Daily Archives: March 27, 2011

Think Energy Efficiency Investments are Costly? Think Again!

A recent article in Industry Week on Sustaining a Green Strategy, which described Dow Chemical’s pursuits to become more energy efficient and further reduce its energy footprint another 25% by 2015, had a very telling number buried in the article. A very significant number. To some, a very shocking number.

Dow has saved 7 Billion with investments into energy efficiency. SEVEN BILLION!

Think about that while also thinking about how many deals you have to negotiate to get that kind of savings in an average Fortune 500. Considering that, on a large direct spend category, 3% is the average savings an organization will find as it negotiates the same hundred-million dollar category again and again, if the average deal size is 100 Million, that’s 2,334 negotiations to get the same savings. (Well, not exactly, as some deals will save 10%, but since other deals will only save 1% due to skyrocketing prices, it’s not far off.)

It’s true that Dow has made 2 Billion in energy efficiency investments to date, but Dow also avoided 9 Billion in energy expenditures from these investments, giving it a net savings of 7 Billion to date — with more savings accruing every day as energy prices continue to rise. And when you consider the constant demands for power from lighting, heating, cooling, and computing that a modern organization is subjected to, it doesn’t take long for an investment to pay off — and it will keep paying off year after year. So make the investment, even if you have to take out a loan to do so. The savings will pay the interest many, many times over.

For a Successful Supply Chain, Think Long Term

The HBR recently ran a great article on Creating Shared Value that quickly gets to the problem with many companies today, and, by extension, many supply chains.

Companies themselves … remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success.

By failing to take into account the well-being of their customers, the depletion of vital natural resources, supplier viability, and general economic distress of the communities in which they do business, companies are thinking very short term and sacrificing long-term success for short term gains. And unless they correct their thinking, and, according to the article, focus on shared value, they will fail to build real wealth.

But when the focus is on social good, the real reasons that long-term thinking yields supply chain success become muddied. Simply put, they are:

  • Lower Operational Costs
    Reducing the need for natural resources reduces the costs associated with those resources. Long term thinking selects the solution that will reduce the need for expensive resources in the long term, even if integration costs a little more in the present.
  • Lower Material Shortage Risks
    Switching to more environmentally friendly materials and materials that are not in short supply, even if costly up front, secures supply for the long term. In contrast, depending on a rare mineral or hazardous material brings the risk that a single natural disaster or environmental regulation can take out an only source of supply.
  • Lower Risk of Market Backlash
    If your consumer base all of a sudden goes green and you’re seen as the worst offender, bye-bye sales and no supply chain will save you.

So think long term. The savings will pay for the effort many times over.