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Sustainability Driven Innovation

Sustainability Innovation Leaders - Profit

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Sustainability Innovation Leaders - Profit

In this installment of leaders, we will be covering two companies and a philosophy:

  • We'll start with Packsize, a unique on-demand box creation system for shipping and fulfillment operations, especially those which are e-commerce centric.
  • From there, we'll transition from discussing the negatives of shipping air to the positives of rebuilding heavy iron when we take a look at Caterpillar's Remanufacturing operations.
  • And we'll close with a talk from Michael Porter, a leader in business strategy and long-time Harvard business professor, who is discussing the power of profit for social good.

Since Profit is usually covered in depth in public financial filings like 10K (and not GRI), I will be using VISAS to discuss the innovations and how the companies communicate the innovations more so than the sustainability reports.

Packsize

Please watch the following 3:26 video.

Video: Packsize: Packaging for all business types (3:26)

Credit: Packsize. "Packsize: Packaging for all business types." YouTube. July 26, 2018.
Click here for a transcript of the Packsize: Packaging for all business types video.

[Music]

The Packsize mission is to provide smart packaging for a healthy planet. We make all this possible for customers worldwide with a fleet of custom box-making machines. Businesses of all types are doing away with the old store-and-retrieve box inventory by producing right-size boxes for every order or product as needed, right on their own packaging lines.

By offering hardware, software, accessories, consumables, and professional consultation and care services, Packsize is a full-service, single-source partner for any company that ships a variety of products, SKUs, and sizes.

When using an on-demand packaging system, there are three ways to capture a product’s dimensions to determine the size and style of box needed: manual measurement, scanning the product barcode, and via an integrated warehouse management system (WMS).

The following examples also demonstrate how easily Packsize integrates with third-party equipment to tailor and optimize each packaging workflow to suit your company’s needs.

In this setup with an IQ 3, the operator is capturing product dimensions manually. Although this can be done with a handheld disto, a Cubiscan 75 is used in this example. The 75 automatically captures the length, width, and height of the products to be shipped. Upon capturing the dimensions, the Packsize machine immediately produces a right-sized box for the scanned product. This process gives a company the ability to capture volumetric data that doesn’t yet exist for the new inventory on the spot, while also providing the option of storing that data for future orders if necessary.

In this next setup, the operator scans a product barcode, which is relayed directly to the EM9. If there are several products in the shipment, the operator scans all the product barcodes through the order, and the EM9 will produce a box that will fit all the products. The right-sized box eliminates space that was previously stuffed with void filler or air. PackNet, which is Packsize’s production and optimization software, can supplement this process. PackNet DIM, for example, has cavity fill and nesting capabilities and can store these product attributes for future use.

[Music]

The third solution is a whole integration with a WMS. In this scenario, the Packsize X4 receives volumetric data already in place with the company’s WMS when a customer places an order, computing the length, width, and height without barcode scanning or manual measurement. With minimal labor, the X4 automatically produces a right-sized box upon receiving the desired box dimensions straight from the WMS, again via PackNet.

[Music]

On-demand packaging improves your packaging methods, simplifies your packaging needs, and provides sustainable results, all while lowering your costs and benefiting your bottom line.

[Music]

The Insight

Shipping boxes are loaded with inefficiency: either you inventory a tremendous number of different sized boxes and pay a high price per box due to low volumes, or you limit the number of sizes and waste money and material on void filler (i.e. Styrofoam peanuts) and pay unnecessarily high shipping costs due to empty volume. Packsize is a machine that creates perfectly-sized boxes on-demand as an order is fulfilled. Very little, if any, void fill is needed, and shipping costs are reduced significantly.

The Opportunity

With the advent of major online retailers and e-commerce being a major area of growth, parcel shipments reach new records virtually every year. During the holiday season in 2014, FedEx saw a 9% increase in shipments to 290 million, and UPS an 11% increase to 585 million. Despite this massive growth over the past decade, the box itself had remained unchanged and inefficient.

Furthermore, one has to question the sustainability of brands shipping massively oversized boxes, as well as how much they are wasting on those boxes.

