Hidden Costs Provide Hidden Opportunities

Point: When choosing areas to target for process innovations, consider the complementary – not just direct – costs and benefits

Story: Companies naturally look for a satisfactory return on their investment when they make process improvements. But, sometimes the way they analyze costs and returns can blind them to significant gains.  For example, in most regions, water is cheap. Making investments to reduce water usage may be laudable from an environmental standpoint, but it’s often hard to justify on strictly financial terms if one only takes the nominal cost of the water into account.  However, water carries complementary costs associated with its usage. For example, the total cost water usage includes the costs of waste water disposal, chemical treatment from manufacturing processes, energy use associated with heating and cooling it, and so on.  These associated costs may total as much as 100 times the nominal cost of water, according to McKinsey & Co, who calls these associated costs “carrier costs.”

Let’s take a look at an IBM plant in Burlington, Vermont to see the carrier costs of water and how they can be reduced.  The IBM-Burlington plant saved over $740,000 in water costs annually, and another $2.3 million in energy costs, by being more aware of its water usage patterns.  Most of the changes that the IBM-Burlington plant made to achieve its savings weren’t rocket science, which makes them all the more exciting because it means that such savings are attainable by others.

First, when IBM pumped water to its factories, it took water out of frigid Lake Champlain. For 50 years, IBM pumped incoming water and heated it so that it could be used. Yet in another factory on the same corporate campus, IBM chilled water in 13 two-story tall chillers to make it cold, even in winter. By instead routing the incoming cold water directly to the areas that needed chilling, IBM now gets “free” cold.  Moreover, the industrial process that needs the cold water heats up that water without needing to use electricity. By using Vermont’s outdoor cold temperatures, which are rarely above freezing during the winter months, IBM makes cold water during the winter, again for “free” without needing to using electricity to run the chillers.

Similarly, a pulp-and-paper company achieved savings when it examined its water use and the heat energy lost in cooling process. By storing water in a different way, recapturing heat from condensation processes and reducing the amount of steam consumed by boilers, the company reduced total operating expenses by 2.5 percent.

Action:

  • Identify the associated (“carrier”) costs of using a staple like water.
  • Target processes for improvement in the way water is stored, heated, cooled, or treated for manufacturing or internal use.
  • Install sensors that monitor water temperature, contamination, pressure, etc. (Excess water pressure, for example, can cause pipes to leak or burst.)
  • Coordinate and cross-connect the multiple uses of the water to reduce the costs of heating, cooling, and treatment (e.g., let the “waste heat” from one process serve to prewarm water used in another process).

For more information:

“Measuring the Real Cost of Water,” McKinsey Quarterly, March 2013

Charles Fishman, The Big Thirst: The Secret Life and Turbulent Future of Water.

1 Comment »Case study, How-to

World’s Biggest Challenges are its Biggest Market Opportunities

Point: While many people wring their hands over seemingly insurmountable problems, entrepreneurs roll up their sleeves and work on solutions.

Story: Peter Diamandis, founder of the X PRIZE Foundation and Zero Gravity Corp., is particularly optimistic. Seeing what small teams can accomplish with today’s technologies, he sees limitless opportunities. “A Maasai tribesman in Kenya today has better mobile communications than President Reagan had 25 years ago. If they’re on a smartphone, they have access to more information than President Clinton did 15 years ago,” he says.

These achievements don’t get as much attention as bad news, because our brains are wired to hone in on anything that could threaten our survival. But above the din of disasters and terrorist attacks are the facts that more people have been lifted out of poverty in the last 50 years than the previous 500. The cost of food is 1/13th what it was in 1870. Even those living below the poverty line in many countries today have access to a telephone, toilet, television, air-conditioning and a car — things that Andrew Carnegie or John D. Rockefeller couldn’t have dreamed of a century ago.

Moore’s law — the doubling of computing power for the same price every 12-24 months — is now showing up in other areas that are linked to computing power, including sensors, 3D printing and biotechnology.  For example, 3D printers that cost $500,000 can now be bought for $1300, making them accessible to small companies and entrepreneurs.

