This is one of the two choice achievements in the game. You'll get this or 001 based on a choice at the start of the game.
Once you get the cocoon guy into the pushable cart on the circular tracks, you have to push him into the room with the scooping machine, put him in it, and activate it. Then you'll get his arm, which you can put a key on, and use to progress.
The achievement should unlock once you get the arm.