage in local operations. After all, it is easier for buying firms to control the sustainability of their supply chains in their own country (Tachizawa & Wong, 2014). When it makes sense to locate operations in low-wage cost countries Locating operations in mature economies is not natu- rally without caveats, making offshoring a desirable op- tionforgiventypesofindustries.Astrongdeterminant of global network design is corporate taxation. While corporate tax in the USA (federal plus local) is about 40%, it is only 26% in Canada, 30% in Mexico, 25% in China (down from 30%), 30% in Spain, 18% in Switzer- land,12.5%inIreland,andevenzeroinfiscalparadises, or very small with taxation loops (KPMG, 2013). Thus, setting part of the operations in a country that offers better fiscal conditions make fiduciary sense for large corporations. Companies such as Apple and Google reportedly pay little in corporate taxes by using such loops, but in at least one high profile case (Starbucks) the company has agreed to increase their tax payments due to public backlash (Bloomberg, 2013). Low labor cost is still another important consider- ation in offshoring decisions, especially in labor- intensive industries (e.g. textiles and electronic as- sembly). For instance, in the 2011 survey of primary textile (Werner International, 2012) the hourly la- bor cost in Switzerland is almost $50, compared to
  7. 7. 7ARTICLES |Locating Operations in High Labor Cost Countries – Evidence from Spain ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 03-16 $2.1 in China (and over $18 in Spain, where some textile firms manage to stay highly competitive – see case Inditex, further in the text). There are as well operational reasons to offshore op- erations. Wharton Professor Mauro Guillen (Knowl- edge@Wharton, 2011) cites the example of the Spanish maker of cigarette lighters Cricket, which operates three factories - one in Spain, one in India and a third in China. Although labor costs are high- er in Spain, the per-unit production costs are lower than in China as the plant is fully automated. Still, the company keeps the plant in China to facilitate filling orders for customized lighters, as it is cheaper to retool in China where the lines are not automated. Lastly,anotherfactorthatjustifieslocatinginlow-wage countries occurs when the supply base is located in other countries. For industries such as electronics, that means a global shift of the supply base towards China. In such industries, moving production to a country such as the United States often means a manager will face a weak supply base. For example, in the United States, there are no domestic suppliers of touchscreen displays or batteries, and most of the circuit boards and components had to come from abroad as well. This im- plies higher logistics costs than if the phone had simply been assembled in Asia (Shih, 2014). METHODOLOGY In this study, we use a multiple case study method- ology. Case research is being increasingly used to study industrial location. Gray et al (2013) argue that public secondary data is difficult if not impos- sible to obtain, and standard surveys face difficulty disentangling decision biases and actual costs. On the other hand, in-depth case studies are necessary to facilitate an understanding of the context and real drivers of location decisions (Gray et al, 2013). Fur- thermore, Ellram et al (2013) make a call for more case research that indicates that more strategic fac- tors such as value capture are becoming a more im- portant issue than cost savings. In order to add more empirical evidence to the re- search field, we provide four examples from firms op- erating in Spain, a HLCC and particularly interesting country to focus on, for several reasons: The country is suffering the aftereffects of a financial and banking crisis, and a housing bubble explosion that has created an unprecedented 26% unemployment rate (reduced now to about 19%, but much higher for those under 25). Thus, trying to understand mechanisms for the location of operations in HLCC (and the implicit cre- ation of employment) is a critical priority for Spain. In this study, we analyze four cases in different in- dustries that have located or expanded operations in Spain. The firms have different sizes and strategical priorities, in order to have a more complete picture of location of operations in a HLCC. Two of the cases (NGA and CHEP) are service companies, and two (Ford and Inditex) manufacturing companies, and all have been able to create, attract, or keep opera- tions to the country, creating employment in spite of the crisis. All cases have been documented from secondary data available in Internet and from per- sonal communications with the companies by the authors and extended semi-structured interviews in the cases of NGA and CHEP. In our study, a driver is a factor that affects the de- cision of locating operations in HLCC’s (e.g market pressures). In addition, an enabler is a factor that facilitates that such location have an impact on firm performance (e.g. R&D investments). Accordingly, Table 1 synthesizes the drivers for locating operations in Spain identified in the cases. The drivers are classi- fied according to the typology proposed by Dunning’s (1998) eclectic theory of international production. Fi- nally, Table 2 depicts the enablers that were identified in the study. The enablers are divided according to the stakeholders that are affected in each case. Table 1. Drivers for HLCC location Firm Type of driver (Dunning, 1998) Driver NGA Human Resources Resource-seeking • High availability of skilled workers, with low local demand for such resources • Low cost of living compared to big European cities Market-seeking - Efficiency-seeking Same time zone as Europe Strategic asset-seeking Cultural affinity to European consumer market
  8. 8. ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 03-16 8 AUTHORS | Angel Diaz | Elcio Mendonça Tachizawa CHEP Resource-seeking • Low employee rotation • Availability of skilled workers, with low local demand for such resource Market-seeking - Efficiency-seeking - Strategic asset-seeking • Madrid as a center of excellence • Previous existence of planning and financial teams in Madrid Inditex Resource-seeking - Market-seeking Proximity to consumer markets allows prompt detection of demand patterns Efficiency-seeking • Need to reduce lead time • Unstable, hard-to-forecast demand • Low labor intensity Strategic asset-seeking High capacity of response / flexibility due to proximity of suppliers Almussafes industrial park, Ford Resource-seeking Proximity to suppliers Market-seeking Geographical proximity to consumer markets Efficiency-seeking Labor unions moderation and flexibility Strategic asset-seeking • Cultural affinity to consumer markets • Competitive auto parts industry Table 2. HLCC location enablers Firm Stakeholder Enabler NGA Human Resources Employees • High unemployment level decreases employee turnover • High quality of life incentivizes labor force to stay in the region Universities • University with an active participation in Erasmus program • High quality of courses in the Language area CHEP Employees • High unemployment • High quality of life • High unemployment level lowers employee turnover • Competitive salaries and soft benefits Universities Erasmus Exchange program Inditex Suppliers Close relationship with local suppliers Universities Close ties with local universities Almussafes industrial park, Ford Universities Heavy R&D investments Government Local government support NGA Human Resources NGA Human Resources, a Human Resources service company (part of group Northgate - http://www. ngahr.com), originally centralized in Poland its tech- nical back-office for Europe, Middle East and Africa. But the location had its caveats: it took 3-4 years to train the workers (initially through conventional training, then on-the job training with mentoring) only to see them leaving, resulting in high employee turnover. The company then relocated their service hub to Granada, Spain, where the advantages of lower employee rotation and know-how more than offset higher labor cost. NGA Human Resources has expanded their Granada operations from 15 employ- ees to more than 500, plus 100 more in a back-office
