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SCDigest Expert Insight: Supply Chain by Design

About the Author

Dr. Michael Watson, one of the industry’s foremost experts on supply chain network design and advanced analytics, is a columnist and subject matter expert (SME) for Supply Chain Digest.

Dr. Watson, of Northwestern University, was the lead author of the just released book Supply Chain Network Design, co-authored with Sara Lewis, Peter Cacioppi, and Jay Jayaraman, all of IBM. (See Supply Chain Network Design – the Book.)

Prior to his current role at Northwestern, Watson was a key manager in IBM's network optimization group. In addition to his roles at IBM and now at Northwestern, Watson is director of The Optimization and Analytics Group.

By Dr. Michael Watson

October 31, 2013



The Impact of Natural Gas Trucks On Your Supply Chain Design and Capabilities

As the Use of Natural Gas for Trucks Continues to Rise, You may Need to Reconsider the Design of your Supply Chain


Dr. Watson Says:

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...Anything that can reduce transportation costs will get a lot of attention.
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Recently, I’ve seen a lot of coverage on the use of natural gas trucks.  SupplyChainDigest and CSCMP’s Supply Chain Video news had a segment on Lowe’s move to natural gas trucks.  The Wall Street Journal’s headline article yesterday in the Marketplace section was “Truckers Tap Into the Gas Boom.”  And, at CSCMP in Denver, there were plenty of sessions on this topic.

This should be  no surprise.  As seen in the graph below, transportation costs represent a large portion of supply chain spend.  Anything that can reduce transportation costs will get a lot of attention.




Previous Columns by Dr. Watson

Supply Chain by Design: You Don't Need the Optimization in Multi-Echelon Inventory Optimization

Supply Chain by Design: On Network Modeling - Blaspheming the Baseline

Supply Chain by Design: Profit Maximization Feature and Amazon’s Focus on Lead Time to Grow Revenue

Supply Chain by Design: Using Profit Maximization to Minimize Cost

Supply Chain by Design: Two Big Reasons You Don't Want to Maximize Profit in your Supply Chain Model

More


These natural gas trucks may impact your supply chain design in three ways you didn’t anticipate.

 

1.

You deliver more frequently because inventory becomes relatively more expensive. As transportation costs decrease, inventory starts to look more expensive. So, with cheaper natural gas trucks, it may be better to give up some of the transportation savings for an even greater reduction in inventory carrying costs.

 

2.

You need more facilities. Although natural gas trucks are less expensive to run, there are still some constraints—filling up a tank can take all night, filling up a tank the “fast” way can lead to less range, and there is a lack of infrastructure to fill up in route. All this means that the natural gas trucks are best suited for trips that allow the truck to return back to the depot at night. To capture the savings from natural gas trucks you may need more warehouses closer to your customers.

 

3.

You need better multi-stop optimization. If you deliver more frequently and within smaller geographic areas, it likely means that you will shift more deliveries to multi-stop routes. You will likely shift away from full trucks so that you can reduce inventory, and you will also shift away from LTL since you will have local fleets and nearby stops. This means that you will need to get better at developing multi-stop routes to efficiently deliver to your customers and make sure the trucks return back to the fueling station.


Final Thoughts

When you analyze the impact of natural gas trucks on your supply chain, you may be tempted to assume that you will run your supply chain exactly as you did before, except with natural gas trucks. But, the new cost structure and constraints will lead to other trade-offs. You may find additional benefits or new business models if you dig deeper and think about the design of your supply chain.

 

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