David Drake is an assistant professor in the Technology and Operations Management (TOM) Unit at Harvard Business School and an emerging authority in sustainable operations management. Through his research, Professor Drake studies firms’ environmental and social performance. In his work related to environmental operations, he pays particular focus to industry’s role in combating climate change, exploring how emissions regulation influences the capacity portfolios that firms invest in; how such regulation, when unilaterally imposed, impacts technology choice, offshoring, and regional competitiveness; and how creative collaboration can improve the economic feasibility of clean technology development and adoption. Professor Drake’s work in socially responsible operations explores the design and implementation of innovative business models that improve quality of life in areas of extreme poverty through the products and services offered, the resources preserved, and the opportunities for economic gain created. Professor Drake has published his research in the field’s premier journals and authored pedagogical cases used to teach concepts at the intersection of sustainability, operations strategy, and supply chain management to students and executives worldwide.
Professor Drake has taught the TOM course in the MBA required curriculum and currently teaches an elective course in operations strategy. Through his research, Professor Drake has worked closely with a number of firms experiencing emission regulation under the EU-ETS, and attended the Copenhagen Climate Change Conference (UN COP15) as a delegate. Professor Drake spent five years at Random House where he led the publishing operations projects and the production purchasing groups. He earned his MBA from Vanderbilt University’s Owen Graduate School of Management, and his MSc and PhD in management from INSEAD.
Are Carbon Tariffs Protectionism or Climate Policy?
Some argue that carbon tariffs — carbon costs imposed on imports entering an emission-regulated region — are simply protectionism being peddled as climate policy. Our results suggest otherwise. The implementation of a carbon tariff decreases global emissions relative to equivalent settings without a carbon tariff. Domestic firm profits, on the other hand, can increase, decrease, or remain unchanged due to a carbon tariff. In short, the principal benefit gained through a carbon tariff is not the protection of domestic firms’ profits. Rather, it is an improvement in emissions regulation efficacy, with carbon tariffs enabling emissions regulation to deliver reduced global emissions in many settings in which it would otherwise fail to do so.
Cap-and-trade versus carbon tax: which should firms prefer?
Conventional wisdom suggests that the uncertainty in emissions price under cap-and-trade regulation erodes value when compared to the constant price under a carbon tax. We show otherwise — emissions price uncertainty under cap-and-trade results in greater expected profit. Two operational drivers underlie this result: i) firms can choose not to operate a given technology if emissions price makes doing so unprofitable; and ii) firms with multiple technologies in their portfolio choose the order in which to use those technologies, which increases expected profits relative to a setting with a fixed emissions price. To the extent that they weigh-in on the matter, firms should back cap-and-trade policies over those proposing an emissions tax.
Why Do Firms Respond to Environmental Regulation the Way That They Do?
A regulator’s ability to incentivize environmental improvement among firms is a vital lever in achieving long-term sustainability. How a firm will respond to such regulation depends, in part, on the expected cost of noncompliance, which is a product of the stated penalty, the likelihood that non-compliant practices are detected, and the likelihood that detected violations are punished. In this chapter, through examples of regulatory failures and successes, we develop a framework for understanding how the expected cost of non-compliance interacts with the relative magnitude of three important thresholds to determine whether profit-maximizing firms ignore, avoid, or embrace environmental regulation.
Technology Choice and Capacity Portfolios under Emissions Regulation
We study the impact of emissions tax and emissions cap-and-trade regulation on a firm's technology choice and capacity decisions. We show that emissions price uncertainty under cap-and-trade results in greater expected profit than a constant emissions price under an emissions tax, which contradicts popular arguments that the greater uncertainty under cap-and-trade will erode value. We further show that two operational drivers underlie this result: i) the firm's option not to operate, which effectively right-censors the uncertain emissions price and ii) dispatch flexibility, which is the firm's ability to first deploy its most profitable capacity given the realized emissions price. In addition to these managerial insights, we also explore the effect of investment and production subsidies. Through an illustrative example, we show that production subsidies of higher investment and production cost technologies (such as carbon capture and storage technologies) have no effect on the firm's optimal total capacity when firms own a portfolio of both clean and dirty technologies. On the other hand, investment subsidies of these technologies increase the firm's total capacity, conditionally increasing expected emissions. Subsidization of a lower production cost technology has no effect on the firm's optimal total capacity in multi-technology portfolios.