Lower costs like that make it possible to offer much-needed but low-cost products to the “bottom billion” people in the lower rungs of the economic pyramid. For example, an estimated 1.1 billion people lack access to clean drinking water. But four billion of them are spending 30 cents a day for water, which makes clean water a $400 billion a year market, as inventor Dean Kamen points out. Kamen is in trials with a new water purifier that can turn any water (even polluted water, seawater or latrine water) into pure drinking water for less than .02 cents a liter).

Such innovations by entrepreneurs can solve the world’s biggest challenges.

“That’s my source of optimism. That and a realization I made early on that if there’s a problem, I’m going to solve it. Once you see the world that way, it’s a different place,” Diamandis said.

Action:

  • Look at negative events as potential opportunities to create new products or services to prevent or mitigate the negative.
  • Look past the sensationalized “bad news” to see the less-publicized march of positive trends in human development that create or expand markets for products and services.
  • Consider how to leverage the rising spread of modern infrastructure (communications, utilities, and logistics) to access more suppliers, partners, and customers.

Sources and more information:

Peter Diamandis at the Innovation Summit at the Shell Technology Center Houston, January 9, 2013

Peter Diamandis’ book, Abundance: Why the Future Will Be Much Better Than You Think

Ted Greenwald, “X Prize Founder Peter Diamandis Has His Eyes on the Future,” Wired

No Comments »Entrepreneurs, Innovation, Opportunity

Quick-Win Innovations

Point: Get quick wins by encouraging small experiments throughout the organization. They’re fast, inexpensive, and reduce the fear of failure.

Story: One of the biggest obstacles to innovation is fear of failure. Rarely do people want to bet their careers or companies on what might — or might not — be the next big thing.  But fear of failure becomes a self-imposed obstacle to success.

As Amazon’s CEO Jeff Bezos says, “Innovation is part and parcel with going down blind alleys. You can’t have one without the other. But every once in a while, you go down an alley and it opens up into this huge, broad avenue. And that’s so satisfying and, from a shareholder’s point of view, so successful, that it makes going down blind alleys worthwhile.”

The key twist isn’t to avoid failure but to avoid high costs from failure.  To reduce those costs, institute and encourage ongoing little experiments throughout your company.  For example, Google does this by testing more than 5000 software changes a year. Amazon does it by continuous A/B testing.  And CEO Scott Cook made experiments common practice at Intuit. In Cook’s experience, 89% of experiments don’t lead to a breakthrough or even to an improvement, but that doesn’t make them a “failure” — the experiments simply provide data on what doesn’t work.

These little bets cost little in terms of time and money. They don’t require weeks of planning; rather, they’re tweaks to an idea that can lead to eventual, substantive breakthroughs.  Ever hear of a company called Odeo? Most people haven’t, because Odeo was a small podcasting company of little distinction until its CEO, Evan Williams, gave employee Jack Dorsey two weeks to develop his idea of a short messaging system. That quick prototype developed into Twitter.

Action

  • Don’t use uncertainty of success as a filter — the more you don’t know about your chances, the more you can learn by trying.
  • Do consider how you might inexpensively look down a possible avenue to see where it leads.  You might use a A/B testing, co-innovation with a lead customer, or a quick minimum-viable prototype.
  • Test fast, test often, but pay attention to the results, especially if the unexpected happens.
  • Learn what you can from any failures — not just that the idea failed, but why it failed and what it says about your customers, your markets, or your business environment.
  • Use each test of a new avenue to scout for other avenues. Even a blind alley can have a side-passage that leads somewhere wondrous.

For more information:

Dave Gray, The Connected Company

Bloomberg BusinessWeek, “Jeff Bezos: ‘Blind-Alley’ Explorer.”

Peter Sims, Little Bets and “What are Little Bets?

No Comments »Growth, How-to, Innovation, New Product Development, Opportunity, Productivity

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