ACC311 CS 2 - Case Study Part 2 PDF

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ACC311 – Case Study Part 2

Hannah Vittorio 11533892

Executive Summary This report has been prepared to identify and discuss the key environmental and social concern’s relating to Under Armour’s operations. Potential performance measures have been recommended, to assess the progress towards sustainability goals identified by Under Armour. Implementation of the recommended performance measures will assist Under Armour to establish the effectiveness of their objectives over time. Resulting in reducing their environmental footprint and contributing to achieving sustainable processes.

Table of Contents Executive Summary......................................................................................................................................................... 1 Introduction.................................................................................................................................................................... 1 Environmental Concerns.................................................................................................................................................1 Social Concerns...............................................................................................................................................................2 Sustainability Objectives................................................................................................................................................. 2 Objective 1..................................................................................................................................................................3 Objective 2..................................................................................................................................................................3 Objective 3..................................................................................................................................................................3 Conclusion.......................................................................................................................................................................4 References....................................................................................................................................................................... 5

Introduction With this growing pressure from stakeholders to be accountable for their sustainability, it is pivotal that information is provided on Under Armour’s environmental and social performance (Langfield-Smith, 2015, p.759). The establishment of environmental and social performance measures, assist managers in gaining a better understanding of the environmental and social impacts of their business, right across their supply chain. Conducting an environmental cost analysis including conventional costs, hidden costs, contingent costs, relationship/image costs and societal costs, can identify ways in which such costs can be managed more effectively (Langfield-Smith, 2015, p.657). Good supply chain management can reduce the risk of disruption and reputational damage. Environmentally conscious practices can lead to direct cost savings by using less raw materials and reducing energy and waste use. A business that manages social and environmental issues together is likely to have lower risk associated with its business (Bain, 2015).

Environmental Concerns The key environmental concerns relating to Under Armour's operations include: 

Materials used: percentage of responsibly sourced materials used in products, packaging material used.

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Energy efficiency: total energy consumed on production line, transportation energy used, idle energy losses, percentage of renewable energy used.

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Water use: total amount of water used on production line, percentage of recycled water used.

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Waste and Emissions: amount of waste generated in production, greenhouse emissions, percentage of waste recovered to be reused, recycled or remanufactured.

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ACC311 – Case Study Part 2

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Hannah Vittorio 11533892

Supply chain partners: involvement of suppliers towards sustainable practices is essential. As this is an area, where the most damage to the environment can occur and therefore has the greatest opportunity for improvement.

Social Concerns The key social concerns relating to operations include: 

Supply chain transparency: ethical risks, exploitative labour practices, focus on cheap labour increase risks to quality, productivity and lead times.

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Health and safety of workers in Supply Chain: exposure to harmful chemicals, high temperatures, high voltage electricity, and dangerous machinery.

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Labour and Work Practices: assessment of internal and external (supplier) work practices, OH&S issues.

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Employee diversity and development: employee satisfaction, employee turnover, training opportunities.

Sustainability Objectives The following table summarises the sustainability objectives identified by Under Armour and the recommended performance measures to assess progress towards achieving these objectives. Dimension Business Sustainability

Objective 1. Engaging with suppliers to support the factories that, and workers who, make our products.

Possible Performance Measures 1. Staff training regarding sustainability practices and OH&S, measuring attendance rates and evaluating feedback. 2. Audit of suppliers work practices. 3. Staff turnover rates.

2. Improving our materials and design, which determine a significant share of our impacts from our vision to products’ end of life – and is an area where we have more control to promote cleaner and healthier environments.

1. Water usage (total litres and litres per unit of product). 2. Percentage of responsibly sourced materials used in products. 3. Energy use (total kWh and per unit of product).

3. Enhancing sustainable practices in our corporate, retail, logistics, and owned manufacturing operations.

1. Reduction of waste 2. Direct and indirect greenhouse gas emissions by weight. 3. Transportation energy use

Objective 1 Collaboration with suppliers is essential to address the challenges of the apparel industry. Working closely with suppliers will help to build their capabilities to manage social and environmental issues effectively (Chin et al, 2015, p.698).