  9. 9. 9ARTICLES |Locating Operations in High Labor Cost Countries – Evidence from Spain ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 03-16 related organization. Talent availability for this type of service center that requires skilled workers is criti- cal, and Granada has a multicultural university that provides technical training and graduates with good language skills. Technical and language expertise are partially due to the European exchange program Erasmus (Granada is one of the most active univer- sities in this program) and the high quality of its courses in the language area (El Mundo, 2015). High unemployment levels and a labor force who wants to stay in the region due to the high quality of life also help to minimize turnover. Although offshoring activity in the sector is high, competition for global resources that are not backed by strong brand name (as NGA Human Resources feels was their case, vis- à-vis the likes of Microsoft or Google) is fierce, and there is currently little competition for these re- sources in Granada. There are also many advantages in the location for serving the European market: cultural affinity, less change management and su- pervision required, and same time zone. The advan- tages of the larger Spanish cities (Madrid, Barcelona) would be less significant in this particular case, due to higher cost of living and more local competition for resources. CHEP CHEP is the world leader in the pooling of pallets (readily recognized by being painted blue on the side) and containers. The company, owned by Bram- bles Limited, an Australian company, employs 7700 persons, owns over 285 million pallets and contain- ers, and has over 300,000 customers in more than 50 countries. With 440 service centers, it performs over 2.5 million movements of pallets and contain- ers every day. García and Díaz (2012) described the transforma- tion of the European unit of CHEP, from a country- based organization, to a pan-European organization. As a result of this reorganization, strategic, tactical and operational activities, that were performed lo- cally at each European country, were centralized in Madrid, where 50% of the European staff is located (the other half reports to Madrid but is decentral- ized at the country base as this allow proximity to markets and improvements in sales and operations -S&OP). CHEP Europe has also recently centralized the execution of transportation for all of Europe, the last function that remained decentralized; relocated some seventy additional specialized staff to Madrid. Among the reasons argued for the centralization of operations in Spain are the previous existence of planning and financial teams in Madrid, which operated as a center of excellence, assuring control and supervision for the next processes to be central- ized, especially activities critical for their impact on customer service. The availability of skilled labor in Madrid is cited as another location factor, as young workers with higher education and languages exper- tise, in a country with high unemployment, find mo- tivating the opportunity to work in an international company that offers progression opportunities. The Department of Transport Execution required that a significant percentage of the new employees were natives of the country they were to serve, and the student exchange program Erasmus facilitated the recruiting of international workers, as many participants in this program welcomed the oppor- tunity to stay in Spain after finishing their studies. The country and the city quality of life are frequently mentioned as differential elements in international recruitment. The company recognizes that the economic situation in Spain makes employee rotation to be very low, and that this circumstance can change in the future. However, the company expects that offering com- petitive salaries and other soft benefits will make these workers stay: “a good working environment, opportunities to grow here or in the 50 countries where we operate, sustainability message, Corporate Social Responsibility policies…”. The company did analyze alternative location for the centralized functions (particularly in Eastern Eu- rope), but were dismissed due to issues with recruit- ment. The company cites data from the Economist in which over 40% of Polish or Hungarians companies have difficulties in filling jobs, while the same figure for Spain is less than 15% (The Economist, 2015). Inditex/Zara In a sector (garments) traditionally characterized by offshore production, Inditex has adopted a different approach. Zara, the flagship company of the Inditex group, consists of a network of producers in a con- centrated area (Northern Spain) that allows the com- pany to respond more quickly and with more flex- ibility than its competitors. This Spanish integrated
  10. 10. ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 03-16 10 AUTHORS | Angel Diaz | Elcio Mendonça Tachizawa manufacturer-retailer of apparel has been defined as ‘Armani for the masses’ (Díaz & Solís 2002). Sales and profits make Inditex/Zara one of the largest and most successful fashion companies in the world. Net profits of Inditex were 2.36 billion Euros in 2012, out of sales of 15.9 billion Euros, both registering growths of 16% with respect to 2011. Flexibility is key in Zara’s business model. It launch- es over 100 collections per year (11,000 new gar- ments) and has a total design-to-store cycle time of less than 4 weeks. Interestingly, driven by “fast- fashion" retailers like Zara, some apparel manufac- turers are relocating production back to the United States, aiming at shortening lead times and increas- ing responsiveness (Sheng 2015). Every garment in Zara will be on sale for a maximum of 5 weeks, after which it is removed and sent to discount stores or destroyed. Zara invests close to zero percent of its sales in advertisement (5% of sales for Gap), relying instead on keeping customers perpetually interested in finding new surprises (Zara´s customers visit the conveniently located stores an average 17 times a year). While Gap brands, Zara intrigues. Two distinct flows can be appreciated at Inditex. One consists of long-term cycles, i.e., purchasing of raw materials and the other a short-term cycle, i.e., design, fabrication and distribution. The long cycle starts three to six months before each fashion sea- son and consists in the acquisition of two thirds of the raw materials required, mainly cloth (sourced mainly from India, China, Morocco –a main sourcing central is located in Tanger-, Mauricio, Korea, Italy, Germany and Turkey), and about one half of all gar- ments. These are those items that are thought to be stable, i.e., basic products for which demand is fairly predictable, or have a high labor component (e.g., embroidered garments). The rest of the garments (those thought to have a higher risk) are produced in-house in the short cycle described below. The short cycle starts with design, an in-house affair with over 200 designers. A key aspect of the process is related to the area managers, who decide based on local knowledge (e.g. the Caribbean or Eastern Eu- rope) how much of a particular product they estimate will be required for four to five weeks of demand in their area of expertise. Patterns are scanned and sent electronically to the manufacturing plants, all located in the same area for in-house production (Ar- teixo, in Northern Spain where headquarters are lo- cated). Here capital-intensive activities such as dying and cutting are performed, while sewing is manually done mostly by outsourced local micro-companies. Production is then pushed into the stores, where the manager sends feedback in close to real time about what moves and what doesn’t (colors, sizes, mod- els), allowing