The Beauty of a Sustainable Supply Chain

The new age of sustainability is like a three-legged stool, and over the last couple of weeks I’ve discussed my ideas for the first two legs, including customers and energy or transportation. The third leg involves products, and this idea takes some thinking to fully comprehend.

Most of us don’t think a lot about products because they are ubiquitous. Unless you lived in the old Soviet Union, the concept of bare store shelves makes no sense. In the old CCCP, basic commodities were in short supply, and for everything from bread to shampoo, you stood in line. If you wanted a car or a better apartment, you could wait years. In a market economy, there are always products in the stores, and our conundrums are usually more over what to select.

The aforementioned commodities are things that, in a market economy, are abundant and cheap, and they are usually of decent quality because their manufacturers long ago figured out how to make a profit on large production runs with the necessary quality. But market economies thrive on what’s new and innovative. It’s the new products that are in relatively short supply, because their innovators have difficulty keeping up with demand. This shortness contributes to premium pricing. So what happens when the innovation engine sputters?

Getting It From Here to There

The idea of sustainability, in my mind at least, doesn’t require a catastrophic failure at any point in the product supply chain. It simply means a drop in demand. In the last couple of years we’ve seen what tight credit does to quell demand, and we have experienced the recessionary results. When demand is permanently depressed, the effects on the economy can be significant.

Tight credit isn’t the only thing that can reduce demand. Escalating prices can do the same thing. For instance, if the cost of transporting goods to market escalates significantly, the cost must be reflected in the price of the good, which necessarily makes the product more expensive and begins to price some customers out of the market.

My concern about energy brings this point home. When fuel cost US$1.50 per gallon in 2000, the cost of moving a standard 40-foot shipping container from Shanghai to New York was about $3,300. Eight years later, when fuel hit $3.50, the same container cost $8,350 to move the same distance. At $8 per gallon, the cost of the move will be $15,000. Don’t say it can’t happen. There’s only so much space in the box, so as shipping costs rise, so do the prices of the products, which means some products will be prohibitively expensive — people will make more commodities domestically, and shippers will gravitate to making and shipping more costly goods.

The other factor — in addition to transport — to consider when evaluating product sustainability is commoditization. Commodities are what they are because they are inexpensive and ubiquitous. Consumers love them, but vendors crave the days of new products and new categories for their fat profit margins. But the innovation engine is slowing down. Notwithstanding Apple’s torrid pace of new product introductions, there are fewer new categories and investments in new companies, which produce the lion’s share of new categories and new products have slowed markedly. For instance, last years was the slowest year for VC investments since 1997 — before the dot-com boom.

Talk to the Crowd

All of this is a very condensed version of a larger story, the point of which is this: In such a market, product line extension and value engineering are more important than conventional innovation. Even Apple, which still introduces major new product categories, is adept at these disciplines. But as we all begin to innovate internal to our products rather than by building new categories, the risks associated with getting innovation wrong escalate.

It’s one thing for a new company to guess wrong and go bankrupt, but when an established company introduces a product that few people want, it is more serious. The tools we use to ward off product-related failures are the same we use for getting our messaging right — social media.

Sustainability is increasingly an issue to be mediated by social media, though to be sure, sustainability will never be completely defined by it. Nonetheless, the strides we’ve made in integrating social media into the CRM suite are a good down payment on the future. Even more than with messaging, the key to success is inbound communication — the ability to ask open-ended questions of customers and then to gather and analyze their responses.

Inbound social media gives us insights into how to position products and services, and it can do the same for product development. Last week we saw what Wal-Mart achieved through inbound social media to develop effective messaging. Many other companies, making everything from personal care products to cars to cookies to financial products, are discovering the power of inbound social media. They are finding exact needs and building better products to meet those needs, and in doing so they are making their businesses sustainable — better able to compete in a changing landscape.

So in short, sustainability has many dimensions or challenges, including customers, products and transportation. That’s not exactly the “people, process and technology” mantra that we’ve been used to, but to paraphrase Mark Twain, it rhymes.