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Supply Chain Frontiers Issue #18. Read all articles in this issue

Many of the best practices that underpin supply chain design will become obsolete as rising energy costs force companies to rethink the way they make and deliver products. That was the main message to emerge from the Major Session panel on energy efficiency at the Council of Supply Chain Management Professionals’ (CSCMP) annual conference last October. The panel was organized by MIT’s Center for Transportation & Logistics (CTL), and a one-day conference this April at MIT organized jointly by CSCMP and CTL will take a more in-depth look at the issues. 

How energy prices will fluctuate over the next few years is unknown, but the chances are that the low-cost regime supply chain managers have taken for granted has come to an end. “Cheap oil has permeated all aspects of supply chain,” said CTL Research Director Larry Lapide, one of the CSCMP panelists. The shift to offshore manufacturing and smaller and more frequent shipments, the growth in premium air freight services, and the increasing use of plastics in raw materials and packaging are all strategies that companies have implemented either to cut supply chain costs and inventories or increase channel velocity. But these strategies have also pushed up energy consumption. “And now we are vulnerable to oil price shocks,” Lapide warned.    “We are in uncharted territory,” said panelist Chuck Taylor, Principal, Awake Consulting, who painted a bleak picture of future energy supply/demand trends. In 1956 geophysicist Dr. M. King Hubbert predicted that oil output in the United States would peak around 1970, which it did, said Taylor. The second peak forecast by Hubbard is around 2015, just eight years away, but this one is global. And despite all the hype surrounding alternatives, oil-based fuels remain the predominant choice for transportation, noted Taylor.   Not all energy outlooks are as pessimistic as Taylor’s, but the premise that companies must start to recast their supply chains to take account of energy efficiency is gaining ground. First, enterprises must measure fuel consumption in the supply chain, suggested Lapide – something relatively few have done because cheap oil has been the norm.   After quantifying usage levels and setting goals for cutting consumption, there are a number of routes to conservation. Panelist Brice Russell, Senior Vice President, Supply Chain, Mars Incorporated, described how his company deployed a transportation management execution system to slice five percent off the 100 million truck miles it clocks per annum in the United States. The program saved the equivalent of 1.2 million gallons of fuel. A bolder move was to acquire another company to streamline its distribution network and add capacity. The acquisition slashed freight volumes from factories to customers by 20%, Russell said.       Dell has also made some bold moves to cut energy costs through more efficient distribution, explained panelist Ray Archer, Vice President of Americas Manufacturing for Dell’s Americas Operations. About three years ago, the company’s plants changed from manufacturing by product type to making all the products required in local geographies. “We send orders to the plant based on the zip code of the customer,” he said. The company built a $100 million facility in the United States as part of this effort. The strategy reduced outbound logistics costs by 20%, cut the delivery cycle time by a day, and yielded energy efficiencies, because the product is made closer to the customer. Dell is now implementing the second phase of this “fulfillment chain.”   Key themes during the panel discussion were collaboration and alignment. Russell believes that trading partners must collaborate to develop the win-win incentives that will drive energy efficiency. An example is suppliers and buyers cooperating to improve truck utilization by increasing the number of full truckload shipments. Aligning internal interests is also crucial. Russell pointed to a program at Mars that saved $7 million through the double-stacking of pallets. But the initiative was confined to logistics – about $7 million in savings was left on the table, Russell said, because other departments such as manufacturing and marketing did not participate.   As oil prices climb and become more volatile, the case for energy-efficient supply chains will become stronger. “No matter what happens to oil you are always going to be better off with an energy-efficient supply chain,” said Lapide.   For more information on the CSCMP/CTL Energy-Efficient Supply Chain conference, scheduled for April 30, 2007, at MIT, Cambridge, MA, contact Ken Cottrill.