for fast adjustments of the produc- tion plan. Replenishment of stores is done twice or three times a week, with a lead-time for existing (or subject to slight design modifications) items of two weeks, and of five weeks for new products. This ver- tically integrated, centralized approach to fashion is strikingly different than the more usual offshoring used by Gap and others, and requires a higher level of asset utilization. Nevertheless, it allows for a fast response system that minimizes error in forecasting and thus waste. In sectors like clothing, furniture or household appliances, where product launches are frequent, reducing the time gap between design, production and distribution is critical. In such con- text, keeping manufacturing close to customers and suppliers is an effective strategy to assure control over these stages in production and assure a highly responsive system. Strong ties with local universi- ties are also important to assure a constant inflow of specialized workers and specific knowledge. For example, the Inditex Chair of Corporate Social Re- sponsibility at the University of Coruña. Almussafes industrial park, Ford Spain is the second largest producer of autos (and first of industrial vehicles) in Europe, and the 12th worldwide. Ninety percent of the production is ex- ported to over 130 countries, generating the largest contribution of all sectors to exports, over 17% of total (ICEX, 2013). The activity of the automakers is accompanied by an important auxiliary sector (6th in the world), led by companies Gestamp and An- tolín. The sector represents a contribution to Span- ish Gross Domestic Product (GDP) and employment as large as that of tourism (around 10% of total). In spite of an important contraction in the European auto market, the industry has experimented a nota- ble comeback, with Ford Spain absorbing part of the production of Belgium, PSA (Peugeot Citroën) Spain part of the production of France, Renault absorbing production from France and Turkey, and Nissan in- vesting $170m. Labor costs in the auto sector in Spain are around 25 Euros per hour, almost half of that in Germany, but 5 times higher than Romania and almost 8 times higher than China (Expansión 2013). How
  11. 11. 11ARTICLES |Locating Operations in High Labor Cost Countries – Evidence from Spain ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 03-16 to explain then the success of the sector? One explanation can be found in the case of the evo- lution of the Almussafes industrial park of Ford, in the proximity of Valencia. Over the years, the plant has evolved into a large industrial park, with over 90 suppliers connected to the assembly line via conveyors allowing for just-in-sequence pro- duction, an initiative that has been successfully adopted in other factories of Ford (e.g. Saarlouis, Germany and Genk, Belgium). Labor and Union moderation and negotiation flexibility, know- how, and the proximity to suppliers (due in part to incentives from the local government) will soon make Almussafes the largest factory of Ford in Eu- rope, as it absorbs the production of other Europe- an plants (Cinco Días, 2013). Other explanations come from the heavy investments in Research & Development (89 robots for each 10,000 workers). The President of Ford has recently declared that the company plans to make the Spanish plant a “global innovation center” of the firm, focusing on models of higher size and sophistication for the export market (El País, 2015). Moreover, other factors that explain this decision are a competi- tive auto parts industry (which obtains 60% of its revenue from exports), and the geographical and cultural proximity to consumer markets (Spain is a privileged export platform for European, North Africa and Latin American markets). In order to facilitate the cross-case analysis, we catego- rize the main drivers for locating operations in Spain of each case. The cases are analyzed according the eclectic theory. A summary table can be seen in Table 3. These cases are analyzed under the theoretical lenses of the eclectic theory of international production (Dunning, 1980, 1988, 1990). In this theory, three determinants of international production are pro- posed: ownership advantages, location advantages, and internalization advantages. In this study, we are particularly interested in the location advantages suggested in the eclectic theory. Our aim is to use this theoretical lens to analyze the location decisions of the companies mentioned in the study. DISCUSSION Empirical evidence of the location of operations in HLCC is scarce in the academic literature (Ellram et al, 2013; Gray et al, 2013; Tate, 2014). While location decisions are usually justified by labor costs (Baker & Roberts, 2006; Martinez-Mora & Merino, 2014; Tondolo et al, 2011), the results of the study sug- gest that location decisions include a much broader set of drivers than just cost. Furthermore, results of this study are in line with previous studies concern- ing the cross-sectorial nature of location decisions in high-cost countries, i.e. the fact that it encompasses multiple a diversified array of industrial and service sectors (Gray et al, 2013). While location in low-wage countries remains a nat- ural option for specific types of industries (e.g., labor intensive, or located in countries that offer impor- tant tax advantages) or when it is important to guar- antee trade compliance (e.g. some countries prevent importing from certain others), business cases are often oversimplified by considering only labor costs or taxation considerations. Locating operations in HLCC may offer many cost, risk and agility advan- tages, plus a positive effect in job creation that could produce a hedge against protectionism. In particu- lar, although local operations risks are often lower than offshoring since firms have more knowledge and are closer to local markets, they tend to be more concentrated (i.e. the array of potential location al- ternatives in the case of problems is more limited.) A key driver of the cases is the reduction of employee turnover. This is in line with recent research: stabiliz- ing the workforce has been detected as one of the main motivations for bringing back production to HLCC’s. Indeed, high worker turnover is a problem Table 3. Drivers for HLCC location Type of driver NGA CHEP Inditex Ford Resource-seeking X X X Market-seeking X X Efficiency-seeking X X X Strategic asset-seeking X X X X
  12. 12. ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 03-16 12 AUTHORS | Angel Diaz | Elcio Mendonça Tachizawa on the shop floor because it injects variability and unpredictability into production schedules (Shih, 2014). Another important driver detected in the study is skill availability. Many authors are consider- ing the scarcity of non-strategic resources in areas with high economic growth, especially trained and motivated workforce (Tate, 2014). In our study, the broad availability of linguistic skills in Granada fa- vors the location of operations in the city, in the case of NGA. However, even more critical is the gap of skills in the manufacturing sector. This is important as the resources used by firms in their traditional manufacturing operations (e.g. suppliers, workforce, and even the company’s own internal product design capabilities) can atrophy, creating a generational skills deficiency in most developed countries. Ac- cordingly, the position of Spain in the World Rank- ing of Economic Complexity has been decreasing steadily in the last decades (from the 18th position in 1995 to the 27th position in 2013). The Economic Complexity Index (ECI) is calculated yearly by the Center of International Development of Harvard University, and measures how diversified and com- plex a country’s export basket is (for more informa- tion, see http://atlas.cid.harvard.edu/rankings/). In order to solve this problem, increasingly com- mon in the developed world, many companies in the United States are hiring more experienced manufac- turing engineers or