EcoNet

I recently attended the Aberdeen’s CPO Summit meeting with some the top Chief Procurement Officers in the country and now understand why we are always fighting the last war.

The speaking agenda was packed with aging ex-CPO’s from companies whose glory has long since faded.  Companies like Sears and Chrysler whose products and services are so unexceptional that they have nearly lost all relevance in the marketplace today.  In the case of Chrysler they weren’t even “too big to fail” but just a place that employed a lot of hardworking people who we need to keep working to prevent wrecking the economy even further.

Listening to these ex-CPO war stories made me think that this position is so ill equipped to lead an organization to their next new market that they are actually placing their companies at great risk.  I had a chance to talk to some very bright CPO’s who clearly had an abundance of people skills, ability to spot excess costs and negotiate for win/win outcomes but they lacked imagination and insight into what is about to become the largest opportuntiy on their horizon: the emergence of a new energy driven economy as the next “Internet” scale business innovation.

I was curious why the dominant topic seemed to be how to reduce indirect purchasing costs.  You know, how to buy office supplies and janitorial services cheaper.  I was surprised that Sustainability was not even on their radar.  Even worse, many talked openly how they felt Global Warming was not a problem that they thought much about and they suspected it was just a fad.  It occurred to me that this profession is so preoccupied looking backwards analyzing “spent money” they can’t envision how to save money in the future.

I was surprised that not one of these high powered CPO’s thought that energy prices would rise again once the recession ends or that they will have to pay more for diminishing supplies of key raw materials like rare earth metals, lithium batteries,  precious metals such as platinum or silver.  Instead they were laser focused on travel spending, services and printing costs.

Message to the CEO: Don’t hand the binoculars to these guys.  They can only tell you where you have already been.

The trouble with “Green Business” is that it conjures up images of a movement without shedding much light on how focusing operations on sustainability leads to greater corporate profitability. While it is understandable that Marketing departments are excited about being viewed as “green“, from an operations point of view, it doesn’t really help the business understand how it should respond to green consumer preferences or pending environmental legislation (see  Joel Makower’s “Why Doesn’t Green = Better?“).

Consumers are becoming increasingly aware of the environmental impacts of the products and services they choose, in fact, studies have shown that about 10% of customers today are willing to pay a little more for a “green” product while 25% of them couldn’t care less.  From a Marketing perspective, however, the real prize is the remaining 65% of consumers who have yet to make up their minds. If building brand value is all about associating your products to newly identified needs and wants then it is especially true if the next generation of consumers choices differ from those of their parents.  Savvy companies like Walmart view their customers in generational terms and know they must remain relevant on the environment and sustainability.  They understand that young people today have a keen awareness of pollution, population growth, and resource depletion and the few lectures that parents do get from their children are all around recycling and energy use.  If the environment and sustainability become intergenerational issues than we better get used to “green” marketing.

What about “green” operations, or more precisely Eco-Operations; haven’t we been doing Lean manufacturing for years and why isn’t that enough?  It is true that Lean and Total Quality efforts of the past were very effective at eliminating waste but are not necessarily well calibrated to reduce future risks and costs in a resource constrained world. Lean manufacturing will tell you a great deal of how your current activities generate waste but won’t tell you much about how the cost of energy will impact you in the future and what you should be doing about it today.  Lean will not shed much light on the cost of carbon or how it could ripple throughout the economy due to regulatory legislation. “Green Business” is then really about the sustainability of your operations, your supply chain and ultimately your products impact on the planet.

It is clear now that environmental regulations and their costs will only increase, whether from straight carbon taxes or more stringent limitations on the use of hazardous materials. In addition, resource limitations, whether of fuels or other raw materials, will also likely lead to cost increases in the future. Though many of these costs will be borne directly by suppliers rather than brand owners, they will eventually be passed on throughout the network resulting in higher-priced products. As costs rise, companies’ imperatives to heed and improve their environmental records will move from idealism and marketing strategy to a more straightforward economic concerns. The quest for profits will ultimately drive sustainability.

Make no mistake Walmart’s announcement to eventually implement Eco labels on all products is big news, probably bigger than cap and trade legislation.  What Walmart said, in effect, was that its customers would be given more information to make choices among products based on their environmental and social impacts through a sustainability scorecard now being developed with several universities and NGO partners.  That means the nearly 100 million US customers a week who shop at Walmart will now have additional insight into the “total costs” of production, not just the price tag they are accustomed to seeing. Walmart believes customers will want to know where products are made and how they are produced and they expect this to become the new normal in retail.

