These days, we often read headlines about the need to reduce dependence on foreign oil and to lower greenhouse gas emissions to minimize the expected impact on climate change. We also see prices going up for gas, home heating oil, electricity and water. These higher prices don’t just hit us on the home front. They also mean increases in the cost of preparing, manufacturing and shipping raw materials as well as finished goods, which influences the costs of the products companies make and consumers buy.
These issues are not localized to the U.S. Economies all over the world are dealing with them. This is due, in large part, to a sharp increase in the consumption of natural resources, such as oil, coal and water caused by the rapid rise of the middle classes in highly populated countries, such as China and India, and combined with normal growth of consumption in other industrialized countries around the world. This concept is covered a great deal in Thomas Freidman’s books The World is Flat and Hot, Flat and Crowded.
The U.S. is also in the midst of an energetic presidential election season with presidential candidates John McCain and Barack Obama stating that they will support a cap-and-trade approach to reducing greenhouse gas (GHG) emissions in the U.S. Additionally, regulations (in Europe) and market forces are driving many companies to adopt extended producer responsibility and product stewardship practices, whereby they take back products they have produced for recycling.
What Does this Mean for Your Company?
The first thing to do is recognize that the costs of these inputs to a company’s operations will likely continue to go up as demand continues to increase, creating more scarcity. Basic economic supply and demand principles are at work here. Additionally, it should be expected that there will be new costs on greenhouse gas emissions as cap-and-trade programs (or taxes) are implemented in the future and the caps are gradually lowered over time. These issues affect diverse industries such as transportation, manufacturing, retailing and even service companies, because all use the basic raw materials of oil, electricity and water either directly or indirectly in operations.
What to Do About This?
As individuals and employees, we probably feel there is something we should be doing in response to all of this. But in many cases, we are not sure where to start, because it seems so overwhelming.
The good news is that the problem of managing escalating costs of inputs and operations, as well as managing risks to the company is not unusual for companies to face, so businesses have well established ways to address this. The difference now is that costs are increasing for things that have been pretty negligible in the overall scheme of operations basically since the industrial revolution began.
In the book, Green to Gold, authors Daniel C. Esty and Andrew S. Winton outline many examples of well-known companies that have tackled these issues head on and been able to realize significant cost savings and risk reductions while improving customer loyalty and market share. These improvements have come from companies rethinking how they do many things, such as:
- Redesigning manufacturing processes and changing other company operations to reduce energy, greenhouse gas emissions and water consumption,
- Redesigning products and company operations to use fewer raw materials and produce less waste,
- Reusing what was formerly thought of as waste in other products or activities and
- Redesigning products so they can be recycled more easily and the parts can be reused in new or different products.
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