Sucking It Up

Here's a consequence of escalating oil prices that many businesses have yet to contemplate, or don't want to: The supply-chain management strategies spawned during the last 20 years — quick transport, lean inventories, and a growing reliance on low-cost, offshore labor — may not make good business sense anymore.

Why? The era of cheap oil, which those strategies depended on to be economically viable, is over. Crude-oil prices in the United States have reached the stratosphere, setting an inflation-adjusted record of nearly $110 a barrel in early March. They could rise by 50 percent in as little as two years, if recent predictions are anywhere near accurate.

The long-term supply outlook is not promising: petroleum production levels are showing signs of peaking, as the world's huge fields are depleted. In the United Kingdom's well-harvested North Sea, producing a barrel of oil now requires a capital outlay four times greater than in 2003. On the demand side, the U.S. Energy Administration projects that worldwide oil needs will reach 98 million barrels per day by 2015, up from 2007's 85 million barrels — an output level experts see as a long-term peak.

Much of this fossil fuel is being burned in corporate supply chains. The movement of goods by truck and rail consumes 20 percent of all energy used in transportation, which itself consumes one-third of all energy. In commodities businesses, total logistics costs can account for as much as 15 percent of a product's total cost, says Steven Serneels, a partner at S&V Management Consultants in Belgium.

Reducing the supply-chain consumption of expensive oil has therefore become a priority for many companies. No, they aren't giving up just-in-time inventory strategies — not yet anyway. But they are adopting practices that use fewer trucks and save thousands of gallons of fuel — also cutting costs, as it happens — while still being efficient. Given that the United States uses 25 percent of the world's oil and demand from emerging economies is escalating, "there will have to be big changes" in supply chains, says Chuck Taylor, president of Awake Consulting. "Conservation is the biggest and quickest way to extend the supply of oil." Adrian Gonzalez, a consultant at research firm ARC Advisory Group, agrees: "It's something that hits the bottom line; it's very evident. You have more control over it, and it can make a bigger impact" than other green strategies.

Inventory policies, sourcing, and distribution-network decisions have a direct impact on oil consumption. As a first step, some companies are looking to what happens on the highways — although it can be tough to eke out savings.

Streamline the Fleet
Companies are upgrading their fleets of trucks with auxiliary power units, automatic tire-inflation systems, and enhanced trailer aerodynamics (such as spoilers), as well as switching from large tractor-trailers to smaller trucks when delivering finished product into congested cities. Wal-Mart, which operates its own vast fleet, is saving 60 million gallons of fuel annually by using some of these strategies. The retailing behemoth intends to double the fuel efficiency of its fleet by 2015.

More than 600 carriers and shippers have signed up for the Environmental Protection Agency's SmartWay program, a voluntary freight-industry partnership aimed at fuel-efficiency improvements and reduced CO₂ emissions. SmartWay offers a small-business loan to help trucking companies purchase upgrade kits (average price: $16,500) that include idle-reduction devices, low-rolling-resistance tires, aluminum wheels, and aerodynamic equipment. But the payback from these upgrades is not always immediate, Gonzalez says.

Count the Miles
An easier way to cut oil consumption may be simply to ship products fewer miles. "Once you get to $100-per-barrel oil, the incremental cost of adding smaller warehousing facilities closer to the customer to drive down transport cost makes sense," says Curtis Greve, executive vice president at Pittsburgh-based Genco, one of the largest third-party logistics providers in the United States.

The high cost of oil was a principal driver of Kimberly-Clark's "network of the future." Begun three years ago, the project involves moving the company's distribution centers closer to end-users in major markets, says Mark Jamison, vice president of Dallas-based Kimberly-Clark's customer supply chain. Kimberly-Clark also decided to lease distribution centers and have them run by third parties, so the network can flex as market conditions change, Jamison says.

So far, relocating distribution centers has reduced customer miles (the miles driven from a center to a customer) by 2.8 million and cut fuel use by 500,000 gallons. The new network has also enabled Kimberly-Clark to use more intermodal transport — in particular, "trailer on a flat car," in which the long-haul portion of a product's journey is by rail. Rail use saved the company almost 2 million gallons of fuel in 2007 alone, Jamison says.

The network has yielded customer benefits, too. By locating its distribution centers closer to major markets, Kimberly-Clark has cut the time needed to replenish customers' shelves. "Now, within 85 percent of North America we're within one day's transit time," says Jamison. "With the previous network, it was 65 percent."

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