Commentary: Getting Off the Commodity Treadmill

Lead Author: Dr. Jeff Howe

Publish date: 08.01.2005

 

Making Flutes From Sticks

 

Lately I seem focused on thinking small. That's right, not big but small. My references are to books like “All I Really Need to Know I Learned in Kindergarten” by Robert Fulgham, or to Occam's Razor (simplest solution is best). I am even hosting a working session with Sarah Suzanka, author of the Not-So-Big House , at a regional conference this week. But doesn't this fly in the face of the American way? Isn't bigger better?

 

In a Federal Reserve regional report on the economy recently, one author noted that a significant portion of American industry is on a “commodity treadmill”, and they just can't seem to get off. They keep working harder and faster, and getting nowhere. To me this describes much of society. As consumers, we keep thinking we need more stuff. As producers we are ingrained with the core belief that the more we produce, the cheaper we can produce, and thus everyone can have access, and we'll all be happy. Is this true?

 

I've tried to think of a long-term commodity industry that has been successful– and I can't. Let's take agriculture for example. In the last 100 years we have lost 95 percent of our farmers, we are producing exponentially more food than ever before, and the remaining farmers are heavily subsidized. From an employment and profitability point of view, the commoditization of agriculture has been a dismal failure. The paper industry annually loses hundreds of millions of dollars and has significantly reduced employment in North America. The steel industry is a fraction of what it was, and core wood products companies are amongst the most cyclical in existence. To a certain extent self-deletion is the goal of commoditization. That is, the theoretical ideal cost structure for a commodity producer is zero material cost and zero labor. Therefore, the better skilled the firms are that compete toward this goal, the fewer people will ultimately be employed in the industry and the lower the value of raw materials necessary to manufacture products.

 

Yet all this investment in increased productivity is suppose to be designed to provide consumers with what we think we want. Let's take for example, flour. One of the reasons highly processed white flour became so ubiquitous was the fact that it stores for such long periods, something customers wanted. Of course, what we've begun to realize is that this refining process also removes most of the nutritional value of the wheat as well. All those things that made the wheat spoil were the things worth eating. But today, new shipment and storage methods minimize the necessity of highly refining the flour, and whole wheat has made a huge comeback; and local and regional bakeries as well. Bread actually has flavor again!

 

Given the new possibilities technology offers, should not all core products be reconsidered? Could we start at the consumer level and really look at what people want and try to provide it? To a certain extent, organic food is leading the way. People have been quick to learn that a tomato with a “5 mph bumper” has a lot less flavor than one organically and locally grown. But again, the durability of the commodity tomato arose from the requirement of being able to ship it around world. We prioritized transportability over flavor and nutrition. Yet, specialization has always been more profitable and the concept is applicable in every industry. I am reminded of the story recently of the farm family that raised three crops on their thousand-plus acre farm in Ohio and ended up going bankrupt in the early 1980's. They were left with their home and six acres after generations of family members working the farm. However, the story has a happy ending – today, they employ nearly 100 people on those six acres, raising hundreds of specialty crops (including over 80 varieties of tomatoes) that they sell direct to restaurants in the region. They were forced to change, and they did it well. Technology (phones and the Internet) gave them access to a wider variety of customers than ever before, and the result is employment is up, variety of products is up, and profits are above anything they use to get.

 

Today, consumers are more selective than ever before and anyone can go on the Internet and find stuff they can't imagine they ever wanted – or lived without. People are demanding greater variety, more options, quicker responses, and more service. The question is what are they seeking in all this opportunity? What are the inner needs and desires that are driving them on? And the question also arises, IF commodity businesses invested their capital and ingenuity on greater variety, more flexibility, quicker set up and less maintenance – could they provide the greater access consumers desire, but to specialty products rather than commodity items? If so, perhaps people could get exactly what they want, when they need it, and at a competitive price. For example, could you make a paper machine that cost $100 million dollars, instead of a billion, but could take a wide variety of material inputs and produce a wide selection of products, just in time (JIT) for regional needs? The result would be a significant decrease in capital costs, transportation costs, inventory costs, etc. such that the customer gets greater variety and service at similar cost. Research shows that around the globe world-class organizations are making this change; sacrificing volume for variety and gaining profits in the process.

 

The fear may be that by thinking smaller we are giving up something significant in our lives, perhaps even compromising on The American Dream. Yet, today, it is the environment that suffers for our insecurity (some might call it gluttony). We are able to continually have more and more and bigger and bigger because we are willing to exclude the long-term environmental impacts to achieve the short-term gains of the 5000 square foot house, the third SUV, and the 200 mph leaf blower. Yet, what we really want is not more, but better, and the challenge to both the consumer and the producer is that as soon as price rules the roost, people buy what is available, not what they want. To offset the fact that they aren't getting what they really want - they buy a lot. They compensate for quality with quantity.

 

Could consumers buy a lot less and be happy, if it was the right stuff? Might they even pay more? We'll never really know until industry begins providing solutions to individual consumer's unmet needs. The question for much of the wood products and other core industries is the extent to which they are willing to consider the needs of the individual consumer. And move toward making a majority of what they sell be more like a flute instead of a stick.

 

Dr. Jeff Howe