Vision

Not terribly inspiring, but accurate:

"We are the global leader in On Demand Packaging®. With Packsize as your packaging company, making boxes is easier than printing labels. Smarter packaging means fewer planes, fewer trucks, and less material."

Innovation

The patented software and equipment is the real star of the Packsize offering. They hold multiple patents for the machinery, and it provides speeds sufficient to meet the demands of even high-volume shippers like Staples and REI. It is smart enough to size boxes exceptionally well and with minimal waste. Furthermore, a little bit of business model innovation in that the machines are leased for $1 per year to companies, with Packsize making its money on the cardboard supply (and therefore, actual usage).

The technology, while simple in concept, is a game-changer.

Storytelling

Very little on the emotional side, though Packsize does share some case study videos from satisfied companies. It also does a nice job with some white papers on use cases.

Achievement

They do leverage their client list heavily in most materials, and it speaks volumes: Staples (the world's second largest online retailer), Rubbermaid, GE, Crutchfield, REI, Andersen Windows, and more.

Structure

For what sustainability materials they do have, structure is lacking. It is mostly trivia on packaging waste more than covering how many tons of GHG are prevented from correctly-sized boxes, etc.

The Secret

They're a company making what is a highly sustainable product and using sustainability buzzwords, but they might not really understand sustainability.

Caterpillar Reman

Please watch the following 4:18 video.

Video: Caterpillar Remanufacturing Overview (4:18)

Credit: CatRCD. "Caterpillar Remanufacturing Overview." YouTube. February 14, 2012.
Click here for a transcript of the Caterpillar Remanufacturing Overview video.

ON SCREEN TEXT: In the next decade, the most successful companies will be those that integrate sustainability into their core business. - Doug Oberhelman, Caterpillar Chair & CEO

For Caterpillar and its customers, sustainability is a competitive advantage and sustainability is what remanufacturing is all about. Caterpillar is a global leader in the remanufacturing business. Our Cat Reman Program supports the cat machine and engine product lines as well as remanufacturing activities at our subsidiaries Solar Turbines, Progress Rail, and EMD. We're setting the pace for the industry and delivering value to our customers worldwide. Customers get a product with the same quality, performance, and warranty as a new product, but at a fraction of the price which really helps reduce owning and operating costs. In short, remanufacturing is good for customers, good for business, and good for the environment. Caterpillar's Reman process reduces waste, lowers greenhouse gas production, and minimizes the need for raw materials. And our customers find new value for products that would otherwise go to the landfill. We remanufacture more than two million components each year. That means Caterpillar recycles an average of 1.94 billion pounds or $880 million kilograms of end-of-life iron each year.

As an example, here's how the process works for Cat Reman products. A customer needs a replacement part for a Caterpillar product. They buy a Cat Reman part or component. The Reman price includes a core deposit which gives the customer financial incentive to turn in the product being replaced. Once the dealer inspects and accepts the old product, also called a core, the deposit is returned to the customer. Now the remanufacturing process begins. The Cat dealer ships the core to one of our core receiving facilities located around the world. We confirm the dealers inspection and refund the cost of the core deposit to the dealer. The core is then shipped to one of our Caterpillar remanufacturing facilities around the world where the remanufacturing work is performed.

First, the core is disassembled into its individual elements down to the level of every individual nut and bolt. Its original identity is lost. Then each element goes through a cleaning process followed by a rigorous inspection using detailed caterpillar remanufacturing criteria. The individual components are salvaged to exact specifications using advanced technologies many of which were developed by CAT Reman. This provides the same quality, performance, reliability, and durability as new while salvaging a significant percentage of the original material creating a sustainable competitive advantage. Elements that don't pass are removed from the process and recycled.

Finally, salvaged and new elements are assembled in the Cat Reman products that include engineering updates. Will fitters just can't match the tolerances, precision, or technology of Cat Reman. Each product is tested to ensure it meets specifications same as new and is assigned a new serial number.

Finally the product is painted and made ready for sale as a Cat Reman product. As a result, our customers can select from a broad portfolio a value-packed remanufactured products. They're as good as when new and as strong as ever. Today we're also remanufacturing products for companies outside of the Caterpillar family which turns our sustainability efforts into an engine for growth. It's good news for Caterpillar, our customers, and the world we share.

