Martin Christopher's Blog

The Coming Crisis in Supply Chain Management

In a remarkably short space of time the issues of carbon footprints, potential energy shortages and raw material cost increases have risen much higher on the agenda in boardrooms round the world. There is a growing realisation that major discontinuities to established patterns of working may be just around the corner and that 'business as usual' may no longer be possible.

There will be many ramifications of these potentially seismic changes but there is one particular challenge which requires our immediate attention - the immient arrival of what some have called 'Peak Oil' and its implications for supply chains.

Peak Oil - the concept of Peak Oil was originated as far back as 1956 by Dr Marion King Hubbert, a geologist at Shell. What he recognised was that all oil production, be it from an individual field, a country or the entire world follows a normal distribution i.e. a bell-shaped curve. All the current indications are that we have reached the top of that curve, or that we shortly will. Even with new discoveries that total amount of oil reserves will still be in decline once the peak has passed.

Demand and Supply - at the moment the world demand for oil is approximately 85 million barrels a day which by chance is about the current daily output of all the working fields. However, whilst output is about to start to decline as Peak Oil is reached; demand continues to grow - particularly fuelled by economic growth in countries such as India and China. The gap between the demand and supply will get larger by the day.

Filling the Gap - some commentators have suggested that the gap between the demand and the supply for oil will be filled by discoveries of new fields or new fuels (e.g. biofuels). However such is the likely deficit that it is estimated that we would need to find new reserves of oil (or create alternative fuels) equivalent to five Saudi Arabias over the next 20 years. Simple economics tells us that the only way the gap will be filled is by the price mechanism. In other words the cost of oil will increase dramatically to reflect the shortfall in supply. US $200.00 a barrel is not that far away and US $300.00 is quite possible before long.

Supply Chain are Energy Intensive - today's supply chains are more energy intensive than before because they are more transport intensive than they used to be. There are a number of reasons for including:

• Focussed factories and centralised distribution - as a result of rationalising production and distribution many companies are now having to serve customers at a greater distance
• Global sourcing and offshore manufacturing - the well-established trend to low-cost country sourcing and manufacturing has meant that supply chains are significantly extended and products travel much further
• Just-in-time deliveries - as more customers demand just-in-time deliveries from their suppliers, it is inevitable that shipment sizes reduce whilst deliver frequencies increase.

 Implications for Supply Chain Strategy - most supply chains and distribution networks have been designed on the principle of cost minimisation - even though the definition of cost might have been somewhat limited. The problem is that many of the network optimisation exercises that were carried out in the past did not factor in the potential for oil prices to rise to US $ 200.00 a barrel or more. There is an urgent need for supply chain strategists to revisit those calculations and to conduct 'what if' analyses based upon worst case scenarios of transport costs.

It is likely that the results of these analyses will cause a radical rethink of the structure of our supply chains; possibly with a return to much more local-for-local manufacturing and sourcing.

Reducing the transport-intensity of our supply chains - apart from a greater proportion of local-for-local sourcing and manufacturing, what other activities might reduce the transport-intensity of our supply chains?

• Bigger vehicles/vessels: even though controversial this is one proven way to reduce the transport cost element per unit shipped
• More load consolidation: using 'milk round' collections, cross-docking arrangements and shared transportation
• A review of product and packaging design to enable more product per cubic metre of transportation requirement
• Using sophisticated tools, e.g. intelligent agents, to enable dynamic sourcing, routing and consolidation
• Greater use of postponement strategies to enable standard products to be shipped in bulk for local configuration
• Greater focus on the reduction of port and road congestion, through an integrated infrastructure including the development of post-centric logistics.