fuel for thought about supply chains

In a provocative article in the premier issue of CSCMP'S Supply Chain Quarterly, supply chain veteran Chuck Taylor warns supply chain managers that the era of cheap oil has ended and will not return. It is not a new argument by any means, but Taylor draws on both expert opinion and statistical analysis to paint a persuasive and worrisome picture about what declining supply and rising costs will mean for world economies and for supply chains in particular.

High fuel costs, Taylor reminds us, have effects on supply chains well beyond the obvious issue of transportation prices. "Ask yourself what will be the impact on the supply chain when sales and pricing policies, service levels, order quantities, packaging, the number of stock-keeping units, and inventory strategies all have to change in a world without cheap oil," he writes. "What about networks, modal selection, plant and DC operations, sourcing strategies?"

One of the ironies of modern supply chain management, Taylor suggests, is that the rush to global sourcing, which is helping drive growth in places like China and India, boosts demand for energy even as world petroleum output may be peaking. That drives up energy costs, and the resulting high costs of transportation could force corporations to rethink global sourcing strategies.

Taylor argues that as transportation costs rise, supply chain managers need to look anew at the lean principles developed by Toyota in the years after World War II as a model for supply chains. He contends that global sourcing and lean do not mix. "It is beyond me how someone can claim that a 12,000-mile supply chain with a three-week lead time and inventory stretched halfway around the world is lean," he writes. "A true lean system operates as locally as possible."

He also laments the lack of a sound U.S. energy policy that acknowledges and addresses the need for reducing the nation's dependence on oil. "There appears to be no energy policy in the United States other than Cheap Oil," he observes. He believes active government engagement in energy and transportation regulation may be inevitable, and that supply chain professionals had better be alert to that and engaged in helping form rational law and regulation.

A crucial part of the energy debate, of course, is the environmental impact of burning fossil fuels. Oftentimes, fuel-conservation and environmental interests dovetail nicely, as I found when developing a story on heavy truck anti-idling rules for this issue of DC VELOCITY. The motor carrier and fleet executives I spoke with were anxious to comply with all of the various state and local anti-idling ordinances, not just because they were forced to do so, but also because it coincides with their business need to run trucks more efficiently and conserve increasingly expensive fuel.

Policy does not always work that way, however. In the United States, we have actually seen some degradation of fuel efficiency among truckers, in large part due to the federally mandated use of new, cleaner-burning diesel engines. Though the engines are greener than their predecessors, they also operate less efficiently. But the carrier executives I spoke with are committed to working with suppliers and customers to both reduce emissions and improve mileage. DC operations have an important role in achieving those goals through such efforts as improved scheduling or extended hours (the last of which, of course, has its own energy cost implications).

The efforts of motor carriers suggest that economic forces— such as rising fuel prices—will create market-driven conservation efforts. Higher transportation costs will force businesses to rethink their supply chain strategies. Regulations, fines, and fees on carrier operations are certain to stimulate further discussion about how to address real, energy-driven constraints.

The world is not running out of oil; Taylor does not argue that the sky is falling. But demand that will permanently outstrip supply means our love affair with cheap oil is over. And markets alone cannot resolve this issue. As Taylor writes, "Geology, not economics, will set the limits for this finite resource on our planet."