The Insight

It all actually started as a favor in 1973. Ford, a major customer, asked Caterpillar to supply it with rebuilt truck engines. "It was something we had to do," according to Steven L. Fisher in a 2005 Bloomberg article.

The real insight would come when Caterpillar realized how profitable the remanufacturing division could be.

The Opportunity

To make profit multiple times on the same Caterpillar part while providing customers with outstanding service and a factory warranty. An engine connecting rod can be rebuilt up to seven times during its life, and CAT Reman will turn a profit on every single one of those "seven lives" while keeping that iron out of a scrap yard or landfill.

To give you a feel for the size of the Remanufacturing division, it remanufactured 500,000 tons of equipment from 2004-2014, and revenue is predicted to grow at at roughly 20% annually.

Vision

From "The Benefits of Remanufacturing":

GOOD FOR CUSTOMERS
Cat remanufactured parts and components provide same-as-new performance and reliability at fraction-of-new costs—while reducing the impact on the environment. And over-the-counter availability gives customers more options at repair and overhaul time. The results are maximum productivity and lower costs.

GOOD FOR BUSINESS
The remanufacturing program is based on an exchange system where customers return a used component (core) in return for our remanufactured products. Reman options are one more way we support our customers and help lower owning and operating costs.

GOOD FOR THE ENVIRONMENT
Caterpillar is a global leader in remanufacturing technology, recycling more than 120 million pounds of end-of-life iron annually. Because we are in the business of returning end-of-life components to same-as-new condition, we reduce waste and minimize the need for raw material to produce new parts. Through remanufacturing, we make one of the greatest contributions to sustainable development—keeping nonrenewable resources in circulation for multiple lifetimes.

Innovation

While the program may seem straightforward, the logistics of returns, fulfillment, and refunds, let alone the thousands of remanufacturing processes themselves, are daunting. Caterpillar is famously tight-lipped about its manufacturing processes, but to be able to resurface and rebuild parts with service lives in the tens of thousands of hours is an engineering achievement, however it is accomplished.

Storytelling

Caterpillar gives the Reman division significant airtime in both its Sustainability Report as well as its core marketing, sharing stories of both success and satisfied customers.

They are especially proud of the fact that their "take back" percent, that is, the percentage of parts that are returned for remanufacturing, hovers between 93% and 95%.

Achievement

They capture achievements in a few different ways throughout their CSR and marketing materials, and all are illustrative: lbs of EOL material remanufactured and placed back into service, % of total parts remanufactured, etc.

Structure

They do a solid job of making sure that the emphasis they place on the Reman program in their sustainability program is reflected in their sustainability goals in a meaningful way. In fact, two of their nine major sustainability performance measures are Reman specific indicators.

The Secret

Caterpillar now considers remanufacturing in the product design process so that it may become ever more efficient... and profitable.

Michael Porter

Please watch the following 16:24 video. If the video is not displaying on the page, please view it on the Ted website. A transcript is available on the external site as well.

Video: The case for letting business solve social problems (16:24)

The Case for Letting Business Solve Social Problems
Click here for a transcript.

I think we're all aware that the world today is full of problems. We've been hearing them today and yesterday and every day for decades. Serious problems, big problems, pressing problems. Poor nutrition, access to water, climate change, deforestation, lack of skills, insecurity, not enough food, not enough healthcare, pollution. There's problem after problem, and I think what really separates this time from any time I can remember in my brief time on Earth is the awareness of these problems. We're all very aware.

Why are we having so much trouble dealing with these problems? That's the question I've been struggling with, coming from my very different perspective. I'm not a social problem guy. I'm a guy that works with business, helps business make money. God forbid. So why are we having so many problems with these social problems, and really is there any role for business, and if so, what is that role? I think that in order to address that question, we have to step back and think about how we've understood and pondered both the problems and the solutions to these great social challenges that we face.