working with local community colleges to incorporate industry credential systems and/or training into the schools’ programs to attract students (Shih, 2014). An interesting result of this study is related to labor intensity. While most studies assume that labor- intensive activities are prone to production in low- wage countries, our findings show that this may not be true, since even highly labor-intensive (e.g. call centers) activities can be moved to HLCC. Thus, an implicit assumption that only automatized activities should be kept in the developed world (because of the high labor cost) is questioned. Although much of previous research suggests that cost-related factors play the most important role in location decisions, our study suggests that other fac- tors (e.g. employee turnover, links with supply base) may be equally important. Actually, the risk of sup- ply interruption, together with the movement of manufacturing to various regions suggests that sup- ply base is becoming an important location factor (Ellram et al, 2013). As the Inditex case shows, positioning manufactur- ing close to the market minimizes the inventory of goods in the pipeline and reduces delivery times. More importantly, the closeness reduces the length of ordering cycles, enabling companies to respond more quickly to market changes (Shih, 2014). With respect to the enablers, an analysis of the im- pact on stakeholders provided interesting results. The most relevant stakeholders in the analyzed firms were the employees and local universities. On the other hand, other stakeholder categories such as consumers or media were not mentioned. A possible explanation is that the main drivers of the firms in the study were in Dunning’s resource-seeking cate- gory thus stakeholders who could potentially provide such resources would acquire greater importance. The reasons for that should be further investigated. Finally, an important gap in the literature refers to the potential differences between services and goods location decisions. Are there different drivers for ser- vice and manufacturing firms? Our study does not in- dicate a significant difference between the drivers of service and manufacturing location decisions. How- ever, it would be interesting to have more research specifically designed to investigate this issue. Social and political impact of location decisions The HLCC location enablers depend heavily on the so- cial and political contexts. It can be argued that devel- oped countries are suffering a structural destruction of employment (Díaz 2012), resulting from system- atic increases in productivity that have displaced labor from the primary sector of the economy (agriculture, mining) to the secondary sector (manufacturing), and then again to the tertiary sector (services). While the four cases discussed above show the po- tential for job creation in Spain, much remains to be done to achieve unemployment values closer to oth- er countries in the OECD. Some enablers, induced from the gathered evidence, are sketched below: Rebuild companies’ supplier ecosystem and some ba- sic core competencies (in line with Shih, 2014). For instance the creation of local clusters, following the examples of Ford Almussafes and of the technologi- cal cluster of Granada, discussed above. Incentivize technical education and stimulate young talents in this area. In the same vein, reduce the mis-
  13. 13. 13ARTICLES |Locating Operations in High Labor Cost Countries – Evidence from Spain ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 03-16 match between the unemployed skills and what em- ployers need, through educational reform: according to the OECD, over 45% of all College graduates in Spain are working at jobs of low skills requirements, twice the OECD average (Economist 2010). In multi- lingual Europe to speak at least a second language is also critical. In a study of US-based firms who brought back their operations to the country, few of the new hires were prepared for the expectations placed on them or the environment in which they would be working (Shih, 2014). While Chinese firms have been developing vast pool of technical resources in manu- facturing, HLCC have lagged behind (Shih, 2014). Reduce corporate taxes. Corporate taxes in Spain are between 20 and 25% for small companies and 30% for companies with more than 25 employees and profits over 300,000 Euros. A flat rate, closer to 20% will stimulate re-shoring, employment and state in- come (as most tax revenue all over the world come from personal taxation). Simplify regulation. Spain occupies the position 74 in the Ease of Doing Business ranking of the World Bank, and despite recent advances, but much re- mains to be done to facilitate hiring and firing, improve productivity, reduce public holidays and assorted worker benefits, and simplify procedures for the creation of companies. Related to this is im- proved access to credit, especially for SME. But eventually job creation and competitiveness have to come from the Spanish workers themselves. As one director of an automobile assembly plant told one of the authors: “We are aware that this factory was located in Spain because of the advantages of a weak currency and cheap labor. These advantages are now lost, and we have to substitute for productivity, efficiency and innovation to keep our jobs”. CONCLUSION Free trade promotes innovation and competition, grants access to much larger markets, and to the ex- change of ideas. Tragically, faced with a combination of global economic slowdown, increased unemploy- ment/underemployment, and migration pressures many countries are being tempted by populist and protectionist short-term political solutions that could result in the erection of barriers to global trade. This is a complex issue and in this paper we focus at providing more empirical evidence on the location of operations in HLCC, grounded on previous literature and organi- zational theories. This issue is increasingly relevant, being object of intense discussion at practitioner, aca- demic and policy levels. As a matter of fact, the location of operations in HLCC’s does not only present relevant repercussions at supply chain decisions, but it also is characterized by important social implications. We be- lieve that an integrated discussion of both dimensions, usually neglected in the literature, can raise a more fruitful debate of how such decisions affect stakeholder management, and can lead to industrial policies that counter populist and protectionist political behaviors, assuring the sustainability of global supply chains. Although this paper constitutes a contribution in this direction, we acknowledge the limitations of being based on a small sample of companies located in Spain, and of the secondary nature of the data. Obviously, firms don’t like to broadcast previous bad decisions. Thus, collecting more quantitative data on location decisions is recognized by academ- ics as a complex task (Martinez-Mora & Merino, 2014). However, more cross-sector and geographi- cally diversified studies on this area are important to support more grounded conclusions. Moreover, tt would be interesting to study the supplier loca- tion decision as well. To what extent are the loca- tion drivers for manufacturers the same as those for their suppliers? Overall, a better understand- ing of total factors involved in location decisions is needed to support business and political decisions. In particular, the application of different organi- zational theories can provide some useful insights about locating operations in high labor cost coun- tries and policy implications. We hope to have con- tributed on this direction as well. ACKNOWLEDGMENT We are deeply indebted to José Luis Díaz, Enrique García and Aitor Vinos for their invaluable com- ments and feedback in the analysis of the cases. REFERENCES Baker W. M., & Roberts F. D. (2006). Managing the costs of ex- patriation. Strategic Finance, 87(11), 35-41. Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99-120.