Why is Walmart doing this? During their July Milestone Meeting in Bentonville Arkansas, Mike Duke, the CEO explained that most of the great retailers of the past were unable to appeal to their next generation of customers because they had either failed to change with them or had become less relevant.  While Walmart knows it has, and must continue, to deliver on their promise of “More for Less”, it is now concerned about how to deliver on the “Live Better” part of the slogan; especially if these new consumers prefer products made with sustainably in mind (see Joel Makower’s “Why Doesn’t Green = Better“). Mr. Duke noted that the children of today’s customers care deeply about environmental matters.  To the largest retailer in the world it is not only a matter of staying close to their future customers but also managing brand risk by not appearing to be out of touch with their present day customers.

Walmart is taking the lead in focusing their suppliers on their carbon and resource footprints as a way to drive competitive advantages and protect their brand. With tens of thousands of partners around the globe they feel they have the opportunity to not only improve the quality of the products they offer but also eliminate sources of unnecessary costs deep within their supply chain.  To make the point Walmart explained that by focusing on packaging and transportation efficiency in 2008 they were able to increase case load by 3% while driving 90 million fewer miles and saving $200,000 in the process.  They accomplished this by using more fuel efficient trucks, filling truck tires with nitrogen and working with suppliers to increase packaging density and deploy more intelligent routing. To accomplish this Walmart had to work closely with their suppliers to reduce the amount and size of packaging used to ship products.  This sort of Supply Chain collaboration will become the model of Operational Excellence as companies seek to meet Walmarts sustainability targets.

Product Label Transparency

About 40% of the products sold today at Walmart and Sam’s Club are private label products.  These are products where Walmart deals directly with the manufacturer to eliminate name brand owner markups.  This is especially significant as it will likely be these trading partners who will be the first wave of manufacturers to provide information needed to create the eco label.  Since Walmart is, in effect, the brand owner they have every right to require disclosure on all hazardous materials, energy consumed, Green House Gases (GHG) emitted or water consumed during manufacturing and shipment to Walmart Warehouses but they stopped short of requiring this level of detail, at least for now (see “It’s Easy Being Green, The Meaning of Eco-labels”).  To get traction quickly they are asking 15 simple questions around Energy and Climate, Material Efficiency, Natural Resources, People and Community.  Straightforward questions like:  Have you measured your corporate greenhouse gas emissions?  Have you measured water use and waste generation?  Do you know the origin of all the components in your product?  Do you know where your components are made and do the factories follow local laws?

Risk Management

As the largest retailer, Walmart drives more resource consumption than any other business in the world.  In a crowded world of 6.7 billion, expected to balloon to 9 billion by 2050, there is a practical limit to the amount of resources we can continue to harvest if everyone wants a lifestyle similar to those enjoyed in the developed countries.  Walmart understands that under as a business-as-usual scenario within a few short decades resource constraints will pit the “haves against have nots” and prices will begin skyrocket.  Not good for their business…

A closer look into the current economics of first world production, distribution and consumption reveals horrible inefficiencies from a system perspective. Nearly half the electrical energy produced is wasted within the distribution system and by inefficient appliances, half the food production in the US is ultimately thrown away and cheap energy and globalization has produced incredibly complex supply chains that are fragile and bloated with unneeded costs.

The Future of the Supply Chain

The days of linear supply chains and arms length business relationships are coming to an end.  Globalization killed it and in its place are now value chains and networks that are both competitive and codependent on a flow of information from consumers to manufacturers.  Walmarts sustainability initiative is not about crushing suppliers or stealing their IP or creating new bureaucracies, it is about becoming more efficient, lowering costs, extending natural resources and improving the standards of living of consumers around the globe.  In 2006 Walmarts price competitiveness was thought to have resulted in savings for consumers of over $287 billion, or $2,500 per household according to Global Insight  an independant research firm. Walmart knows it must squeeze this waste and more out of production and transportation systems to remain the top retailer. And as Martha Stewart would say “that’s a good thing” for the next 3 billion people on the way.

The Supply Chain metaphor is not wearing well.  The idea fit well a few decades ago when companies were vertically integrated, had local suppliers and served home markets.  Now it seems to look more like a relic of another century.  Companies that once proudly claimed to make things have found it far more profitable to outsource manufacturing and redeploy their earnings towards product development and marketing.  As Apple, Cisco, Nike and others have found it is all about developing IP and their brands. 

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