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Transportation in the ?fuel-challenged century

May 19, 2010

Business prospects are improving. However, companies are still under terrific pressure to hold down costs. Many have done an admirable job, but continue to be daunted by one of our time’s most-vexing cost-management challenges: wildly fluctuating oil prices.

The problem, of course, is that most supply chains were designed in an era of lower and relatively stable fuel prices. Global sourcing and manufacturing decisions traded off longer transport distances for cheaper labor. Inventories were kept lean, with materials shipped in smaller batches via faster but more fossil-fuel-intensive modes. Distribution models emphasized consolidation, with fewer facilities and longer transport distances. Each of these supply chain strategies depended on—and assumed—reasonably priced fuel.

Unfortunately, “reasonably priced” (or even “predictably priced”) oil is unlikely to be part of the global economy’s future. For one thing, world oil production could peak by 2011 and oil prices will almost certainly rise in response. Several decades later, our planet could run out of practically-accessible oil. Great stores will remain, but prices will have to rise just to cover the cost of extraction. Then there is the issue of sustainability: Green requirements are prone to increase the cost and complexity of using carbon-based fuels.

Transportation, of course, is the supply chain function most directly affected by fuel-related issues; so here is a look at what transportation-related shifts might help shippers avert problems and seize opportunities associated with short-term price volatility and long-term price escalation. Then, in the June issue, we’ll examine what actions might be advisable for other supply chain functions: network design; planning and forecasting; sourcing and procurement; and distribution and warehousing.

Tackling transportation

Responding effectively to the challenge of perpetually pricy petrol, shippers may need to revisit and potentially revamp their transportation strategies. Virtually every aspect—from asset ownership to carrier relationships to customer service—belongs on the table, with priorities that most likely include:

Lower-cost modes: To one extent or another, shippers may need to move from fuel-intensive modes (e.g., road and air) to slower but more economical choices, such as rail and water. Better planning, timing, inter-company collaboration, and even philosophical changes may be needed to accommodate slower modes of transportation.

A tighter focus on utilization: Most companies should consider re-examining their operating models and transportation paradigms. Some may conclude that realigning customer/store-service contracts is needed—pushing, for example, for more factory-direct shipments, larger inventory minimums, or wider delivery windows that let the shipper hold freight until a truck is full. Two or more organizations might also work together to consolidate shipments to low-density areas.

Smarter ways to buy: Companies could determine that maximizing volume with one carrier is not the best policy in an era of runaway fuel prices. Instead, an entity might use an elite carrier when on-time delivery is key, and a low-cost carrier when delivery timing or accuracy are less important.

Thinking differently about transportation assets: Oil price cataclysms could make many private fleets less justifiable—replaced by commodity transportation providers or third-party logistics services providers that can minimize costs by running full truckloads, minimizing one-ways, and amortizing investments over a larger asset base.

Leveraging transportation technology

Worldwide fuel woes enhance the desirability of advanced transportation technology. Take GPS telematics—enabling companies to track vehicle locations in real time. The principal benefit is that by optimizing dispatching and routing capabilities, total miles traveled can be reduced.

Telematics also makes it possible to remotely monitor speed, breaking, gear-shifting, idle time, and out-of-route miles, all of which can result in greater fuel economy. Research shows that telematics can reduce fuel consumption by up to 14 percent while paring vehicle-maintenance costs by roughly the same amount.

Allowing carriers to understand and electronically view shipper needs could be a similar priority. With higher visibility, carriers may be able to submit pricing offers based on capacity guarantees from shippers. And guaranteeing capacity is one way for shippers to reduce costs, since it allows carriers to effectively plan routes and maximize equipment utilization and staffing, while limiting the amount of empty miles.

Non-IT innovations should also become more desirable. Good examples include wide-base tires and automatic tire-inflation systems, which minimize roll resistance and aerodynamic drag. The U.S. Environmental Protection Agency believes that using wide-base tires on a long-haul truck can save more than 400 gallons of fuel per year. Low-viscosity lubricants can create similar benefits. Advances in tractor-trailer aerodynamics also affect fuel consumption.

Moving ahead

There is never a bad time for companies to review, and seek to optimize, their supply chains. But with fuel prices so worrisome, reassessing transportation is doubly important. Next month we’ll explore fuel-savvy strategies for other supply chain processes.

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