Walmart, CPG, Organizational Judo: EPA Clean Power Plan Hits Procurement

pierre mitchell headshot Pierre Mitchell

Yesterday we ran the first part of a recent conversation with Pierre Mitchell, Spend Matters' chief research officer, on how procurement should think about quantifying regulatory cost, such as those potential costs coming down the pike from the upcoming final rule of the EPA Clean Power Plan. We covered how to begin framing costs and risks, for both the procurement organization's own input costs and for those of its suppliers – which trickles into supplier risk management.

In this second half of the convo, we get at the "third leg of the stool" – innovation. Specifically, we touch on whether the threat of supply chain risk brought on by regulatory compliance actually drives procurement organizations to undertake innovation in practice. Below is an edited version of our conversation.

To get the full monty on how procurement can prep for EPA Clean Power Plan compliance, please register for tomorrow's video webinar hosted by our sister site, MetalMiner: What EPA's Clean Power Plan Could Cost US Businesses (and What Procurement Can Do About It) – if only for Pierre's wicked-good video interview.

Consumer Packaged Goods (CPG) and Regulatory Cost Impacts

Taras Berezowsky: Before we get into the innovation piece, as a recap on the cost management and risk management side of things, any specific industry examples to share?

Pierre Mitchell: Probably the best industry that is really dealing with this is consumer packaged goods. Food manufacturers, as well as other segments around CPG that use a lot of commodities -- not just food commodities, but plastics and metals and things like that -- they are really dealing with this issue. Because they're selling into a channel, like to Walmart or to a large retailer, where they're going to be very cost-aware, let's just say.

You're not going to be able to pass on a ton of those costs to the retailer, and ultimately to the consumer. So for companies that are really good at managing these types of costs and risks, they have the ability to not only forecast what's going to happen in terms of the impact of coal prices on their electricity costs and input costs to their suppliers. They're actually going to be able to convert and translate that all the way through and say, OK, if the cost of polystyrene, or some other kind of materials that we use, let's say, in our coffee cups, that we're going to sell into Walmart is going to go up by 20%, and we're making 10% margin, 15% margin, I want to be able to know which of these SKUs is going to actually become unprofitable for me 3 months down the road, or 6 months down the road, so I can get ahead of that and figure out how to shift our mix to another product line. Let's figure out how we can try to increase our costs and the prices that we charge in our next contractor, slowly raise them so it's not such an abrupt change for the consumer.

Also, how do we find substitute materials? How do we find substitute suppliers? A lot of the strategic suppliers are being very upfront in saying, "our costs are going up. And just to let you know, we're going to start raising our prices." Because they're starting their gamesmanship, basically. They're protecting their business. And those discussions are starting to happen now. So as they're doing that, the procurement and supply chain organizations are thinking, OK, well, is this necessarily the supplier that I want to be using? Maybe I want to use a supplier that is in a low-cost region that has some captive supply sources and energy costs are lower, wherever that might be – maybe Mexico, Latin America, somewhere in the BRIC region. Maybe there are some suppliers that just have a lower cost structure because they do have some of these lower energy costs. And maybe regulatory costs are part of it.

There are a lot of levers you can pull. But for someone like a CPG manufacturer that is really kind of caught between the rock of retail and price-sensitive consumers, and the hard place of increased commodity costs, which the regulatory costs are a big piece of, that is a real challenge for them. They are really trying to work through a lot of these issues.

Sustainability, Innovation in Supply Chain: Silver Lining of Regs?

TB: We've been hearing, "Well, perhaps regulatory compliance forces an opportunity for innovation." Would these organizations be pushing forward on some innovative sustainability fronts, those advanced strategies and tactics for handling an increased cost environment, regardless of regulatory pressure? Or are the regulations spurring that? or is it a mix of both?

PM: The topic of innovation and the relationship between innovation and cost is a good one. Let's take the example of renewables. Any progressive procurement organization that is managing its energy costs is going to have a fairly good understanding around its energy supply chain and the utilities that it's consuming, and renewable programs that it might be pursuing.

Those could be as simple as getting credits for better demand management and internal consumption and power and things like that. But for others, it might be, maybe we look at geothermal. Maybe we look at solar, and maybe some of these higher-cost types of energy sources. If you're using a traditional utility that is using more coal-fired sources, and you look at when that electricity cost starts to go up, you might really start to consider some of these options beyond demand management.

There's certainly a lot of innovation there in terms of wind and solar on the renewables standpoint. But there is often a cost to that. There's also a brand aspect of that. In your own sustainability initiatives as a company, and what you report out on your sustainability metrics, it's always great to have a renewable strategy and to have these types of green initiatives, and not just greenwashing, but actually take it to heart and do these things.

Because really good sustainability practices really do lead to lower cost – total costs – and through better demand management, total spend management. So most progressive procurement organizations certainly look at any type of sustainability kind of issue to create a great excuse for them to re-engage suppliers around supplier management, to re-engage suppliers around supplier innovation. It's a great excuse to go out to suppliers for more than just trying to exact another pound of flesh from them.

So just like the P&Gs and the Walmarts and the Apples have really [been moving on] -- maybe sometimes regulatory compliance initiatives have been kind of the spark that has kicked them in the pants a little bit to do some of this. But once they've really gotten on board with it, they've really done a pretty good job at going upstream and working with their suppliers to try to understand the costs, and try to take them down. I think there's a silver lining, maybe, to any regulation here. And I think there are going to be some side effects. But procurement organizations are going to be pretty active on the innovation and sustainability side anyway.

Any procurement organization is going to use what I call "organizational judo" and take the initiative from these kinds of regulations and try to use it for something good. At the end of the day, more costs coming into the supply chain is never necessarily good. But if you can kind of deal with it as best you can, well...Certainly, that is one of the key values of procurement: to help manage the supply side and deal with these types of adverse supply cost increases.

Go ahead and register for tomorrow's video webinar, hosted by our sister site, MetalMiner: What EPA's Clean Power Plan Could Cost US Businesses (and What Procurement Can Do About It) – and see how Pierre's thoughts relate to other manufacturing perspectives.

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