Posted by: glennandert | 21-November-2009

Cradle to Cradle

About half way through my first year’s sailing journey through the South Pacific I anchored in the lovely lagoon of a tiny island in the middle of nowhere.

A couple of days later I was walking the deserted windswept beach on the windward side of the island. [No, the boat didn’t sink  🙂  I was just exploring.]  Much to my disgust, the beach was littered with every sort of rubbish that floats, from tennis shoes to plastic bottles.  There was even a “Danger Wet Floor” cone in perfect condition perched upright on the beach.  Even though there is no land to windward for thousands of miles – this tiny ‘unspoiled’ island paradise in the middle of a vast ocean had been forced to become a ‘rubbish filter’.  And the tiny village on the island had no means to dispose of it.

Wind the clock forward a couple of years.  One of the people I met after arriving in Wellington was Nick Churchouse from the Dominion Post.

Nick gave me a book called Cradle to Cradle.  It’s been a year since I’ve read the book.  But the concept still intrigues me.  I’ve thought of two new businesses that were built on the foundation of the ideas in the book. So it has certainly had an impact on my thinking.

I’d like to tell you a story to illustrate one of the central concepts in the book.

You run a car repair shop and are constantly cleaning up grimy dirty engine parts to enable inspecting and repair of the part.  You’ve discovered that the quickest way to accomplish this is to soak the part in a grease solvent designed for this purpose.  You go through a lot of this stuff.  To keep your costs low and stay competitive, you buy the cheapest imported solvent you can find.

You know the solvent is nasty stuff – after all, you wear gloves when handling parts that have come out of the soaker.  What do you do with it when the solvent is saturated and is no longer effective at cleaning parts?  You know that proper disposal is an issue.  But you have enough problems to deal with running your business without getting a PhD in environmental studies to figure out what to do with this stuff.  You ran into this guy Tom that runs a small chemical disposal business.  He comes by once a week and takes it off your hands.  You pay him in cash.  He always says “don’t worry, I’ll take care of this properly for you”.  What does Tom do with it?  You don’t know, and you really don’t want to know.  But it might be that he simply dumps it in a ditch on a deserted road when nobody is looking.

This scenario is known as “cradle to grave”.  It replays itelf everywhere you look.  Let’s look a little deeper at how it works in our example.

The supply chain for the solvent manufacturer ultimately looks something like this:  Pump oil out of the ground.  Refine it.  Process it.  Add some other chemicals.  Poof, solvent.  Environmentally messy, and expensive.

The supply chain for the metal container (the packaging for the solvent you buy) looks something like this:  Big mining operation.  Dig minerals out of the ground.  Refine them.  Process them.  Truck them to the next step in the supply chain.  Stamp them into metal buckets. Paint the bucket with nice colors and the manufacturer’s logo.  Environmentally messy, and expensive.  You’ll thank me for ignoring the supply chain for the paint. 🙂

That’s the ‘cradle’ part.  Harvest the raw materials from the earth, and fashion them into the final goods.  You’re in the middle.  You buy it.  You consume it.  And ultimately… you dispose of it.  That’s the grave part.

The grave part is very ugly.  It doesn’t matter where you look, it’s a mess.  Here in New Zealand we spend tons of money to collect plastic bottles as part of our “recycling” program.  Ultimately, most of that ends up in China where they burn it, because the energy produced from burning it is more valuable than cleaning it, chopping it and blending it 5% with new resin.

That’s ‘the old cradle-to-grave world’.  What might ‘the new cradle-to-cradle world’ look like?

You don’t buy solvent at all.  You rent a service.  The service works like this:  You explain your application to the solvent company (strip grease off of car parts).  They choose the solve that they have specially designed for this application.  They deliver fresh solvent to your door in metal containers, and they take away the containers that are now filled with grease laden solvent.

You pay a fee for this service that’s essentially determined by the amount of grease that you remove from your car parts.  There are plenty of these solvent companies.  One of the dimensions that they compete on is price per unit of grease removed.  Another is making it easy – like door-to-door delivery.

You love it.  You get the exact product you need, easy as pie.

Because the solvent company’s revenue structure is based on price per unit of grease removed, and because their cost structure includes deliver and pickup, they have an incentive to make solvents that absorb the most amount of grease.

But the real kicker is that they aren’t selling solvent anymore, they are selling grease removal.  The solvent itself is now part of their cost structure.  And solvent is the major cost.  So, they figure out a way to extract the grease from the solvent, allowing them to put the solvent back in a can and send it out to you again.  That’s fine with you – you’re paying by the amount of grease removed, so as long as the stuff works, you’re happy.

Suppose the going rate is roughly $100 a can.  $60 of that is in the cost of the solvent itself.  So, a company that can figure out how to send the solvent around the loop a few hundred times can turn a $60 cost into a $0.60 cost.

What about those metal cans?  They go around the loop along with the solvent.  So if the can was $10 of the cost, they’ve just reduced that to $0.10.

The solvent company is a regulated chemical enterprise.  Their environmental practices are audited twice a year.  They can’t hide.  All that solvent that comes back has to be disposed.  That’s expensive.  Actually, it’s a nightmare.  That accounts for another $20 in the cost structure.  So, the company that figures out how to send the solvent around the loop a few hundred times just reduced that cost to $0.20 per can.

Let’s add that up.  You, the consumer, pay $100 per can for the grease removal service.  The solvent company’s cost structure is $60 for the solvent, $20 for disposal, $10 for the can and $5 for other overhead.  They make $5 in profit on each can.  When they figure out how to send the solvent around the loop 100 times, the cost structure becomes $0.60, $0.20, $0.10 and $5.00, for a total of $5.90, leaving $94.10 in profit on each can.  That’s close to 19 times more profit per can.

What’s the moral of the story?  If you’re an entrepreneur, a businessman, or a product designer, the book is an awesome read.  And in any case, tell your government to regulate enterprise in a way that encourages entrepreneurship, competition, and cradle to cradle business relationships.

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Responses

  1. Tom Daly, a sailing friend of mine, points out that ‘solvent as a service’ has been in action for years. For example, http://www.safetykleen.com. Excellent. Phew, at least I didn’t pick an example that couldn’t be done!


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