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  17. 17. 17 JOSCM | Journal of Operations and Supply Chain Management | FGV EAESP SPECIAL ISSUE Submitted 26.09.2016. Approved 07.03.2017. Evaluated by double blind review process. Scientific Editors: Ernesto Santibanez Gonzalez and Charbel Jabbour DOI: http:///dx.doi/10.12660/joscmv10n1p17-32 COMPARING MADRID AND SALVADOR GHG EMISSION INVENTORIES: IMPLICATIONS FOR FUTURE RESEARCHES ABSTRACT This paper compares the Greenhouse Gas (GHG) emission inventories of Madrid and Salvador and discusses some implications for future researches, focusing on city- level carbon accounting (CLCA) of emissions from urban supply chains (USC) and final consumers. To carry out this study, secondary data were collected from official documents of municipal governments of these two cities. According to the results, there are differences in stationary energy GHG emissions due to the big distinction concerning electricity emission factors used by each city. Air transportation GHG emissionsarealsoverydifferent.Thesetwocitiessharesomecommonfiguresregarding road transportation and per capita waste sector GHG emissions. In the conclusion section, we discuss opportunities for improvement of the cities’ GHG emission inventories as well as some implications for policy-making and future researches on carbon accounting, with focus on an integrated production-consumption system. KEYWORDS | Greenhouse Gas emissions, urban supply-chain, city-level carbon accounting, Salvador, Madrid. José Celio Silveira Andrade jcelio.andrade@gmail.com Professor at Universidade Federal da Bahia, Escola de Administração – Salvador – BA, Brazil Andrea Dameno andreadamenonielsen@gmail.com Researcher at Universidad Politécnica de Madrid – Madrid, Spain Javier Pérez javier.perez@etsii.upm.es Lecturer at Universidad Politécnica de Madrid – Madrid, Spain Juan Manuel de Andrés jdeandres@etsii.upm.es Lecturer at Universidad Politécnica de Madrid – Madrid, Spain Julio Lumbreras julio.lumbreras@upm.es Professor at Universidad Politécnica de Madrid – Madrid, Spain ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 |17-32
  18. 18. ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 17-32 18 AUTHORS | José Celio Silveira Andrade | Andrea Dameno | Javier Pérez | Juan Manuel de Andrés | Julio Lumbreras INTRODUCTION Estimates show that the Greenhouse Gas (GHG) emissions caused by three European consumption areas (food, mobility and housing) showed no signifi- cant reductions between 2000 and 2007. However, when looking from a production perspective, in many economic sectors, there has been reduction in GHG emissions, or a decoupling between growth and emis- sions. The GHG emissions of goods consumption in the European Union (EU) are higher than the pro- duction emissions of the goods produced there, with the largest difference occurring in 2008 when con- sumption emissions were about a third higher than production emissions. Between 1995–2010, the EU production emissions decreased, whereas consump- tion emissions were slightly higher in 2010 than in 1995 (Gandy, Wiebe, Warmington, & Watson, 2014). In 2009, the GHG emissions associated with EU con- sumption equaled 4,407 million tonnes, which was 2% higher than in 1995. In comparison, the United Nations Framework Convention on Climate Change (UNFCCC) production-based (PB) estimate of 4,139 million tonnes in 2009 was 9% lower than in 1995. These data indicate that, in order to meet its 2050 ob- jectives and contribute fully to meeting the global 2°C target, the EU will need to accelerate its implementa- tion of new policies, while restructuring the ways that Europe meets its demand for energy, food, transport and housing (EEA, 2015). Thus, making cities more sustainable is one of the most vital challenges of the 21st century, especially because cities exert a significant impact on the envi- ronmental status quo. When it comes to tackling cli- mate change cities play a key role. The ability of city policy-makers and other stakeholders to take effec- tive action depends on access to good quality data on GHG emissions. Therefore, a greater emphasis placed on the measurement of emissions and transparent data on GHG emissions is crucial. City-level carbon accounting (CLCA) standards are fundamental to en- able city decision-makers to identify emission sources and their drivers, to reduce the carbon dependence of their economy and to stimulate opportunities for more efficient urban supply chains (USC). Cities need to establish mitigation objectives and de- velop environmental policies in order to hold back the consequences of climate change. The most frequently used analytic tool is the GHG emission inventory, which estimates the emissions associated with the activities of the city or country studied. The devel- opment of these inventories is the first step towards achieving the different goals set up by the regulatory organism and they are particularly helpful in tracking the progress over time. In order to compare inventories and facilitate the in- tegration of inventories from different cities, stan- dardised methodologies for developing and reporting GHG emissions have been developed. Considering this, the Compact of Mayors, supported by 457 cities, published the Global Protocol for Community-Scale GHG Emission Inventories (GPC) in 2014. This inter- nationally accepted methodology helps cities develop their GHG inventories in a consistent and widely rec- ognised way. Therefore, most of the city-level GHG inventories us- ing the GPC methodology are carried out focusing on a production approach and they do not account for all the emissions embedded in products and services con- sumed in a city. The large and increasing share of GHG emissions ‘hidden’ in imported goods underlines the importance of calculating the carbon emissions and impacts of USC and final consumers (Schaltegger & Csutora, 2012). This paper comparesthe GHG emission inventories of Madrid and Salvador, which reported in 2015 their 2013 emissions to GPC, and it discusses some im- plications for future researches focusing on CLCA of GHG emissions from USC and final consumers. These two cities were chosen for some reasons. Firstly, Madrid has a long trajectory in doing the integration of the air pollutant and the GHG emission invento- ries. In fact, since 1999, the city has been producing its two inventories following the Core Inventory of Air Emissions (CORINAIR) methodology, which is coordinated by the European Environment Agency (EEA), and meets the requirements established by the Intergovernmental Panel on Climate Change (IPCC) and the Task Force on Emission Inventories and Pro- jections of the United Nations Economic Commission for Europe (TFEIP - UNECE). Although Madrid has been producing GHG emission inventories for more than 10 years, only in 2015 the GPC methodology was implemented in order to re- port the 2013 Madrid’s GHG emission inventories (Madrid, 2015a). Even if Madrid’s experience regard- ing the use of the GPC standards is not very long, it does have a long experience in gathering data and calculating emissions using international principles. Therefore, the recent adoption of the GPC methodol-
