VideoFor fast-growing businesses such as United Natural Foods, rising fuel costs make a more compelling business case for distribution facilities that reduce the miles that products travel. The new distribution centers that the company opened last year have helped its fuel consumption grow more slowly (10 percent) than its business volume (mid-teens), says CFO Shamber.
Higher oil prices are also exacting a toll on offshore outsourcing, where manufacturers may be located 10,000 miles from consumers. Rhode Island–based toymaker Hasbro, for example, expects a 15 percent increase in the costs of made-in-China products in 2008. CFO David Hargreaves says some of Hasbro's Chinese vendors are relocating portions of their supply chains from coastal to inland areas to cut labor costs, thus adding even more shipping miles between factories and consumers.
Still, "the price of oil would have to increase fairly dramatically to wipe out completely the benefit of manufacturing in China," says Lorcan Sheehan, senior vice president at ModusLink, a Massachusetts-based supply-systems vendor.
Pack Smarter
In the drive to cut fossil-fuel consumption, truck loading has become a science. Fitting more product on a pallet can mean less-frequent trips and fewer trucks. By eliminating an outer carton from its Knorr vegetable-soup mix and creating a new shipping and display box, for example, Unilever halved the packaging. That resulted in 280 fewer pallets and six fewer trucks a year to transport the same quantities.
Similarly, Wisconsin-based consumer-goods company S.C. Johnson saved $1.6 million, cut fuel use by 168,000 gallons, and used 2,098 fewer trucks in 2007 through a "truckload utilization project." The project changed the company's habit of packing Windex glass cleaner and Ziploc bag products in separate loads, because it found it could utilize the vehicle's maximum load weight by mixing them. The company also used more "day cabs" (trucks with no sleeping compartments) because they are 3,000 pounds lighter and can hold more product.
Many companies have been asking, "Why do we have an extra two inches of air space in our container design?" Genco's Greve says. "The impact of design on the cost of transportation is on the radar screen of marketing departments and designers."
For 2008, Kimberly-Clark is also working on packaging. To outfit items such as Depend undergarments with end-of-aisle displays, the company used to ship the finished product to a co-packer that assembled the displays and returned them to Kimberly-Clark docks. Now the company is putting the co-packers into its own distribution centers to assemble the displays, so that the products make only one outbound trip. "This one is a slam dunk," Jamison says. "We'll start saving money the minute we start."
Rethink JIT
Other supply-chain management strategies that developed in the era of cheap oil will almost certainly have to be rethought. Example: just-in-time delivery to keep inventory costs down.
In Europe, with gasoline and diesel representing 20 to 30 percent of total transport costs, companies shipping or receiving low-value-density products like food or commodities are seeking a new balance between working capital and the cost-to-transport, says S&V's Serneels. In doing so, they are making JIT less of a priority. Some customers are becoming content with fewer shipments to avoid less-than-full truckloads, he says, accepting slight increases in working capital to reduce transportation costs.
A European organization called ELUPEG (European Logistics Users, Providers and Enablers Group) is even helping competitors team up for fuel reduction. For example, a distribution center in Holland serves two independent manufacturers (Lever Faberge and Kimberly-Clark) with consolidated deliveries to retailer sites. Benefits include increased delivery frequency, lower inventory, fewer out-of-stock situations, and improved on-time performance, according to Alan Waller, vice president of supply-chain innovation at Solving International, a UK consultancy.
Aligning the interests of supply-chain partners and competitors in the United States may be more difficult. Over time, service-level agreements with suppliers will develop to include clauses requiring the partner to disclose its oil footprint, "but it will be a relatively slow adoption and evolution," predicts John Fontanella, vice president of research at AMR Research.
Looking Down the Road
Expensive as oil is at present, it could get worse in a hurry. A disruption of the thousands of barrels flowing into U.S. ports per day is certainly a possibility, given that the politically volatile countries of Venezuela, Nigeria, Angola, and Iraq were among the top 10 oil suppliers to the United States last year. But Taylor of Awake Consulting contends that, in general, companies are not concerned yet about making a supply chain more resilient in the face of possible oil shortages.
Such passivity may be the result of two things. First, over the past 30 years, the cost of oil has caused no degradation to service levels, whether it be air, ocean, or surface transport. Second, companies continue to believe that higher oil prices can be passed downstream. "If diesel were to go to $4 to $5 a gallon, in all likelihood [we would absorb some of it], but a portion is going to get passed on to our customers," says Shamber of United Natural Foods. How economically viable that will be remains to be seen.
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