Supply Chain Synchronization

Increasing the energy efficiency of supply chains

Today, the transportation of goods consumes 15 million barrels of oil a day—roughly one-fifth of total production. Wow.

This staggering amount reflects the fact that supply chains of many manufacturing sectors went global when oil was cheap. In 2008, when oil hit $150/barrel, this variable in the supply chain equation proved that a supply chain model predicated on cheap oil is no longer viable. It also exposed the opportunities to increase margins and reduce risk by decoupling a supply chain as much as possible from energy.

Tobias A. Meyer, an associate principal in McKinsey’s Frankfurt office, has published a fascinating interactive to illustrate the challenges and show the opportunities to reduce energy costs in supply chains. Meyer has made an important contribution to McKinsey's ongoing study of efficiency in supply chains. McKinsey has "looked at numerous opportunities to reduce the amount of oil used to get goods from a manufacturer’s dock to a retailer’s shelf. These opportunities are available not only to manufacturers but to wholesalers, distributors, carriers, and third-party businesses. [They’ve] grouped these opportunities into six levers to illustrate possible next steps. Of course, the players in a chain operate independently from one another, so achieving all of these gains would require coordinated efforts and investments—a considerable challenge."

The six levers (divided into two groups) are:

        Supply chain set up

1. Increase value density
2. Reduce average transportation distance
3. Change the mix of transportation modes
   
   Transport assets
   
   
4. Address asset technology (e.g. rail, tanker, trucking)
5. Assess usage of individual assets
6. Assess usage of collective assets

Improving energy efficiency has become a top concern for executives, Tobias Meyer's interactive is a helpful tool to begin exploring levers for potential energy-efficiency gains in each stage of the supply chain. The ability to obtain the maximum gains will be contingent on the supply chain participants coordinating activities and sharing better information. The technology tools necessary to do this have been emerging over the past 5 years, and are becoming mature enough to help make a significant difference.

New technologies and technology adoption is setting the stage for novel business models

Jacques Bughin, Angela Hung Byers, and Michael Chui of McKinsey have recently posted an article reminding us that "The history of recession is also the story of technology advances that overturned the existing competitive order."

While we have all been working through the worst recession in 60 years, it is during this time that the seeds are being sown that will create new winners in the "new normal" economy. Bughin, Byers, and Chui write: "Though companies are tempted during a downturn to manage for survival, recessions in fact reveal periods when the competitive pecking order changes dramatically. Research by our colleagues shows that nearly 40 percent of leading US industrial companies tumbled from the top quartile of their sectors during the 2000–01 recession....In the here and now, new technologies and technology adoption is setting the stage for novel business models that portend disruptions as great as those of past downturns."

For those working in the supply chain space, the recession has naturally brought renewed focus on reducing inventory, eliminating obsolescence, and increasing inventory turns. Those companies that are also reevaluating their supply chains to enable new business models and create new areas of value will be strongly positioned to disrupt their industries. The challenge, of course, is to focus on cost reduction while simultaneously making strategic investments that will generate revenue from new services and offerings.