  19. 19. 19ARTICLES |Comparing Madrid and Salvador Ghg Emission Inventories: Implications for Future Researches ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 17-32 ogy has not implied a significant change for the city’s usual inventory development. In fact, the distinction mainly resides in a different activity classification, which led to a reorganization of the results and the calculation of some indirect emissions that were not considered before. On the other hand, Salvador’s first attempt to develop a GHG emission inventory was in 2015, with 2013 emission data. This has been the only inventory pro- duced so far by this Brazilian city and it was developed using the GPC methodology. Then, Salvador is at an initial stage of the development of GHG emission in- ventories under the GPC framework. Thus, this com- parison between GHG emission inventories from two cities with different trajectories regarding their expe- riences in producing air pollutant emission invento- ries could provide useful contributions toscholars and practitioners improving the quality of CLCA methods. Secondly, this comparison acts as an evaluation meth- od for the GHG emission inventories of Salvador and Madrid. Comparing results from Madrid, to the first- stage results from Salvador could contribute to these Brazilian city decision-makers improving the quality of the future inventories. Additionally, the availability of the GHG emission in- ventory data for these two cities and the existence of an academic research collaboration between the Tech- nical University of Madrid in Spain and Federal Uni- versity of Bahia in Brazil about urban carbon account- ing methods. It is important to point out that most of GHG emission inventories of cities around the world are not of open public access to academic researchers. Finally, large cities like Madrid and Salvador are con- sidered more consumers of goods and services than producers. Then, this paper contributes to put into discussion some challenges regarding the necessity of a future urban carbon accounting academic research agenda to switch the focus from current GHG inven- tories to an integrated production-consumption car- bon accounting system. LITERATURE REVIEW A number of international initiatives have been devel- oped over the past decade to standardize the method- ology for conducting a city GHG inventory. The most widely referenced programs include: the International Local Government GHG Emissions Analysis Protocol (IEAP), developed by the Local Governments for Sus- tainability(ICLEI)in2009;theInternationalStandard for Determining GHG Emissions for Cities (ISDGC), jointly developed by the World Bank, the United Na- tions Environmental Programme (UNEP) and the United Nations Human Settlements Programme (UN- HABITAT) in 2010; the Baseline Emission Inventory/ Monitoring Emission Inventory Methodology (BEI/ MEI), developed by the Covenant of Mayors Initiative in 2010; the U.S. Community Protocol for Accounting and Reporting of GHG Emissions, developed by the ICLEI USA in 2012; the Publicly Available Specifica- tion (PAS) 2070:2014 for measurement of GHG emis- sions of a city, developed by the British Standards In- stitution (BSI) in 2013; and, finally, the GPC, jointly developed by the World Resources Institute (WRI), ICLEI and the Cities Climate Leadership Group (C40) in 2014. These methodologies present differences that range from the use of different emissions catego- ries to the consideration of different GHG emission boundaries (WRI, 2014). Normally, the existing methodologies have two dis- tinct focuses: PB inventories and consumption-based (CB) inventories. Conceptually, CB inventories can be thought of as: consumption equals PB emissions minus the emissions from the production of exports plus the emissions from the production of imports. While PB inventories allocate GHG emissions to the producer, CB inventories allocate emissions to the fi- nal consumer. CB methodologies typically account for a larger num- ber of emissions as most goods and services con- sumed in cities are not usually produced locally. Cities import most of their goods and services from other regions. The methods used following the principles of consumption are very different from the ones used in the more traditional approach of PB inventories. The idea of allocating emissions to the final consumer is not recent, but, given its complexity, there has not been a global consensus on what type of methodology to apply yet: Life-Cycle-Analysis (LCA) inventories, Environmentally-Extended-Input-Output (EEIO) matrixes, Compound Method based on Financial Accounts (MC3) etc. (Peters, 2008; Cagiao, Gomez, Domenech, Mainar, & Lanza, 2011; Larsen, Petters- en, Solli, & Hertwich, 2013). Some of the CLCA standard that adopted the CB methodologies, like the PAS 2070 standard, recognize cities as both consumers and producers of goods and services. The PAS 2070 sets out requirements for the assessment of GHG emissions of a city or urban area by using two methodologies: Direct plus Supply Chain
  20. 20. ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 17-32 20 AUTHORS | José Celio Silveira Andrade | Andrea Dameno | Javier Pérez | Juan Manuel de Andrés | Julio Lumbreras (DPSC) and CB. The DPSC methodology captures territorial GHG emissions and those associated with the largest sup- ply chain serving cities. It is consistent with the GPC. Thus, the DPSC accounts for GHG emissions from six source categories: stationary energy sources (en- ergy use in residential buildings and commercial, in- dustrial and government buildings and facilities), in boundary and transboundary transportation, Indus- trial Processes and Product Use (IPPU), Agriculture, Forestry, Other Land Use (AFOLU), waste and waste- water treatment and some goods and services (water provision, food and drink and construction materi- als). The CB methodology uses input-output modeling to estimate direct and life cycle GHG emissions for all goods and services consumed by residents of a city. So, the PAS 2070 captures both direct GHG emissions (from sources with the city boundary) as well as indi- rect GHG emissions (from goods and services that are produced outside the city boundary for consumption and/or use within the city boundary). Used to assess 2010 GHG emissions of London, the PAS 2070 has estimated the total GHG emissions using the DPSC and CB methodologies and has com- pared them to previous results calculated using the London Energy and Greenhouse Gas Inventory (LEG- GI). The LEGGI covered GHG emissions only from the combustion of energy used within the city boundary (for transport and to power and heat homes/work- places). According to the assessment results, the total 2010 GHG emissions of London calculated using the CB methodology are 40% higher than those calculated using the DPSC methodology and 156% higher than those calculated using the LEGGI methodology (Minx et al., 2013; BSI, 2014). The London case study shows the difference between PB and CB methodologies. Cities like London – and any other large cities, which are considered more “consumers of goods and services” than “producers” – inevitably give rise to the production of GHG emis- sions beyond their boundaries and highlight the need to include a wider range of emission sources in their GHG inventory. In some countries like China, cities have higher per capita GHG emissions than the national average be- cause they concentrate industrial activities. Weber, Peters, Guan, and Hubacek (2008) documented that, in 2005, approximately 30% of Chinese emissions were related to the production of exports and that this share increased rapidly in the early 2000’s. On the other hand, most Organisation for Economic Co- operation and Development (OECD) countries show the opposite trend (Hoornweg, Sugar, & Gomez, 2011) because the influence of the consumption of imported goods and service on the cities’ GHG inven- tories is higher than the national-scale ones. Weber and Matthews (2007) created a multi-country