Digging In

With the economy in the pits, companies are leaving no stone unturned in their efforts to cut supply-chain costs.

Taming Energy and Transportation

Better forecasts allow for tighter inventory levels, saving working capital. But what to do about those soaring energy bills? Some companies have seen their expenses rise so high that they see a solid rate of return behind multi-million-dollar efforts to curb them. At Kinross’s Maricunga operation, for example, 12 massive Caterpillar “haul trucks” consume more than 2.5 million gallons of diesel fuel a year. Kinross is installing mining-truck simulators at a cost of $1 million each, one benefit of which is the ability to train operators at every location how to drive so that they save fuel and reduce tire wear. The company is also replacing the haul boxes on its trucks with lighter-weight versions and is treating the box liners with chemicals that help make sure all the ore slides out each time a load is dumped.

To get better pricing on fuel and other consumables, Kinross is coordinating procurement of key commodities with the help of Quadrem International Ltd., a Dutch company that offers an E-commerce platform for buyers and suppliers. And it is seeking to become a “little more sophisticated” in the way it hedges against oil-price increases, says Sean Samson, trading customized options contracts in the over-the-counter market, for example, and exploring hedging opportunities for other commodities. While declining to discuss specific returns on these investments, Samson notes that “at $60 a barrel, a lot of these initiatives didn’t offer great payback. At $120 a barrel, they do.”

Dow Chemical, which consumes the equivalent of 850,000 barrels of oil a day in energy and hydrocarbon feedstocks, is focusing its fight against rising energy costs on conservation. Although it increased the energy efficiency of its worldwide operations by about 22 percent between 1995 and 2005, Zavitz says, it is targeting another 25 percent improvement from the 2005 baseline between now and 2015, via multiple short-, medium-, and long-term initiatives. In 2007, the company announced several joint ventures to secure more-cost-effective feedstocks and promote the development and use of renewable and alternative energy sources. For example, the company has launched an initiative in Brazil to create polyethylene from ethanol derived from renewable sugar cane.

Many companies that are not big consumers of oil and oil derivatives have nonetheless been affected by the sharp rise in fuel costs, of course, especially those in shipping-intensive industries. Avnet Inc., an $18 billion distributor of electronic components and computer products, tries to pass increased freight costs on to its customers where it can, but in the meantime is working with them to minimize the use of overnight and two-day delivery services that typically cost 40 percent or more than standard ground delivery. “By changing their ordering patterns a little, we both save money,” says Avnet senior vice president, CFO, and assistant secretary Ray Sadowski. The company also is trying to consolidate orders more effectively to minimize freight costs, he says, “without having a negative impact on our customers.” Avnet is pursuing similar initiatives with its suppliers, asking them to shun high-cost shipping services when they aren’t required to meet customer timetables.


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