Winning the Hardware Software Game Winning the Hardware-Software Game - 2nd Edition

Using Game Theory to Optimize the Pace of New Technology Adoption
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According to a recent BW article, “OfficeMax Calls Delivery Cutbacks a ‘Green’ Initiative” by John Carey, “motivated by environmental concerns”, OfficeMax announced that it will eliminate its Monday deliveries in the Washington, DC area.

… [C]ompressing 5 delivery days into 4 … reduces carbon emissions from delivery trucks (and from drivers commuting to work), and brings less traffic congestion. The company figures that just having the drivers stay home, instead of coming to work on Monday, eliminates 60,000 miles of commuting. The company is rolling out the program nationally this month, with different no-delivery days in different regions.

Hmmm. If OfficeMax really wants to reduce carbon emissions, and if paring deliveries from five days a week to four is good, then doing deliveries only three days a week must be better, right? Hell, why not just eliminate deliveries altogether? That would save 300,000 miles of commuting for OfficeMax drivers!

When you start thinking about it that way, it quickly becomes clear that OfficeMax’s goal here should not be to reduce carbon emissions as much as possible per se, but rather to reduce the amount of emissions associated with a profitable or productive activity, without reducing the level of profitability or productivity. In other words, what OfficeMax should be trying to minimize is not its total emissions, but rather, its emissions per dollar of profit, at the same time making sure that lower emissions do not come at the expense of lower profits.

Is this new policy sustainable from a competitive standpoint?

Under the new scenario relative to the old, OfficeMax delivery drivers are working the same number of hours. So, OfficeMax labor costs should be the same.

Assuming the delivery trucks will be driven the same amount of total miles under the old and new schedules, then costs associated with use of trucks should also be the same.

The savings in gas costs associated with 60,000 fewer miles of commuting by delivery drivers currently translates into about $5,000 – $10,000 a year, which is relatively trivial. If and when the US starts charging for emissions, then the value of the emissions associated with 60,000 fewer miles of commuting (at $15 - $30 per ton) ranges from roughly $250 to $800 a year. Again, a relatively trivial amount.

So under OfficeMax’s new initiative, the total company costs for sales in Washington DC should remain the same, and total employee and social benefits sum to roughly $5,000 - $11,000.

What about OfficeMax customers? Will they be any worse off? That is, under the new scheduling policy will OfficeMax potentially lose customers to rivals?

OfficeMax’s general deliveries take one to three days. I would have to believe that OfficeMax will arrange its new delivery schedule so that the average customer is no worse off under the new compressed schedule than he would have been originally. That is, I assume that customers will still receive their deliveries within one to three days. In this case, the only customers who will not be happy with the new policy are those who prefer to take deliveries on Mondays and/or those who order on Monday and need same-day delivery. I can’t imagine there are that many customers out there who insist on Monday deliveries. As for same-day-deliveries, I would imagine that the general logistics of delivery scheduling mean that same-day deliveries are handled differently than regular deliveries. In this case the new delivery scheduling wouldn’t affect same-day deliveries. So then OfficeMax’s customers should generally be no worse off with the new initiative.

Now that we have the costs and benefits of the current initiative, we can return to one of my earlier questions: should OfficeMax stop at four delivery days a week, or should it further pare down delivery days?

At four days a week, OfficeMax can use the same crew of delivery drivers, and as we saw above, OfficeMax labor and truck costs should remain about the same. However, if OfficeMax were to cut delivery days to fewer than four days a week, then it would almost certainly have to run a larger fleet of trucks and drivers to get the same total number of deliveries done in fewer days. This would increase OfficeMax’s costs of labor and trucks, and the added delivery personnel would increase commuting miles, thereby offsetting any savings in the original drivers’ gas and emissions costs. At the same time, while not being able to take delivery on Mondays shouldn’t cause OfficeMax to lose substantial numbers of customers, precluding deliveries two days a week or more might very well result in lost business.

What we’re left with is that OfficeMax’s new initiative is probably optimized at reducing delivery days by only one day a week, as opposed to by more. However, the overall social impact of OfficeMax’s initiative sounds a lot better than it really is.

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