input- output model to estimate embodied carbon emissions and forecasted that, if this trend continues, emissions embodied in United States (US) imports will exceed emissions of domestic production within 20 years. Thus, a large and increasing share of European and US GHG emissions are embedded in imported goods as a ‘carbon rucksack’ (Schaltegger & Csutora, 2012). Such divergence between production and consump- tion perspective trends is common (Hoff, Nykvist & Carson, 2014; Tukker et al., 2014). However, it should be borne in mind that CB methodologies are subject to greater data uncertainty and shorter time series, as well as difficulties in defining system boundaries. EEIO matrixes are still barely developed at city scale and growing complexity of city’s supply chains poses substantial challenges to this kind of carbon account- ing and makes it more difficult to use CB methodolo- gies in policy-making (Wiedmann et al., 2013). Therefore, hybrid carbon accounting, which combines economic approaches of input-output analysis with physical approaches, should be used as an approach for urban supply chain and final consumers account- ing when physical material flows cannot be measured or only at exorbitantly high costs (Settanni, Tassielli, & Notarnicola, 2011). Physical material flows are ap- proximated based on financial information and are as- sumed proportional to monetary flows. Such applica- tions, however, should be treated with caution, as the accuracy of hybrid accounting information is far lower than when using physical primary data. The applica- tion of hybrid carbon accounting may be justified by high data collection costs or unavailability of data due to confidentiality problems, but this should not be an excuse when primary physical carbon data can be col- lected with reasonable effort (Schaltegger & Csutora, 2012). Tsai et al. (2012) provided a practical example on how input-output analysis can be combined with activity-based costing to more effectively link physical material flows and economic flows of costs. Thus, PB methodologies have been further developed and they have a more solid background as compared to CB and hybrid methods. The methodologies used for GHG emission calculation are more standardized
  21. 21. 21ARTICLES |Comparing Madrid and Salvador Ghg Emission Inventories: Implications for Future Researches ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 17-32 and they allow easier comparison among cities. It is inside this framework that the GPC methodology is presented. GPC is built upon the worldwide used IPPC Guide- lines, which provide detailed guidance on data col- lection and calculation of GHG emissions. The GPC methodology provides a robust framework for gen- erating GHG emission inventories, divides emission sources into sectors that have been globally adopted, and proposes two different approaches for reporting the results: scope and city-induced frameworks. It has been adopted by more programs and initiatives including the Compact of Mayors, the Carbon Disclo- sure Project (CDP) reporting platform, the PAS2070 and International Organization for Standardization (ISO) 37120:2014 (Sustainable Development of Com- munities). Up to date, more than 100 cities have used GPC to measure GHG emissions (WRI, 2014). Scope framework This approach adds up emissions by scope. GHG emis- sions can occur inside and outside the city bound- ary. Three scopes are objectively defined in order to cover all relevant GHG emissions and avoiding double counting. This is shown in Figure 1: Figure 1. GPC Scope Framework: sources and bound- aries of city GHG emissions Source: WRI (2014) Scope 1 accounts the GHG emissions from stationary energy, transportation, waste, IPPU and AFOLU sources
  22. 22. ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 17-32 22 AUTHORS | José Celio Silveira Andrade | Andrea Dameno | Javier Pérez | Juan Manuel de Andrés | Julio Lumbreras located physically within the city boundary. This scope (called territorial emissions) allows for the separate accounting of all GHG emissions produced within the geographic boundary of the city, consistent with national-level GHG reporting. The scope 2 considers the GHG emissions that occur due to the consumption of grid-supplied electricity, heat, steam and/or cooling within the city boundary. GHG emissions associated with electricity are one of the biggest areas of variability among cities and can be essential in order to mitigate emissions. Finally, the scope 3 accounts the GHG emissions that occur outside the city boundary because of activities that take place within the city boundary. The GPC includes scope 3 accounting for a limited number of emission sources, including transmission and distri- bution losses associated with grid-supplied energy, andwastegeneratedinthecitybutdisposedortreated outside the city boundary and out-of-boundary trans- portation. Cities may optionally report other Scope 3 sources associated with activity in a city—such as GHG emissions embodied in fuels, water, food&drink and construction materials. CB methodologies are an alternative to the sector- based approach to measure city emissions adopted by the GPC. It focuses on the consumption of all goods and services by residents of a city, and GHG emissions are reported by consumption category rather than the emission source categories set out in the GPC. The CB methodologies allocate GHG emissions to the final consumers of goods and services rather than to the original producers of those GHG emissions. As such, GHG emissions from visitors’ activities and the pro- duction of goods and services within the city bound- ary that are exported for consumption outside the city boundary are excluded. CB inventories typically use an input-output model, which links household consumption patterns and trade flows to energy use and GHG emissions, and their categories cut across those set out in the GPC. So, CB approach is complementary to the GPC and it provides a different insight into a city’s GHG emission profile. For example, King County in the U.S. state of Wash- ington carried out a study published in 2010 using 2008 data to estimate the emissions associated with all goods and services consumed by the region’s two million residents, regardless of where the emissions were produced. Total emissions were estimated at 55 million MtCO2e, of which over a quarter was released outside the US. Overall, emissions associated with lo- cal consumption by residents, governments and busi- nesses, including the production of goods, food and services from outside the County, were more than twice as high as emissions that occurred inside the County’s borders. King County’s “geographic-plus” based inventory separately estimated regional emis- sions at 23 million MtCO2e, using a methodology similar to the GPC. The difference in emissions re- flects the different sources covered by the two meth- odologies. Some sources are included in both inven- tories and, therefore, the results should not be added together in order to evict double-accounting (WRI, 2014). City-induced framework This approach gives cities the option of selecting be- tween two reporting levels: BASIC or BASIC+. These levels cover specific scopes in different categories of activities, being the BASIC+ level the one that pro- vides further analysis. The BASIC+ reporting level includes the three BASIC categories (stationary en- ergy, transportation and waste) and aggregates IPPU, AFOLU and any other emissions occurring outside the geographic boundary due to city activities (WRI, 2014). Stationary energy, the first