Which retailers are most efficient?

Retailers are under considerable margin pressure, so you would expect them to take any measures possible to reduce cost.  Much work has focussed on labour productivity, or getting more sales per staff person, for example by introducing self-checkout.  However there is still much to be done on resource productivity.

A recent data set on leading retailers’ greenhouse gas emissions, sales, and employee numbers shows a wide variation in labour productivity and sustainability.  Interestingly, the most labour efficient retailers are also the most emissions efficient – no company is just “green” or solely focussed on automation or scale.

CVS (a pharmacy retailer) and Costco (a warehouse club) exceed their peers on both measures, but amongst the others there are some interesting differences.  Walmart and Tesco do not achieve the labour productivity of Kroger (a leading US supermarket), but both are significantly more efficient on greenhouse gas emissions.  This is probably no accident – both Walmart and Tesco have made bigger commitments to reducing emissions.  

Tesco aimed to reduce energy use by 50% from 2000 to 2010, versus Kroger’s target of a 30% reduction over the same period.  Walmart gave themselves just 4 years to achieve a 30% reduction (from 2005-2009), and they aspire to supply their stores with 100% renewable energy.

There are big savings for retailers who make efficiency their priority.  Improved lighting systems, daylighting, energy controls, heat recovery, behavioural change, and many other approaches can reduce costs significantly, often with a 2-3 year payback period.  For any firm in the retail sector, sustainability in terms of a reduced carbon footprint should have a leading role in their effort to thrive in these challenging times.

Why your waste costs 20 times more than you think

Waste disposal costs are rising.  Heightened attention is being turned to dealing with it cost-effectively, diverting it from landfill and getting the best possible income stream from recycling or re-using it.  This attention to waste is a good thing.  We want to reduce the cost of it, to make our businesses more competitive.  However the truth is that most managers are missing 95% of the cost of their waste.  If your facility’s waste costs were 20 times higher than you thought, what action would you take?

The answer is obvious – you would stop trying to maximise the recycling and re-use value of your waste stream.  Instead, you’d try to stop producing it in the first place.

Let’s look at a hypothetical manufacturing company[i].  Imagine a firm that produces high quality ready meals.  Our firm has operating costs of £50 million a year, and runs two shifts a day.  They produce 500 tonnes of waste per year, and it costs them £100 per tonne to dispose of it (fees and handling costs).  So this firm believes that its cost of waste is £50,000 per year.  This is significant enough to get attention, but at just 0.1% of total cost, it is not the highest priority.

Now, imagine that each day, an average of 10 minutes of each 8-hour shift produces waste.  This takes two main forms: 

• Occasional quality failures (e.g. too little product in one tub, or a run with wrong dates)
• Planned waste, while a new run is started, and the machines are adjusted to get the machines aligned perfectly

So for an average of 20 minutes per day (10 minutes for each of two shifts), the facility is producing waste.  That’s roughly 2% of a 16 hour day.  In other words, 2% of the operational time, and therefore 2% of the operational cost (electricity, people, facilities costs, materials, etc) is waste.  In a facility that costs £50 million per year to run, that’s a cost of £1 million, spent on producing product that will never be sold.

This is just a hypothetical example.  Is it typical?  In fact, this is close to the average for the UK economy as a whole.  As I’ve reported elsewhere, DEFRA estimates there are £23 billion of resource efficiency savings with a year payback or less, just waiting for firms to take advantage of them – about 1.6% of GDP.

A million pounds of a £50 million budget is a substantial sum – it could be better spent holding off the next round of unwanted redundancies, investing in new capital equipment, or developing new products.  If this were your firm, wouldn’t you do whatever you could to stop the waste?

So... just how much of your operational time each day is spent producing waste?

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[i] This could apply just as well to a service company.  For example, in a call centre, it might include outbound calls to wrong numbers, and times when the computers or phone lines are down.

Do more with less – and save £23 billion

That, at least, is the conclusion of a DEFRA study published in March.  It found that for very little cost, UK businesses could produce just as much as they do today, while saving £23 billion in costs.

Given our current economic troubles, it is surprising that this hasn’t been headline news.  The topic is called “resource efficiency.”  The UK government has been trying to encourage firms to improve their resource efficiency by providing advice and grants, and even the European Commission has urged firms on, claiming that “Increasing resource efficiency will be key to securing growth and jobs”.

These claims are entirely realistic.  There are multitudes of case studies available through government agencies and in business school texts, and of course many cases have never been documented.  Just tackling the production of waste products alone – without considering any other efficiency savings – could produce big savings to the bottom line.

The fact is that the funding interventions from the government have so far been very small – less than £100 million per year of the Business Resource Efficiency and Waste scheme.  However, they indicate big potential – every £1 spent by the government achieved an average £1.64 in additional sales and £3.20 in cost savings – and those are the benefits in just one year.  Unfortunately, the budgets for this work are now being cut.

As the ENDS Report has observed, “government will have to depend on businesses stepping up their own efforts independently, without relying on public funds for advice and support.”  Increasing landfill taxes are meant to encourage firms to address their inefficiencies, but waste handling costs represent only a tiny fraction of the true cost of waste.  Moreover, there are many more inefficiencies that have nothing to do with the waste stream.

When so many companies have tackled their waste stream, why have so few put the same energy into efficiencies – that is, into not producing the waste in the first place?  It’s often no one’s job – we assume our employees will identify and eliminate waste if they can, but no one is tasked or measured on this.  And why not?  Well – since the cost of producing waste, or working inefficiently, is almost never measured, those in charge don’t realise it deserves an explicit place in their management structure.

For those companies that grasp the opportunities in resource efficiency, the prize will be higher profits, greater security, and growth.  The government will no longer take the lead, though it is a wonder that it was ever necessary.  Given the size of the prize, it is time more firms put resource efficiency on the CEO’s agenda.

How much is this waste costing us?

Nowadays, waste disposal costs usually have a place in the accounts.  Standard landfill tax costs £56 per tonne (set to rise to £80 per tonne by 2014), and waste disposal services have their fixed and variable fees on top.  Recycling may provide some relief, but still typically involves some cost.  However, waste has hidden costs as well, and these can be considerably more than the disposal or recycling cost.

There are two big hidden costs in waste: the materials, and the production cost.  The first is easier to spot – if you purchase a tonne of steel, and sell products containing 990g of steel, you know you have wasted 1% of the material.  Production managers are usually aware of this, but the finance department may not be.

The second cost is less obvious – the cost of the facility.  Let’s say that a manufacturing firm has operating costs of £100m per year, and is working fairly near its current capacity, so waste products displace products that could be sold.  If the reject rate is 0.1% of products, then the operating cost of producing that waste is £100K per year (0.1% of £100m).  Alternatively, consider this from a time perspective.  If a typical production line in our hypothetical facility spends just 10 minutes of a 16 hour day producing product that can’t be sold, that would be 1% of the time – or £1m cost per year.  Move to another perspective: the opportunity cost of the goods not produced because the line is at capacity.  If gross margins are just 10%, then waste at 1% of production is equivalent to £100K of foregone profit, displaced by waste.

These hidden costs of waste are rarely part of any management accounting system, and may be difficult to pin down.  However it’s worth the effort – keeping track, even at the “guestimate” level, can help companies work out the value of investing in waste elimination initiatives.  Putting a price on waste helps to focus attention on a big win for both the environment and the bottom line.  Recycling may deal with the waste that can’t be eliminated, but the biggest win comes from avoiding waste entirely.