Now, I think many have seen business as the problem, or at least one of the problems, in many of the social challenges we face. You know, think of the fast food industry, the drug industry, the banking industry. You know, this is a low point in the respect for business. Business is not seen as the solution. It's seen as the problem now, for most people. And rightly so, in many cases. There's a lot of bad actors out there that have done the wrong thing, that actually have made the problem worse. So this perspective is perhaps justified.

How have we tended to see the solutions to these social problems, these many issues that we face in society? Well, we've tended to see the solutions in terms of NGOs, in terms of government, in terms of philanthropy. Indeed, the kind of unique organizational entity of this age is this tremendous rise of NGOs and social organizations. This is a unique, new organizational form that we've seen grown up. Enormous innovation, enormous energy, enormous talent now has been mobilized through this structure to try to deal with all of these challenges. And many of us here are deeply involved in that.

I'm a business school professor, but I've actually founded, I think, now, four nonprofits. Whenever I got interested and became aware of a societal problem, that was what I did, form a nonprofit. That was the way we've thought about how to deal with these issues. Even a business school professor has thought about it that way.

But I think at this moment, we've been at this for quite a while. We've been aware of these problems for decades. We have decades of experience with our NGOs and with our government entities, and there's an awkward reality. The awkward reality is we're not making fast enough progress. We're not winning. These problems still seem very daunting and very intractable, and any solutions we're achieving are small solutions. We're making incremental progress.

What's the fundamental problem we have in dealing with these social problems? If we cut all the complexity away, we have the problem of scale. We can't scale. We can make progress. We can show benefits. We can show results. We can make things better. We're helping. We're doing better. We're doing good. We can't scale. We can't make a large-scale impact on these problems. Why is that? Because we don't have the resources. And that's really clear now. And that's clearer now than it's been for decades. There's simply not enough money to deal with any of these problems at scale using the current model. There's not enough tax revenue, there's not enough philanthropic donations, to deal with these problems the way we're dealing with them now. We've got to confront that reality. And the scarcity of resources for dealing with these problems is only growing, certainly in the advanced world today, with all the fiscal problems we face.

So if it's fundamentally a resource problem, where are the resources in society? How are those resources really created, the resources we're going to need to deal with all these societal challenges? Well there, I think the answer is very clear: They're in business. All wealth is actually created by business. Business creates wealth when it meets needs at a profit. That's how all wealth is created. It's meeting needs at a profit that leads to taxes and that leads to incomes and that leads to charitable donations. That's where all the resources come from. Only business can actually create resources. Other institutions can utilize them to do important work, but only business can create them. And business creates them when it's able to meet a need at a profit. The resources are overwhelmingly generated by business. The question then is, how do we tap into this? How do we tap into this? Business generates those resources when it makes a profit. That profit is that small difference between the price and the cost it takes to produce whatever solution business has created to whatever problem they're trying to solve. But that profit is the magic. Why? Because that profit allows whatever solution we've created to be infinitely scalable. Because if we can make a profit, we can do it for 10, 100, a million, 100 million, a billion. The solution becomes self-sustaining. That's what business does when it makes a profit.

Now what does this all have to do with social problems? Well, one line of thinking is, let's take this profit and redeploy it into social problems. Business should give more. Business should be more responsible. And that's been the path that we've been on in business. But again, this path that we've been on is not getting us where we need to go.

Now, I started out as a strategy professor, and I'm still a strategy professor. I'm proud of that. But I've also, over the years, worked more and more on social issues. I've worked on healthcare, the environment, economic development, reducing poverty, and as I worked more and more in the social field, I started seeing something that had a profound impact on me and my whole life, in a way.

The conventional wisdom in economics and the view in business has historically been that actually, there's a tradeoff between social performance and economic performance. The conventional wisdom has been that business actually makes a profit by causing a social problem. The classic example is pollution. If business pollutes, it makes more money than if it tried to reduce that pollution. Reducing pollution is expensive, therefore businesses don't want to do it. It's profitable to have an unsafe working environment. It's too expensive to have a safe working environment, therefore business makes more money if they don't have a safe working environment. That's been the conventional wisdom. A lot of companies have fallen into that conventional wisdom. They resisted environmental improvement. They resisted workplace improvement. That thinking has led to, I think, much of the behavior that we have come to criticize in business, that I come to criticize in business.