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Under Armour states that manufacturers are evaluated for quality systems, social compliance and financial strength prior to engagement. Manufacturers are required to adhere to a code of conduct regarding the quality of manufacturing, working conditions and other social concerns (Under Armour, 2018). Implementing training programs focussed on sustainable manufacturing processes and OH&S issues will increase staff members’ awareness and drive to contribute to sustainable practices (Hermes, 2014). Performance measures to implement would be recording attendance rates and evaluating feedback from staff. Ensuring current suppliers are engaging in safe and fair work practices, resulting in staff feeling valued and engaged is imperative. Conducting audits of suppliers work practices, measuring the completion rate and outcome of each audit conducted, will allow Under Armour to assess the outcome of this objective. Developing shared sustainability goals with suppliers will allow Under Armour to work with them to measure and improve performance. An attractive work environment will result in a higher retention rate of staff and improved productivity (Veleva & Ellenbecker, 2001, p.539). Analysing staff turnover rates will be an effective measure towards achieving this objective.

Objective 2 To evaluate the environmental impacts of the supply chain, assessment must be carried out in multiple areas including material use, energy use, use of other resources, waste and emissions. These four major elements are considered to reflect the inputs to, and outputs from, a production line from an environmental impact perspective (Veleva & Ellenbecker, 2001, p.524) Scarcity of water is believed to be one of the key problems in the 21 st century (Veleva & Ellenbecker, 2001, p. 533). Calculating production water usage (total and per unit of product) and developing cleaner production programs will contribute to the reduction of water consumption. Depletion of non-renewable materials and over consumption of renewable materials is becoming the limiting factor for traditional economic growth. Conserving resources and more efficient use of resources is critical (Veleva & Ellenbecker, 2001, p.533). Poor performance in respect of responsibility-sourced materials, can lead to loss of brand value resulting in reduced revenue (Carlsson-Sweeny, 2012). Determining the amount of materials consumed by facilities in kilograms (total and per unit of product) and analysing this as a percentage of materials used within the business, will contribute to the development of reduced material use. Increased use of energy contributes to the reduction of fossil fuels, as well as global warming and increasing pollution. Conserving energy by using more renewable energy sources is integral for achieving sustainable development (Veleva & Ellenbecker, 2001, p.534). By calculating the total energy use in kWh, the data can be analysed over time to determine the decline in energy consumption and establish the effectiveness of the goal.

Objective 3 Waste relating to clothes and textiles in the fashion industry is estimated to be the fastest growing type of waste globally (Macchion et al, 2017, p.190). Under Armour is seeking to minimise their environmental impact while ensuring quality is not compromised (Under Armour, 2018). Steps towards improving the environmental impact include reduced plastic bag use, fully recyclable product cartons and cartons being shipped to maximum capacity to reduce emissions. Determining the amount of waste generated from retail, logistics, and owned manufacturing operations will allow Under Armour to assess the effectiveness of this goal. Reducing the emission impacts of Under Armour stores, offices and distribution networks will reduce the total environmental footprint of the company. Under Armour states it is focussed on incorporating sustainability throughout their retail and corporate facilities. Current action includes using recyclable materials, installing LED lighting and efficient onsite energy and solar power (Under Armour, 2018). Measuring the total green house gas emissions will assist in determining the effectiveness of these actions.

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Under Armour can reduce transportation emissions by streamlining logistic practices. These efforts will reduce the environmental impact and will also reduce costs (Environmental Protection Agency, 2010). By measuring the green house gas emissions associated with the transportation of goods, Under Armour will be able to work towards reducing these emissions over time and reduce their environmental footprint.

Conclusion Under Armour has identified areas within their business to address environmental and social impacts regarding sustainability. By implementing the recommended performance measures outlined above will allow them to establish the effectiveness of their objectives over time in reducing their environmental footprint and contribute to achieving sustainable products and processes.