Keywords: technology management;
Observation Bias: The Impact of Demand Censoring on Newsvendor Level and Adjustment Behavior
In an experimental newsvendor setting we investigate three phenomena: level behavior—the decision-maker's average ordering tendency; adjustment behavior—the tendency to adjust period-to-period order quantities; and observation bias—the tendency to let the degree of demand feedback influence order quantities. We find that the portion of mismatch cost due to adjustment behavior exceeds the portion of mismatch cost due to level behavior in three out of four conditions. Observation bias is studied through censored demand feedback, a situation which arguably represents the majority of newsvendor settings. When demands are uncensored, subjects tend to order below the normative quantity when facing high margin and above the normative quantity when facing low margin, but in neither case beyond mean demand (a.k.a. the pull-to-center effect). Censoring in general leads to lower quantities, magnifying the below-normative level behavior when facing high margin but partially counterbalancing the above-normative level behavior when facing low margin, violating the pull-to-center effect in both cases.
Keywords: Prejudice and Bias;
Sustainable Operations Management: An Enduring Stream or a Passing Fancy?
Paul Kleindorfer was among the first to weigh in on and nurture the stream of Sustainable Operations Management. The thoughts laid out here are based on conversations we had with Paul relating to the drivers underlying sustainability as a management issue: population and per capita consumption growth, the limited nature of resources and sinks, and the responsibility and exposure of firms to ensuing ecological risks and costs. We then discuss how an operations management lens contributes to the issue and criteria to help the Sustainable Operations Management perspective endure. This article relates to a presentation delivered by Morris Cohen for Paul's Manufacturing and Service Operations Management Distinguished Fellows Award, given at Columbia University, June 18, 2012. We wrote this article at Paul's request.
Keywords: Sustainable Operations;
Service Quality, Inventory and Competition: An Empirical Analysis of Mobile Money Agents in Africa
The use of electronic money transfer through cellular networks ("mobile money") is rapidly increasing in the developing world. The resulting electronic currency ecosystem could improve the lives of the estimated 2 billion people who live on less than $2 a day by facilitating more secure, accessible, and reliable ways to store and transfer money than are currently available. The development of this ecosystem requires a network of agents to conduct cash-for-electronic value transactions and vice versa. This paper examines how service quality, competition, and poverty are related to demand and inventory (of electronic credit and physical cash) where, in this setting, service quality consists of pricing transparency and agent expertise. Among our results, we find that average demand increases with both pricing transparency and agent expertise, and that agent expertise interacts positively with competitive intensity. We also find that competition is associated with higher inventory holdings of both cash and electronic value, and that agents in high-poverty areas hold greater amounts of cash but do not carry a smaller amount of electronic value indicating that they devote more capital to their inventory. These results offer insight to mobile money operators with respect to monitoring, training, and the business case for their agents. This paper furthers our understanding of service quality, competition and inventory, while developing a foundation for the exploration of mobile money by operations management scholars.
Keywords: service operations;
base of the pyramid;
Carbon Tariffs: Effects in Settings with Technology Choice and Foreign Production Cost Advantage
It is widely believed that carbon leakage—offshoring and foreign entry in response to carbon regulation—increases global emissions. It is also widely believed that a carbon tariff—imposing carbon costs on imports entering the emission-regulated region—would eliminate carbon leakage. However, neither of these assertions necessarily holds. Under a carbon tariff, foreign firms with a production cost advantage adopt clean technology at a lower emissions price than domestic firms, and foreign entry can increase in emissions price when foreign firms hold this edge. Further, domestic firms conditionally offshore production despite a carbon tariff, but doing so implies that they adopt cleaner technology. Therefore, carbon leakage can arise under a carbon tariff but, under mild conditions, it decreases global emissions. Due in part to this clean leakage, imposing a carbon tariff is shown to decrease global emissions. However, domestic firm profits can increase, decrease, or remain unchanged due to a carbon tariff. This suggests a carbon tariff's principal benefit is not to protect domestic firm profits, as some argue. Rather, it is to improve emissions regulation efficacy, enabling emissions price to be used to reduce global emissions in many settings in which it would otherwise fail to do so.
