Towards smarter supply chains

Innovation in organisation and management will be needed if sectors are to adjust to new, oil-challenged realities. Supply chains will evolve as a result, notably in transport.

Oil prices aren’t as high as they were in the second half of 2008, but sky-high prices have been replaced by something that is almost as daunting: wild price swings in the short term and the near certainty that, within a few years, the days of outrageously expensive oil will return. Oil price volatility severely hamstrings forecasters and planners, constrains the ability of supply chain network modelers to evaluate and design inventory and warehouse-placement approaches, and makes it more difficult for sourcing and procurement people to know where tomorrow’s materials should come from. No supply chain function has it tougher than transportation. Global shippers of raw materials and finished goods must reposition their transportation approaches to avert problems and seize opportunities associated with chaotic market conditions. New or revised transportation strategies could well be in the offing for most shippers, distributors and retailers. Top priorities will likely lead to the following outcomes:

Slower and cheaper: To some extent, shippers may need to move from fuelintensive modes, for example road and air, to slower but more economical choices, such as rail and water. Better planning, timing, inter-company collaboration and even philosophical changes may be needed to accommodate slower modes of transportation.

More efficient models with a focus on utilisation: Most companies may conclude that realigning customer/store-service contracts is needed–for example, pushing for more factory-direct shipments, larger inventory minimums or wider delivery windows that let the shipper hold freight until a truck is full. Two or more organisations might also work together to consolidate shipments to low-density areas.

Smarter ways to buy: Companies could determine that maximising volume with one carrier is not the best policy in an era of runaway fuel prices. Instead, an entity might use an elite carrier when on-time delivery is key and a low-cost carrier when delivery timing or accuracy are less important.

Core business assets and differentiation: Oil price cataclysms could make many private fleets less justifiable. These may be replaced by commodity transportation providers or third-party logistics services providers that can reduce costs by running full truckloads, minimising one-ways and amortising investments over a larger asset base.

Leveraging technology innovations: Oil issues could cause more companies to view advanced transportation systems as essential for survival. Take GPS telematics, which enable companies to track vehicle locations in real time. The principal benefit is that, by optimising dispatching and routing capabilities, total miles travelled can be reduced. Telematics also make it possible to remotely monitor speed, braking, gearshifting, idle time and out-of-route miles, all of which can result in greater fuel economy. Industry research has shown that telematics can reduce fuel consumption by up to 14% while paring vehicle-maintenance costs by roughly the same amount.

Transportation management systems (TMS) have long been employed by companies to consolidate shipments into more costeffective loads, identify less expensive modes and optimise routes to minimise costs. As fuel prices rise, these capabilities become even more important, and some companies that once thought an advanced TMS was an unaffordable luxury may now find them a necessity.

Enhancing supply chain visibility–allowing carriers to understand and electronically view shippers’ needs–could be another technology priority. Helping carriers see all of a shipper’s volume allows the former to submit pricing offers based on capacity guarantees from the latter; and guaranteeing capacity is one way for a shipper to drive down costs, since it helps carriers plan routes and maximise equipment use and staffing, while limiting the amount of empty miles.

Other transportation-technology innovations include wide-base tyres and automatic tyre inflation systems, both of which reduce roll resistance and aerodynamic drag. The US Environmental Protection Agency believes that using wide-base tyres on a long-haul truck can save more than 400 gallons (1,514 litres) of fuel per year, while cutting CO2 emissions by more than four metric tonnes. Advances in tractor-trailer aerodynamics also affect fuel consumption. Here, the EPA has determined that tractor-roof fairings, cab extenders and side fairings can significantly reduce wind resistance, thus improving fuel economy and eliminating up to five metric tonnes of CO2 emissions per year.

Fuel for thought Despite the various process and technology innovations associated with transportation, the reality is that, sooner or later, there will be different fuels and different vehicle types. Thus it is in every company’s interest to begin planning for the day when carbonbased fuels powering internal combustion engines are not their primary transportation source.

Significant progress already has been made with agriculture-based fuels, with perhaps the most interesting agri-option being algae. This plentiful, high yielding source is drawing interest from companies such as Shell, ExxonMobil, BP, Valero and Chevron. Commercialisation could take a decade.

Waste-to-fuel initiatives are following a similar if less mature arc, with small government projects in place, but little current legislative or financial support. However, if brought to scale–with collection that is not greenhouse-gas intensive–then waste feedstock processing could provide a fantastic source of low-cost, low-carbon renewable fuel.

Technologies are also emerging to support the creation of fungible, interchangeable fuels. The best example is using “synthetic biology” to convert sugar cane to diesel. Several companies are planning commercial plants in 2011, with production starting by 2013.

Butanol, or butyl alcohol, is enticing. Its energy content is similar to gasoline, it is transportable through existing pipelines and mixable with gasoline at ratios much higher than ethanol. Significant production and economic issues remain, but genetic engineering and advances in synthetic biology could lead to breakthroughs.

Further ahead, look for technologies focused on electrification to reach scale. The upside is high, including low running costs and extended driving ranges, but battery cost, capacity and availability are still major hurdles. Researchers estimate that plug-in hybrid electric vehicles (PHEVs) can run at an equivalent price of $.75 per gallon, but the battery premium over internal combustion engines is still great. A key factor is the ability of various countries’ grid systems to withstand PHEV penetration rates.

To prepare for a permanently fuel challenged world, the most important thing most companies can do is maximise their own flexibility. After all, we may know that oil prices are wildly capricious and heading higher, but we can’t know precisely when things will shift, by how much or who will respond. But companies whose investments focus on increased flexibility will be better able to mitigate fluctuating fuel prices, and do a better job of holding down costs. Being better prepared is usually synonymous with better performance.

References

Accenture (2009), “Betting on Science: Disruptive Technologies in Transport Fuels”, available at www.accenture.com

Visit www.accenture.com

©OECD Observer No 279 May 2010




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