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References Are Under Armour's Sustainability Claims Green or Greenwashing. (2017) The Green Market Oracle. Retrieved from: http://www.thegreenmarketoracle.com/2017/11/are-under-armours-sustainability.html Bain, M. (2015) Nike proves that cleaning up your act is smart business. Quartz. Retrieved from: https://qz.com/485333/nike-north-americas-most-sustainable-big-brand-proves-that-cleaning-up-your-act-is-smartbusiness/ Carlsson-Sweeny, M. (2012). How sustainable are Australian retailers’ new sourcing strategies?. The Journal of Superannuation Management. 4(3) 22-26. Retrieved from: http://www.abc.net.au/cm/lb/4796280/data/amp-report-data.pdf Chin, T., Tat, H. & Sulaiman, Z. (2015). Green supply chain management, environmental collaboration and sustainability performance. Procedia CIRP. 26 695-699. Retrieved from: https://ac.els-cdn.com/S2212827114008488/1-s2.0-S2212827114008488-main.pdf?_tid=7b3911c5-546f-4922-b26c3b372a865f67&acdnat=1525227516_0b06027dcc9da0c2fb3aaf66833a4452 Environmental Protection Agency. (2010). Managing Supply Chain Greenhouse Gas Emissions. Retrieved from: https://www.epa.gov/sites/production/files/2015-07/documents/managing_supplychain_ghg.pdf Epstein, M. & Roy, M. (2001). Sustainability in Action: Identifying and Measuring the Key Performance Drivers. Long Range Planning. 34 585-604. Retrieved from: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.611.3871&rep=rep1&type=pdf Global Reporting Initiative. (2015). GA Sustainability Reporting Guidelines. Retrieved from: https://www.globalreporting.org/resourcelibrary/GRIG4-Part1-Reporting-Principles-and-Standard-Disclosures.pdf Hermes, J. (2014) 18 Ways to Raise Employee Awareness About Sustainability. Environmental Leader. Retrieved from: https://www.environmentalleader.com/2014/01/18-ways-to-raise-employee-awareness-about-sustainability/ Huang, A. (2017) A framework and metrics for sustainable manufacturing performance evaluation at the production line, plant and enterprise levels. University of Kentucky. Doi: 10.13023/ETD.2017.373. Retrieved from: https://uknowledge.uky.edu/cgi/viewcontent.cgi? referer=https://www.google.com/&httpsredir=1&article=1097&context=me_etds Kozlowski, A., Bardecki, M. & Searcy, C. (2012). Environmental Impacts in the Fashion Industry. Journal of Corporate Citizenship. Doi: 10.9774/GLEAF.4700.2012.sp.00004. Langfield-Smith, K., Thorne, H. & Hilton, R. (2015). Management Accounting: Information for Managing and Creating Value (7th ed.). McGraw-Hill. Liu, M. (2017). For a true war on waste, the fashion industry must spend more on research. The Conversation. Retrieved from: http://theconversation.com/for-a-true-war-on-waste-the-fashion-industry-must-spend-more-on-research-78673 Macchion, L., Moretto, A., Caniato, F. Caridi, M., Danese, P., Spina, G. & Vinelli, A. (2016) Improving innovation performance through environmental practices in the fashion industry: the moderating effect of internationalisation and the influence of collaboration. Production, Planning and Control. 28(3) 190-201. Doi: 10.1080/09537287.2016.1233361

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Perry, P. (2018) Water pollution, toxic chemical use and textile waste: fast fashion comes at a huge cost to the environment. Independent. Retrieved from: https://www.independent.co.uk/life-style/fashion/environment-costs-fast-fashion-pollution-waste-sustainabilitya8139386.html Tomazin, F. (2017). Big business will be forced to report annually on slavery in supply chains. The Age. Retrieved from: https://www.theage.com.au/national/big-business-will-be-forced-to-report-annually-on-slavery-in-supply-chains20170815-gxwv20.html Under Armour. (2018) Sustainability at Under Armour. Retrieved from: http://www.uabiz.com/company/sustainability.cfm Veleva, V. & Ellenbecker, M. (2001). Indicators of sustainable production: framework and methodology. Journal of Cleaner Production, 9(6), pp.519-549. Retrieved from: http://citeseerx.ist.psu.edu/viewdoc/download? doi=10.1.1.1024.8977&rep=rep1&type=pdf