BASIC reporting level cat- egory, includes scope 1 and 2 GHG emissions. A major part of the emissions associated with stationary en- ergy is produced due to residential, commercial and institutional buildings and facilities heating systems; energy industries; and manufacturing industries and construction. Looking at these emissions, the types of fuels employed to produce energy, the levels of energy efficiency of constructions and the climate are the main determinant for stationary energy GHG emis- sions. Therefore, cities with a higher heating or cool- ing need and a higher level of fossil fuel energy con- sumption will normally have higher GHG emission rates related to stationary energy. So, the thermal and electrical energies play an important role in this GHG emission category, and it presents a strict relationship between the level of economic welfare and the quanti- ties of energy consumed (Croci, Melandri, & Molteni, 2011). The second one, the transportation category, also cov- ers the scopes 1 and 2 GHG emissions. In scope 1 it covers the fugitive emissions from transportation of primary fossil fuels and in scope 2 it covers all jour-
  23. 23. 23ARTICLES |Comparing Madrid and Salvador Ghg Emission Inventories: Implications for Future Researches ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 17-32 neys by road, rail, water and air, including inter-city and international travel. GHG emissions are produced directly by the combustion of fuel orindirectly by the use of grid-supplied electricity. Empirical relation- ships have been established between transportation energy use and population density, with an inverse in- teraction (Kennedy et al., 2009). Cities that are spread out result in heavy reliance on fossil fuel-powered au- tomobiles and, therefore, account for higher trans- portation-related GHG emissions. On the other hand, cities with higher population density and with an ex- tensive public transportation network that enables them to satisfy a bigger quota of passengers, normally present significantly lower emissions associated with transportation (Sugar, 2010). The form of a city, the features of the vehicle stock, the type and the prices of fuels utilized are determinants of GHG transporta- tion emissions (Croci et al, 2011). Finally, the third onecovers the GHG emissions as- sociated with waste category and it includes scopes 1, 2 and 3. The GHG emissions computed within this category are produced due to the inside and outside of city boundary waste and wastewater generation, treatment and disposal. Management of urban solid waste systems has been implemented in most developed countries, not only with the purpose of optimization of resources, but also with the purpose of reducing GHG emissions. Ur- ban solid waste volume increases with economic and demographic growth and some studies indicate that treatment and disposal of it is third one of the ma- jor contributors to GHG emissions after residential, commercial and institutional buildings and facilities; and transportation (Lu, Sun, Ren, & He, 2015). Thus, the per capita GHG emissions and urban solid waste generation are closely correlated to city wealth (Hoo- rnweg et al., 2011). It is a fact that the cities in the world’s poorest regions with lowest per capita GHG emissions have lower waste generation rates. Waste treatment strategies are especially important in order to tackle GHG emissions, as cities grow and consume more resources, there is a clear relationship between emissions and waste. Chinese cities and oth- er cities in developing countries that experiment an incredibly rapid pace of growth have correctly iden- tified this relationship and several thorough stud- ies have been carried out in order to apply the best policies concerning solid waste treatment (Yang et al., 2011; Lin & Huang, 2009; Guerrero, Mass, & Ho- gland, 2013). METHODOLOGY As previously explained, the GPC standards have been chosen in order to compare the GHG emissions from Madrid to Salvador. In order to carry out this study, no primary data were collected and only public sec- ondary data sources were used. For Madrid as well as for Salvador, public secondary data were collected from official and institutional documents of munici- pal and national governments (GPC reports, energy balance, urban waste management reports, airport traffic reports etc.). Table 1 provides Madrid and Salvador’s information. They were used as references to estimate the GHG emission inventory boundariesin GPC reports of these cities. Table 1. Madrid and Salvador’s information from GPC reports City Madrid Salvador Year 2013 2013 Description Capital of Spain; the third largest city in the EU Capital of the state of Bahia; the third largest city in Brazil Area (km2) 606 693 Average temperature (ºC) 15 25.3 Population (million) 3.2 2.9 Density (inhab./km2) 5,292 4,190 GDP (million US$) 103,261 18,521 Source: Madrid (2015a, 2015b, 2014a) and Salvador (2015) Tables 2 and 3 present the data about the GHG emissions of Madrid and Salvador from GPC reports:
  24. 24. ISSN: 1984-3046© joscm | São Paulo | V. 10 | n. 1 | Jan-June 2017 | 17-32 24 AUTHORS | José Celio Silveira Andrade | Andrea Dameno | Javier Pérez | Juan Manuel de Andrés | Julio Lumbreras Table 2. GHG emissions of Madrid in 2013 from GPC report Madrid GHG Emissions Source (By Sector) Total GHGs (tonnes CO2e) Scope 1 Scope 2 Scope 3 BASIC BASIC+ Stationary energy Energy use 2,860 2,985 374.042 5,845 6,219 Energy generation sup- plied to the grid 190.900 - - - - Transportation All emissions 2,660 265.751 33.300 2,926 2,959 Waste Waste generated in the city 431.481 - - 431.481 431.481 Waste generated outside city 5.776 - - - - IPPU All emissions 679.742 - - - 679.742 AFOLU All emissions -32.432 - - - -32.432 Other scope 3 All emissions - - - - - Total 6,796 3,251 407.342 9,202 10,257 Source: Madrid (2015a, 2015b) Table 3. GHG emissions of Salvador in 2013 from GPC report Salvador GHG Emissions Source (By Sector) Total GHGs (tonnes CO2e) Scope 1 Scope 2 Scope 3 BASIC Stationary energy Energy use 303.734 366.395 - 670.129 Energy generation supplied to the grid - - - - Transportation All emissions 2,151 - - 2,151 Waste Waste generated in the city 205.218 - 90.402 295.621 Waste generated outside city 3.515 - - - IPPU All emissions - - - - AFOLU All emissions - - - - Other scope 3 All emissions - - - - Total 2,663 366.395 90.402 3,117 Source: Salvador (2015) In 2015 Madrid decided to adopt the GPC methodology to report its 2013 GHG emissions at BASIC and BA- SIC+ levels (see Table 2). On the other hand, Salvador only covers the BASIC reporting level of the GPC (see Table 3) as this wasthe first attempt to develop a GHG emission inventory. Therefore, it is only possible to com- pare Salvador and Madrid at a BASIC reporting level. So, in order to compare and discuss the results of Ma- drid and Salvador, the following GHG emission indi- cators and relations were used: • Per capita urban and national emissions; • Per capita emission by scope and sector; • Per capita emissions associated with transportation; • Relation between the per capita scope 2 emissions and per capita electricity consumption from sta- tionary sources; • Relation between population density and per capita emissions from road transportation; • Relation between waste generation rate, per capita total emissions and GPD; RESULTS AND DISCUSSIONS Figure 2 shows the differences between per capita ur- ban and national GHG emissions from Salvador ver- sus Brazil, and from Madrid versus Spain. Figure 2. Percapita urban and national GHG emissions from Salvador/Brazil and Madrid/Spain