Sucking It Up

With prices gushing past $100 per barrel, companies are trying to consume less oil.

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.

What about alternative energy sources? Ethanol has long been heralded as a substitute for gasoline, but it takes more energy to produce a gallon of ethanol than the fuel delivers, points out Taylor. In 2007, according to the American Trucking Association, the U.S. biodiesel industry produced about 400 million gallons of biofuel, an amount the ATA calls de minimis.

Organic grocer Whole Foods Market Inc. started converting its trucks to run on a biodiesel blend (B20), made from vegetable oils or animal fats, in late 2006. Four of its nine regional distribution centers have trucks that run on biodiesel. But B20 is still 80 percent petroleum, and the trucks have to be filled from tanks on the distribution center’s premises.

United Natural Foods, based in Dayville, Connecticut, has also tested biodiesel, but CFO Mike Shamber doesn’t see it as commercially viable yet. “Manufacturers haven’t modified engines enough so they can run on those fuels for a longer period,” he says.

In the long run, companies have to learn how to become energy-efficient customers, not just energy-efficient suppliers, says Larry Lapide, director of demand management at MIT’s Center for Transportation & Logistics. He says Wal-Mart’s recent efforts to green its supply chain probably won’t change its own stringent demands for supply-chain partners to meet JIT delivery windows, for example. “They’ll still want JIT replenishment, forcing smaller, more-frequent deliveries that require the use of less-oil-efficient transport modes,” Lapide says.

But companies are at least beginning to consider that a different sort of supply-chain calculus is required in an era of expensive oil. Says ARC’s Gonzalez: “If you believe the environmental problem is big and you have a finite window to solve or control it, we have to start doing things that are not just good for business.”

Vincent Ryan is a senior editor at CFO.

Oil Change

Before oil prices skyrocket further, companies should redesign their supply-chain networks for maximum fuel efficiency. Here’s what CFOs can do:

Review Frequently. Companies usually wait until they enter new markets or acquire other businesses to analyze the oil consumption of their distribution networks. That’s a mistake, says Mark Swenson, a vice president at Miami-based Ryder System Inc. Optimizing the supply-chain network should be a continuous effort, he says. Growth-phase outfits should be adjusting distribution-center locations according to developing demand, for example, while mature companies need to find facilities that can be shut down.

Know Total Costs. To sustain oil-reduction projects, CFOs have to help supply-chain executives obtain data on product-specific and network-wide costs. And they have to be aware of the effect of oil-reduction strategies systemwide. Even as warehouses lower transportation costs, for example, inventory carrying costs rise due to the safety stock each facility must have on hand.

Apply What-Ifs. Is your supply-chain network designed for what’s coming in five years, or even three? “I’d advise any CFO to become aware of not just their company’s petroleum spend but how their distribution system works and what the impact would be of oil shortages or $10-a-gallon fuel,” says Chuck Taylor of Awake Consulting.

Consider Outsourcing. It may help smooth the effects of violent spikes in fuel expenditures. IBM, for example, has outsourced all distribution since 2001. Increases in fuel costs are managed through agreements with logistics providers, says vice president of global logistics Gary Smith. If the price of jet fuel fluctuates outside a set band of 10 percent from an index price, only then does IBM pay a surcharge or receive a discount. After that, the index price resets. Since 1996, IBM’s hardware revenue has fallen 28 percent, but its logistics costs are down 47 percent. — V.R.

West Texas intermediate spot price for crude oil
Projected global oil production vs. demand

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