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Question 2 - Transfer Pricing Q2.1 If the transfer price was established through negotiation between managers the range of possible transfer prices would be between $12 and $20 per sq/m. The Fabric Department has variable costs per sq/m of $12, this is the minimum transfer price amount they will sell the goods for. The Stitching Department will not pay more than $20 per sq/m as this is the market price for fabric that could be purchased externally. With a transfer price of $20 per sq/m the contribution margin per sq/m in the Fabric Department would be $8 per sq/m. If we assume the sale price per unit of a stitched item of apparel sells for $75 and variable costs total $30, the contribution margin per unit for the Stitching Department is $25. Under Armour Transfer of fabric at market price of $20 per sq/m Fabric Department Transfer price Variable costs

$20 $12

Stitching Department

Sales price Transfer price Variable Costs Contribution margin per sq/m $8 Contribution margin per of fabric stitched item * Assumption made on sales price and variable costs per unit in Stitching Department.

$75* $20 $30* $25

Other pricing techniques available to establish transfer price include market-based pricing, cost-plus pricing and the general price rule. An important factor when deciding the appropriate level of transfer price in a situation is whether the supplying unit has spare capacity (Langfield-Smith, 2015, p. 871). We will assume in this scenario that the Fabric Department does have spare capacity. As the company is operating in an existing market with established prices for an intermediate product the use of market-based pricing is ideal. Using negotiation to finalise the transfer price is appropriate in this scenario as the Fabric Department will yield a profit if the fabric is sold to the Stitching Department for more than $12 per sq/m and the Stitching Department will find any amount under the market price of $20 per sq/m attractive.

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ACC311 – Case Study Part 2

Hannah Vittorio 11533892

Q2.2 Cost-plus pricing based on absorption cost with 20% mark-up Absorption cost = 12 + 1 = 13 With 20% mark-up = 13 + 2.6 = 15.6 Transfer price

= variable cost + fixed cost + (20%)(variable cost + fixed cost) = 12 + 1 + (20%)(12+1) = 13 + 2.6 = 15.6

Q2.3 Cost-plus pricing based on variable cost with 30% mark-up Variable cost = 12 With 30% mark-up = 12 + 3.6 = 15.6 Transfer price

Q2.4 Transfer price

= variable cost + (30%)(variable cost) = 12 + (30%)(12) = 12 + 3.6 = 15.6

= outlay cost + opportunity cost = $12 + $8 = $20

Opportunity cost = forgone contribution margin = $20 - $12 = $8 Q2.5 If the Fabric Department has spare capacity, there is no opportunity cost associated with a transfer. Therefore: Transfer price = outlay cost + opportunity cost = $12 + $0* = $12 *Opportunity cost is $0 as the fabric department has spare capacity.

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Question 3 – Capital Investment Analysis Q3.1 1. Annual after-tax cash flow and annual after-tax net profit

Year 1 2 3 4 5 6 7 8 Total

Incremental income tax effect (30%)

Incremental gross profit 3,800,000 3,852,000 3,898,080 3,837,363 3,968,887 3,991,593 4,004,324 4,005,810

Incremental depreciation

-1,140,000 -1,155,600 -1,169,424 -1,151,209 -1,190,666 -1,197,478 -1,201,297 -1,201,743

Cash Flows

Timing

Investment Cash savings Depreciation effect Total

0 Years 1-8 Years 1-8

Incremental depreciation tax effect

-2,250,000 -2,250,000 -2,250,000 -2,250,000 -2,250,000 -2,250,000 -2,250,000 -2,250,000

Before-tax amount -18,000,000 31,358,056 -18,000,000

Tax effect

-9,407,417 5,400,000

675,000 675,000 675,000 675,000 675,000 675,000 675,000 675,000

After-tax cash flow

Annual after-tax cash flow

Ann...