Resources May Not Be Running Out…But That Doesn’t Mean “Business as Usual”
June 11, 2014 - SCMR Editorial
Editor’s Note: The article was written by Diane A. Mollenkopf, PhD, and John E. Bell, PhD, The University of Tennessee, Knoxville College of Business Administration
Global economic trends make it necessary for business leaders to pay attention to the threat of natural resource scarcity for raw materials used in their operations. Global economic changes include increased demand for both consumer and industrial goods due to global population growth, emerging economies and middle classes, and the rise of global commerce fueled by the Internet. In the last several years, major companies have drawn the attention of international media when they have suffered supply disruptions due to raw material shortages.
A recent Wall Street Journal (WSJ) article suggested that such concerns are overstated, claiming the world’s resources are not running out. Economic theory suggests that as prices for resources increase, humans innovate and create substitute materials for their processes, or they discover new resource deposits around the globe. While this is a credible argument, the analysis stopped short of telling the entire story, which has dramatic implications for supply chain managers.
Our examination of four basic issues that underlie the threat and potential response to resource scarcity is intended to add to the conversation on the impacts of impending natural resource scarcity recently dismissed by the WSJ article and make business leaders more aware of opportunities for their companies to prepare for potential disruptions to their supply chains due to potential raw material and resource supply shortages.
1. Access to Resources is Critical
Consider concerns over peak oil. We might not actually use up the last barrel of oil on the planet, but concerns about running out are often overshadowed by issues of availability and timely access to raw materials that can be purchased at a reasonable price. Currently, more gas and oil is now available due to improved technology and new discoveries in North America, but these newer finds are often more expensive to extract and often create pollution levels that governments are restricting. Additionally, the location and quantities of new discoveries may not always meet the capabilities of the current supply chain and the underlying manufacturing and transportation infrastructures needed to utilize them. For example, the Bakken oil fields are significantly separated from sufficient refining capacity, requiring hundreds of thousands of rail car deliveries of crude oil to the Gulf region. Since building new pipeline infrastructure to more efficiently move this supply is seemingly years away, the quantities (and costs) may not meet the desired levels for purchasing companies.
Similarly, consider concerns over water. While water may not technically “run out,” the availability of clean and potable water is a severe issue in nations around the world, particularly where waste water treatment infrastructure and the available quantities of fresh water cannot always meet local demand. Fundamentally, the ability for companies to quickly and cheaply access new resource supplies is not guaranteed, and since the economic downturn of 2008 many nations are putting restrictions on the sale and export of natural resources in a more “gated” world economy .
2. Consider Short Term vs Long Term
In the long term, prices and innovation will help overcome resource shortages. But in the short term (1-2 year periods), resource scarcity issues will require significant efforts on the part of supply chain and logistics managers who must adjust their processes to balance supply and demand in order to stay competitive. Consider recent issues surrounding conflict minerals, such as gold, tungsten, and tantalum . In the long term, issues with the new conflict mineral reporting regulations in the U.S. may be worked out and supply networks will have changed so that the chain of custody is well-documented and conflict-free. But in the short term, companies may struggle to ensure (conflict-free) supply, and they will see an increased layer of administrative costs threatening their profit margins.
Similarly, as much as 34 percent of wild fish sold in the United States (up to $2 billion in revenue) may have been caught illegally, according to a recent study by the University of British Columbia ; and lack of enforcement has grim implications for the long-term supply from wild fisheries. We may indeed run out of important fish species in the long term. Solutions such as aquaculture are still relatively underdeveloped and currently not capable of meeting global demand for fish if wild ecosystems collapse. In the long term, the global economy may once again innovate itself out of this difficult supply situation, but we should acknowledge that yesterday’s ability to innovate does not guarantee that we can continue to quickly do so in the 21st century. While whale oil was substituted with kerosene in the mid-1800s, extrapolating such an example into the 21st century is dangerously optimistic, considering the fact that there were fewer than 1.5 billion people on the planet in 1850, and today there are over seven billion people with ever-increasing consumption levels. The question is: Will we innovate, substitute, and discover resources fast enough to meet modern economic demand levels?
3. Understand the Interaction Effects
The WSJ article is also overly simplistic in asserting that discovery and innovation will fully mitigate resource constraints. Yes, fertilizer (a human innovation) has increased crop yields dramatically, which is important for sustaining world population levels. But we are only beginning to fully understand the impact of fertilization on the water supply, aquatic ecosystems, and human health. We have argued elsewhere that resource issues should be considered from a systems perspective . Forces such as resource base degradation, consumption, and competition all work to increase resource scarcity, while resource base reclamation, discovery, substitution, and recovery can mitigate growing scarcity. At the same time, public policy can act upon any of the forces to impact firms’ responses to resource scarcity issues. An effective supply chain strategy needs to take into account the interactive effects of multiple forces that will impact a firm’s ability to avail itself of needed resources, in both the short and long terms.
4. The Closed Loop Becomes a Necessity
The WSJ article mentioned “recycling” as the solution to many situations, implying this was an obvious and simple solution to reclaiming and reusing resources in short supply. However, developing reverse supply chains and creating closed loop processes requires significant effort, revisions to product designs, new technologies, and network solutions (infrastructure and information) that have not traditionally been part of most supply chain strategies. Yet developing a closed-loop supply chain may offer firms a long-term solution, enabling access to resources that may be increasingly difficult to obtain at a reasonable cost from primary sources. Every ounce of precious metal, packaging material, or recoverable component in a product or process that can be reclaimed, re-processed, and re-used relieves pressure on constrained resources. Closed-loop supply chain systems won’t solve every aspect of resource scarcity, but they are increasingly being viewed as an important supply chain strategy for a changing world. However, these systems will take significant effort to build, and much development across global industries is needed in order for closed-loop systems to mitigate and balance the forces of increasing demand and consumption in our supply chains.
Essentially, resource scarcity is an issue of supply chain risk management, and the companies that are prepared will be in a position to survive the changes, secure opportunities, and perhaps even corner the markets to achieve competitive advantages that few companies even anticipate today. In some ways, the WSJ article may be right… resource scarcity could create a new wave of creative destruction and unique opportunities for companies poised to address resource scarcity through innovative supply chain solutions. However, the challenges that resource scarcity brings to our supply chains should not be dismissed or underestimated.
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