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Commerce · II.01 · MMXXVI · daylight

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WORKBOOK — THE CORPORATE EXECUTIVE

Chapter II.01 · From Scarcity to Abundance

For the person with a P&L, a supply chain, a board and a quarter. This workbook uses the language of the firm without apology, because the firm's own numbers already support most of what follows — they have simply never been arranged to show it.

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THE PREMISE, STATED COMMERCIALLY

Your firm carries supply risk on a small number of materials, components or capabilities. Every one of those risks is currently held in your register as a single undifferentiated thing — availability — with a probability, an impact and an owner.

That register is doing less work than it appears to. Four different failure modes are being held under one heading, and they have four different remedies with four different costs and four different lead times. A material that is near its thermodynamic floor needs substitution research and a downward revision to your growth assumption. A material that is positional needs inventory, logistics and a second route. A capability that is entitlement-limited needs a contract. A non-rival input that is enclosed needs a licensing negotiation, and paying an availability premium for it is simply a transfer.

Conflating these is expensive in a specific and measurable way: it causes the firm to buy inventory against risks that inventory does not address, and to run thin against risks that inventory would have solved for a fraction of the cost.

There is also an asset on the other side of the same ledger, and it is larger. Whatever fraction of your material comes back to you is a stock you already own, and 1/(1−p) says what it is worth. Most firms have never computed p and could compute it this month from data they already hold.

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PART ONE — DISCOVERY

Days 1–30

Exercise 1.1 — Reclassify the supply risk register (one session, two hours, with procurement and engineering in the room together)

Take your top ten supply risks. For each, one line:

  input | rival? | thermodynamic? (ratio to floor) | which position? | enclosed?

The five positions, from the chapter: place · form · concentration · time · title.

Three findings appear reliably and you should expect them.

First, several risks will resolve to time — the material exists, is available, and the problem is that it is not available on your cadence. That is a buffer problem and buffers are cheap relative to almost every other remedy in the register.

Second, at least one will resolve to title — a contract, an allocation agreement, an exclusive, a right of first refusal you gave away in a year nobody in the room now remembers. Title problems are solved in legal, not in operations, and they are usually being worked by the wrong function.

Third, one will resolve to genuinely thermodynamic, and that one deserves the research budget the other nine are currently sharing.

Output: one page, ten rows, each with a named remedy and a named function.

Exercise 1.2 — Find p (one week, with your controller)

For your highest-spend durable material, compute the recovery fraction.

        p  =  tonnes of that material returning to service per period
              ------------------------------------------------------
              tonnes of that material leaving service per period

Define the denominator in writing before you compute the numerator. This is the single control that keeps the number honest, and it is the one thing in this workbook you should not delegate. A recovery rate improves beautifully if the denominator narrows, and a number that can be improved by editing its own definition will be.

You will not have this figure. You will have most of its parts: purchasing records, scrap sales, take-back arrangements, warranty returns, disposal contracts. Assemble it once and it becomes a monthly number.

Exercise 1.3 — The appreciative supply conversation (one session)

Before proposing anything, change one question in one meeting.

Replace "where are we exposed?" with:

"When have we solved a shortage in the last three years without buying more of the thing — by rerouting it, converting it, storing it, or renegotiating who had the right to it? What made that possible, and who did it?"

Record what comes back and record who is named. You are establishing that the capability already exists in the building, which is a materially easier argument than the claim that it must be acquired.

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PART TWO — THE ARITHMETIC

Days 31–50

Exercise 2.1 — The exposure model, done properly (one week)

For each of your three largest material exposures, build the same four lines the chapter builds:

1. Static life of the world reserve at current world production. Sourced — USGS Mineral Commodity Summaries is free, current, and is the source your analysts' analysts are using.
2. Exponential life at the growth rate in your own demand plan, not the world's. T = ln(1 + g·L) / ln(1 + g).
3. The same figure against identified resources rather than reserves.
4. The circulation equivalent: what value of p would deliver the same multiple as the difference between lines 2 and 3.

Line 4 is the one that changes the meeting. For copper, the entire gap between reserves and all identified resources is 2.10×, which p = 50% already matches. You will frequently find that a recovery programme you could fund this year is worth more than a geological outcome you cannot influence at all.

Exercise 2.2 — The headroom ranking (two days)

For every process in your operation with a known theoretical minimum — separation, drying, comminution, smelting, refrigeration, compression, illumination — compute:

        headroom  =  current specific energy / thermodynamic minimum

Rank them. Processes with headroom above five are engineering opportunities with known upper bounds. Processes below two are at the floor: stop funding incremental improvement there and fund substitution or redesign instead.

This ranking typically redirects an existing efficiency budget rather than requesting a new one, which is why it can be done without approval.

Exercise 2.3 — The concentration exposure (one day)

For each critical input, compute two figures and put them side by side with the static life:

  share of world reserves in the largest single jurisdiction
  share of world production in the largest single producer

Phosphate rock is the worked case: 336 years of static life, more than 300 billion tonnes of resource, 67.6 percent of reserves in Morocco, and 40.9 percent of 2023 production in China. Every quantity figure says there is no problem, and every quantity figure is true.

Put the three numbers on one line in the board pack. A long static life beside a concentrated jurisdiction is the clearest statement of a real risk that your current register cannot express at all.

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PART THREE — DESIGN

Days 51–75: the instrument

The chapter's instrument is materials-as-a-service with retained title, financed by an asset-backed working-capital facility against retained inventory. Build it in four steps.

