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9/7/2011
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Waste Management's New Model: Garbage In, Profits Out

The trash-disposal company, No. 3 in our 2011 InformationWeek 500 ranking, is using statistical models to drive price optimization as part of a companywide transformation strategy.

Pricing is one of the most powerful tools in business, yet many IT organizations won't touch it with a 10-foot pole. That reluctance, and a dearth of tech tools for this purpose, explain why the pricing of products and services continues to be driven by gut instincts and personal experience in many industries, rather than by data-driven decision support systems. Waste Management decided that wasn't good enough.

The trash handling and recycling company, which had $12.5 billion in revenue last year, created a price-optimization system that uses customized statistical models of the factors that drive market prices and price sensitivity in each of its 25 regions. Through a Web portal, pricing managers can see customers whose contracts are up and the likelihood they'll accept or reject a price increase.

Pricing managers then apply their judgment on how to proceed. Is the customer in a key market that Waste Management's trying to break into? Is this a customer who has complained recently about poor service? Is it on an existing truck route, thus cheaper to service? "No matter how much you automate, you'll never fully replace the judgment a human being can bring to the table," says CIO and senior VP Puneet Bhasin.

The software provides a starting point for determining where to raise prices and where to ease off. "The key is identifying the right price, so the customer isn't feeling like they're not getting the value, and we're being profitable," says David Logsdon, VP of IT, who helped drive the project.

For a company with 22 million customers that provides more than 100,000 quotes a month, bringing automation, science, and discipline to the pricing process is part of a broader, tech-intensive transformation. Waste Management's ambitious goal is to increase revenue $3 billion to $5 billion over the next three to four years, while cutting costs by $1 billion.

Top 10 IT Innovators: InformationWeek 500
Top 10 IT Innovators: InformationWeek 500
(click image for slideshow)

CEO David Steiner, Bhasin, and other senior execs meet every three weeks for about six hours to discuss the progress of some 15 key initiatives that are under way. The effort launched about nine months ago; projects include e-business improvements, sales-force automation, logistics and routing optimization, and pricing. About 80% of the projects have a major tech component.

The company created a new department as part of its transformation called Decisions Sciences, which brings new expertise in statistics and analytics, and which reports to Bhasin. For the e-business effort, where the company's trying to drive online sales for things such as short-term large trash-bin rentals and small-business services, IT is accountable for budgeted revenue increases. "My friend here carries quota," Bhasin says with a smile, slapping Logsdon on the back.

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Garbage guru
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Garbage guru,
User Rank: Apprentice
7/20/2013 | 2:58:53 PM
re: Waste Management's New Model: Garbage In, Profits Out
I'm new to this forum and not an "IT Professional" but have been in the waste/sustainability industry since 1996. I'm the CEO of a Fortune 5,000 company that manages waste services in 30 states. We deal with the company Waste Management frequently and I was shocked they were interested in developing a transparent pricing model and further surprised to read it required SAS and advanced programming to accomplish.

"Garbage" is, at its heart, a simple business - 1) put it in a container 2) pick it up 3) transport it 4) dump/process it. Every waste company relies on the same simple formula to derive cost: 1) the cost of the collection container + 2) the cost to dispose/process the collected material + 3) the fractional cost to drive from one collection point to the next on a route + 4) the fractional cost to move each collection stop's material to the final location for disposal/processing. This is the commodity part of the business and it's why the marketplace is homogeneous, mature, and focused on winning market share (even if the competition is degenerative and/or illegally priced under cost).
What complicates the equation are the sweetheart deals between governments and garbage companies (let's be honest, they're not "garbage companies", they're TRUCKING companies) and the relative distances between disposal/processing/hauling operations in a market geography. Like politics, all garbage is "local" and typically the area around an MSA (known as a "waste shed") has a mix of assets owned by a mix of companies and government(s). In the ideal world, the hauling companies are not supposed to talk to each other and exploit route densities and/or disposal/processing options to the determent of the market. In the real world, this happens all the time and it's the reason the DOJ and states' AGs' offices have so much say over M&A activity (and criminal prosecutions).
We've use the simple 1+2+3+4 model for over a decade to establish the "true" cost then compare ALL the assets available in a market to derive the best solution. This differs from hauling companies' approach as they can only (legally) discuss pricing about THEIR assets and are not supposed to collude with others in their market areas.
It's the mix of collusion between illegitimate hauling companies and sweetheart franchise deals (in reality monopolized markets under government direction - doesn't that have a sweet ring of "customer satisfaction" tied to it?) that complicates things. It for these reasons that only a small fraction of businesses (less than 2% by population) can afford to sort out all the silliness.
From an IT perspective this may be an "interesting and newsworthy" article. The view from the "garbage" industry remains the same - it's more Waste Management PR window dressing designed to make the company appear "cutting edge" while the reality of the market continues its march away from the old, single-provider, asset-based model.
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