Pollution and Pollutants;
Globalized Markets and Industries;
Sustainable Fleet Operations: The Collaborative Adoption of Electric Vehicles
Keywords: fleet management;
Green Technology Industry;
Unilever: Combatting Global Food Waste
The global consumer goods company Unilever was on pace to hit a number of aggressive targets by 2020 as part of the Unilever Sustainable Living Project, including a goal to halve the waste associated with the disposal of its products. Unilever's chief supply chain officer Pier Luigi Sigismondi and his team were working towards this goal and had chosen to first focus on three key areas—sugar, tomatoes, and tea—and had analyzed where in the “farm to fork” value chain product was wasted. This analysis showed that very little was wasted within areas of the value chain directly controlled by Unilever, and most occurred either upstream with its suppliers or downstream with consumers. How could Unilever encourage these actors to change established practices and entrenched behaviors within a short timeframe to help Unilever meet its sustainability targets and also to improve the operations of its partners in the value chain? By encouraging consumers to better manage their food purchases, did Unilever risk harming its own sales or those of its retail customers? Could Unilever encourage industry-wide changes to have a real impact on global environmental sustainability?
Keywords: food waste;
sustainable business and innovation;
sustainable supply chains;
Organizational Change and Adaptation;
Supply Chain Management;
Growth and Development Strategy;
Beauty and Cosmetics Industry;
Consumer Products Industry;
Food and Beverage Industry;
Forest Products Industry;
North and Central America;
Whole Foods: The Path to 1,000 Stores
The case examines the operations strategy of Whole Foods, one of the largest natural grocery chains in the United States. In late 2013, Whole Foods was expanding rapidly, with a publicly-stated goal of growing from 351 to 1,000 domestic stores by 2022. It was also engaged in a strategic initiative to combat "food deserts"—areas with limited access to affordable and nutritious food. In pursuit of these initiatives, the company's rapid entry into a heterogeneous set of new markets necessitated a reexamination of its store format, target customer base, and approach to human capital.
HeidelbergCement: The Baltic Kiln Decision
HeidelbergCement: Technology Choice Under Carbon Regulation
Governing Rules, Regulations, and Reforms;
Industrial Products Industry;
Drake, David F., Paul R. Kleindorfer, and Luk N. Van Wassenhove. "HeidelbergCement: Technology Choice Under Carbon Regulation." European Case Clearing House Case, 2010. View Details
Ludo (A): Ludo Press and the Newsvendor Problem
Keywords: Problems and Challenges;
Drake, David F., and Nils Rudi. "Ludo (A): Ludo Press and the Newsvendor Problem." Institut Européen d'Administration des Affaires (INSEAD) Case, 2009. (Working Case.) View Details
Cycleon (A): Postal Networks for Reverse Logistics.
Drake, David F., Atalay Atasu, and Luk N. Van Wassenhove. "Cycleon (A): Postal Networks for Reverse Logistics." European Case Clearing House Case, 2008. View Details
Cycleon (A): Postal Networks for Reverse Logistics
Drake, David F., Atalay Atasu, and Luk N. Van Wassenhove. "Cycleon (A): Postal Networks for Reverse Logistics." 2008. (Teaching Note.) View Details
Ignore, Avoid, Abandon, and Embrace: What Drives Firm Responses to Environmental Regulation?
A regulator's ability to incentivize environmental improvement among firms is vital in achieving long-term sustainability. However, firms can and do respond to environmental regulation in a variety of ways: complying with its intent; avoiding the regulation by offshoring or by abandoning the market; or ignoring the regulation by continuing with entrenched business practices. The path a profit-maximizing firm will choose depends, in part, on the expected cost of non-compliance, which is a product of the regulator's stated penalty, the likelihood that non-compliant practices are detected, and the likelihood that detected violations are punished. The type of regulatory regime—compliance-based or "pay-to-pollute"—and three important cost thresholds also drive firm response: i) the compliance or clean technology adoption threshold; ii) the offshoring threshold; and iii) the exit threshold. In this chapter, through examples of regulatory failures and successes, we develop a framework for understanding how these thresholds interact with the type of regulatory regime being considered and the expected cost of non-compliance to determine whether profit-maximizing firms ignore, avoid, or embrace environmental regulation.
Cost vs Benefits;