The humble supply chain will undergo a dramatic change as our energy network and systems transition from oil (fossil fuel) to renewable energy. Which begs the question: Is your company ready?
A business’ success or failure always depends on its ability to source and deliver products and services to the marketplace. Let’s look at how that delivery has historically taken place, how it will change as our energy network changes and how smart companies are preparing themselves.
Supply Chain Evolution
A supply chain is a system of organizations, people, technology, activities, information and resources that move a product from a company or supplier to the customer. Picture a relay race of many runners: Each participant moves the relay baton until it reaches the finish line or, in this case, the marketplace where the product can be purchased.
Reviewing the evolution of the supply chain gives us a valuable foundation to discover what it may look like in the future.
Pre-Industrial Supply Chain
Before the industrial revolution, most people grew, raised or hunted for their food. All basic needs were available in the nearby town mercantile. In early America, some products were imported from European nations, but they tended to be expensive and were available only to the more affluent and urban populations. Goods traveled by truly sustainable supply chains – across oceans via sailing vessels powered by winds and currents, and locally via horse-drawn wagons.
Industrial revolution supply chain
The industrial revolution brought steam and fossil fuel engines, which soon powered cars, trucks, trains and ocean vessels. These technologies vastly shortened the time from manufacturing or production to markets, allowing perishable products to arrive in good condition and products from distant places to become affordable for more consumers.
Modern supply chain
Goods from around the world are readily available in today’s global marketplaces. By using cheap labor in developing countries and an extensive supply chain with numerous links, many products and services are cheaper or more affordable than ever.
The Looming Supply Chain Threat
The question in front of all businesses is how long will today’s supply chain model survive? Two powerful forces are at play that are already disrupting the cost and availability of oil, the ingredient that makes modern supply chains function. These opposing forces are depicted in the Natural Step’s “funnel” illustration. The top arrow represents decreasing resources, such as water, biodiversity and oil. The bottom arrow represents increasing demand for resources (including oil), due to increasing global population and affluence (such as what we’re witnessing in China and India).
Decreasing oil supply and increasing oil demand may create the condition some refer to as “Peak Oil.”
What is Peak Oil?
Peak oil is the point at which global petroleum extraction reaches its maximum rate and begins to decline. Petroleum industry experts predict that reaching peak oil will cause a post-peak oil price increase. Peak oil theorists believe high prices will lead to further oil production decline because modern industrial transport, agricultural and industrial systems dependent on the low cost and high availability of oil will be forced to turn to energy alternatives or otherwise transform their energy structure to eliminate petroleum reliance.
Optimistic peak oil theorists estimate that the global oil decline will begin by 2020 or later. They also assume major investments in alternatives will occur before a crisis causes significant lifestyle changes across oil-dependent nations. Not all energy industry analysts are as sanguine.
For a preview of how post-peak oil would become more expensive, consider the Canadian tar sands. Compared to conventional oil drilling and extraction, Canadian tar sands require more energy to extract useful material and pose a greater environmental threat. As a result, they produce more expensive oil. A similar example is the spread of deep-water drilling, where the costs and risks of oil extraction are enormous, as BP can attest.
Cheap oil is and was the engine that built the modern global economy. It allows production to be placed anywhere in the world (mostly near cheap labor or in different hemispheres where seasonal fruits, vegetables and other crops can be sourced for global markets). Labor savings more than offset the increased costs of transportation and duties. At least, that’s how it’s worked to this point.
The Emerging Supply Chain
What will happen to the global economy and supply chain when the cost of oil or energy exceeds the labor savings difference? Or when there’s a shortage or dramatic increase in the price of oil? Will your company be able to deliver products and services to the marketplace and still earn a profit?
The transition away from fossil fuels (oil and natural gas) to biofuels and renewable energy promises to be a bumpy one. Today’s world is reliant upon cheap and predictable transportation systems powered by oil. The infrastructure needed to support alternative fuel transportation will be expensive and take years to build.
Below are some strategies businesses are using to build resilience in their supply chain. Several of these strategies create immediate as well as future benefits, including avoiding risk, lowering operating costs and creating sourcing/procurement efficiencies.
- Dual sourcing: Sourcing or manufacturing the same product in different counties, which reduces the risk of production being slashed or halted by natural disasters or political instability. In the event of an oil shortage, one source may provide companies an opportunity to move products to market when another source cannot.
- Components: Importing partially assembled products and completing production in the country where they’ll be sold and consumed. This practice can reduce duties and lower shipping costs since the product doesn’t arrive in retail packaging. In an oil shortage, companies that take responsibility for final assembly will already have an inventory of components and will be ready to move finished products to market. And if they are forced to source components locally, they may have the advantage of using their capacity and experience with product assembly to ramp up production more quickly than their competitors.
- Micro factories: Numerous, smaller factories near major markets that reduce travel distances. In an oil shortage, these micro factories will have inventory and production capacity on hand. They may also have material suppliers nearby with the breadth of transportation options to prevent any disruption in the delivery of raw inputs.
- Production next to consumption: Very similar to micro factories, but these companies use a singular factory located in the same market where the manufactured product is consumed. Like the Asian-based automobile manufacturers establishing successful manufacturing plants in the US, these companies benefit from reduced shipping costs and duties assessed by US Customs.
- A model for the future? One future model of supply chain resilience is the “home” printer. 3D printing is currently used primarily by large companies for quick product prototyping, not for salable consumer goods. But amazing developments are taking place every day – from the first 3D printed jaw transplant to 3D printed manufacturing equipment. Some predict we are not far from having a home 3D printer that creates your product at home – once you’ve purchased the license – with no need for a factory, delivery or packaging. In some respects, this would be a return to the pre-industrial supply chain, where manufacturing takes place in the marketplace.
For more on future supply chains, check out Why Your World Is About to Get a Whole Lot Smaller, by Jeff Rubin.
Adapt to Succeed
As these examples illustrate, forward-thinking companies are already adapting their supply chains to mitigate the future impacts of oil scarcity and rising fuel costs. For some, these moves follow previous steps to build redundancy into their supply chain to alleviate risks due to political instability, rising labor rates, security, sourcing flexibility and other issues.
The companies that don’t over-rely on cheap fossil fuels and instead create resilient supply chains will enjoy a huge competitive edge when peak oil arrives. With oil prices on the rise again, many have found benefits in this resilience already.