Step 1 — The clause. Title retention, drafted, registered where your jurisdiction has a security-interest register. Get this through legal before anything else; retrofitting it into an existing supply agreement is far harder than writing it in at the start.

Step 2 — The metered unit. What exactly is sold — lumen-hours, square-metre-months, cycles, tonne-kilometres, uptime. Priced per period, not per unit of matter. Your commercial team will resist this and their objection is usually correct on the first product you propose and wrong on the third. Pick the third.

Step 3 — The return counterparty. A named reprocessor, a named trigger, a named price for returned material, contracted before the first unit ships. A take-back obligation with no priced counterparty is a future write-off wearing a sustainability badge.

Step 4 — The facility. Working capital advanced against the book value of material in service, at an advance rate of p × 0.8 of assessed residual value, ratcheting up as verified recovery improves. That ratchet makes the lender's interest and the operating unit's interest the same interest, which is the structural reason this holds.

The decision ratio, front page:

      p · (residual value per unit)  −  (reverse logistics + reprocessing
                                          + title administration per unit)
      ----------------------------------------------------------------------
                          virgin input cost per unit

Above zero and every cycle of circulation is cheaper than buying the material again. Below zero, do not proceed on environmental grounds and do not let anyone else do so either. A loop that loses money each turn is a subsidy with a logo on it and will be cancelled in the first hard quarter, taking the credibility of the whole programme with it.

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PART FOUR — WHAT TO TELL THE BOARD, AND WHEN

Two things need saying before anyone hears them elsewhere, and both are accounting consequences rather than risks.

Reported revenue falls in the transition year even as cash economics improve, because revenue is recognised over the service period rather than at delivery. Working capital rises, because retained material stays on your balance sheet instead of passing through cost of goods sold at shipment. Model both, present both, present them in the first paragraph. A structure that surprises the CFO in month seven is dead whatever its returns.

The third conversation is with your auditors and it is routine: depreciate the retained asset over its recirculated life rather than its first-use life. That is a discussion about useful economic life, which they have with you every year anyway.

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PART FIVE — THE FIRST NINETY DAYS, ON A PAGE

Ninety days does not produce a circular business. It produces a clause, a denominator, a counterparty and one signed contract, which is the smallest collection of objects from which everything else can actually be built.

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WHAT THIS DOES NOT SOLVE, AND SAYING SO FIRST

One exposure in your portfolio will not respond to any of this, and naming it before somebody else does is what makes the rest of the paper credible.

Where an input has no regeneration and your own demand plan compounds, the arithmetic is against you and no reclassification changes it. Take your fastest- growing material. Compute its static life, then its exponential life at the growth rate in your own plan. Then compute the same figure against every identified resource in the world. In the chapter's worked case — lithium, at a conservative ten percent — the difference between reserves and every tonne identified anywhere on earth is 13.4 years, while halving the growth rate is worth 15.1.

Two things move that number and only two: the growth rate of the draw, and the recovery fraction. Neither is a procurement decision. The first is a product and pricing decision and belongs to your commercial leadership. The second is an engineering and contracting decision and belongs to operations.

State this in the board paper as a finding rather than as a risk, with the number attached, and say which of the two you are funding. A paper that claims a method dissolves every constraint will be disbelieved on all its other claims, and correctly.

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BOARD PAPER TEMPLATE

Title. One line, commercial. "Retained-title lighting contract: 2.0× effective material stock at current recovery, £1.4m facility, secured on the material." Not "Circular economy pilot."

1. The number. The decision ratio, computed, first paragraph.
2. The reclassification. Our ten supply risks, sorted into four kinds, with the count in each and the remedy each implies. One table.
3. The exposure we could not see before. The static-life-against-jurisdiction line for our most concentrated input.
4. p, and its denominator. The current recovery fraction, the signed definition of the denominator, and who recomputes it.
5. The structure. Title, metered unit, return counterparty, facility, advance ratchet, term.
6. The accounting consequences. Revenue recognition and working capital, quantified, in the paper rather than in a footnote.
7. What would make this fail. Three, honestly. Contamination of returned material; a customer who will not accept retained title; a reprocessing price that moves against us. This paragraph is why you will be believed.
8. The honest negative. Our fastest-growing input has r = 0 and a compounding draw, and no amount of this helps. Name it, state what does help — the growth rate, and circulation — and say which we are funding.

Length: two pages. Longer means you have not decided what matters.

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APPRECIATIVE QUESTIONS FOR YOUR LEADERSHIP TEAM

1. When did we last solve a shortage without buying more of the thing — and who did it?
2. Which of our inputs comes back to us in any quantity at all, and who built that route?
3. What do we give away that costs us nothing to reproduce, and what has it returned that we have never counted?
4. Which of our risks is actually a timing problem that a buffer would have solved for a fraction of what we are spending?
5. Where do we hold title we have forgotten we hold — and where did we give title away in a year nobody here remembers?
6. If p were on the front page of the monthly pack, what would people start doing in the first quarter?
7. Which of our processes is genuinely near its thermodynamic floor, and have we stopped funding incremental gains there?
8. If we kept title to everything we shipped, what would we design differently — and which of those changes would we want anyway?
9. Which supplier relationship is really a licence rather than a purchase, and are we negotiating it as one?
10. What is the smallest material loop we could close completely this year, all the way to a priced counterparty for the returned material?
11. Who outside this team would notice first if our recovery number were improving because the denominator narrowed?
12. What would have to be true for this classification to still be honest when the person who benefits from the answer is the one filling it in?