But the more deeply I got into all these social issues, one after another, and actually, the more I tried to address them myself, personally, in a few cases, through nonprofits that I was involved with, the more I found actually that the reality is the opposite. Business does not profit from causing social problems, actually not in any fundamental sense. That's a very simplistic view. The deeper we get into these issues, the more we start to understand that actually business profits from solving from social problems. That's where the real profit comes. Let's take pollution. We've learned today that actually reducing pollution and emissions is generating profit. It saves money. It makes the business more productive and efficient. It doesn't waste resources. Having a safer working environment actually, and avoiding accidents, it makes the business more profitable, because it's a sign of good processes. Accidents are expensive and costly. Issue by issue by issue, we start to learn that actually there's no trade-off between social progress and economic efficiency in any fundamental sense. Another issue is health. I mean, what we've found is actually health of employees is something that business should treasure, because that health allows those employees to be more productive and come to work and not be absent. The deeper work, the new work, the new thinking on the interface between business and social problems is actually showing that there's a fundamental, deep synergy, particularly if you're not thinking in the very short run. In the very short run, you can sometimes fool yourself into thinking that there's fundamentally opposing goals, but in the long run, ultimately, we're learning in field after field that this is simply not true.

So how could we tap into the power of business to address the fundamental problems that we face? Imagine if we could do that, because if we could do it, we could scale. We could tap into this enormous resource pool and this organizational capacity.

And guess what? That's happening now, finally, partly because of people like you who have raised these issues now for year after year and decade after decade. We see organizations like Dow Chemical leading the revolution away from trans fat and saturated fat with innovative new products. This is an example of Jain Irrigation. This is a company that's brought drip irrigation technology to thousands and millions of farmers, reducing substantially the use of water. We see companies like the Brazilian forestry company Fibria that's figured out how to avoid tearing down old growth forest and using eucalyptus and getting much more yield per hectare of pulp and making much more paper than you could make by cutting down those old trees. You see companies like Cisco that are training so far four million people in I.T. skills to actually, yes, be responsible, but help expand the opportunity to disseminate I.T. technology and grow the whole business. There's a fundamental opportunity for business today to impact and address these social problems, and this opportunity is the largest business opportunity we see in business.

And the question is, how can we get business thinking to adapt this issue of shared value? This is what I call shared value: addressing a social issue with a business model. That's shared value. Shared value is capitalism, but it's a higher kind of capitalism. It's capitalism as it was ultimately meant to be, meeting important needs, not incrementally competing for trivial differences in product attributes and market share. Shared value is when we can create social value and economic value simultaneously. It's finding those opportunities that will unleash the greatest possibility we have to actually address these social problems because we can scale. We can address shared value at multiple levels. It's real. It's happening.

But in order to get this solution working, we have to now change how business sees itself, and this is thankfully underway. Businesses got trapped into the conventional wisdom that they shouldn't worry about social problems, that this was sort of something on the side, that somebody else was doing it. We're now seeing companies embrace this idea. But we also have to recognize business is not going to do this as effectively as if we have NGOs and government working in partnership with business. The new NGOs that are really moving the needle are the ones that have found these partnerships, that have found these ways to collaborate. The governments that are making the most progress are the governments that have found ways to enable shared value in business rather than see government as the only player that has to call the shots. And government has many ways in which it could impact the willingness and the ability of companies to compete in this way.

I think if we can get business seeing itself differently, and if we can get others seeing business differently, we can change the world. I know it. I'm seeing it. I'm feeling it. Young people, I think, my Harvard Business School students, are getting it. If we can break down this sort of divide, this unease, this tension, this sense that we're not fundamentally collaborating here in driving these social problems, we can break this down, and we finally, I think, can have solutions.

Thank you.

(Applause)

Credit: Michael Porter. "The case for letting business solve social problems." TEDGlobal. 2013.

Overall

While I do find that Porter makes quite a few good points in this lecture, I tend to be more of a fan of his writings on the topic (namely his paper you read on the last page).