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  Feb. 10 , 2006 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

SCM and the End of Oil

Last summer, I wrote a piece on the “Supply Chain Impact of $100 Oil,” which drew a lot of lively response.


I don’t mean to repeat the topic so soon, but a few accidental discoveries of late have me thinking afresh on the subject. It’s worthwhile for all supply chain and logistics professionals to consider potential issues with energy, to say nothing of all the other economic and political ramifications continually rising energy prices would have.


While reading Forbes magazine’s annual investment, I tripped upon an article about billionaire investor Richard Rainwater. He’s made a literal fortune over the years with some very smart bets, including investing heavily in oil in the 1990s when it got very cheap.


Right now, he’s investing hundreds of millions more. 


Most of us haven’t heard of “Hubbert’s Peak.” It was named for Shell geologist named M. King Hubbert, who observed that oil wells/fields have a very predictable output profile, shaped like a bell curve.  Annual output increases until half the oil is gone, after which it starts to decline, because the oil at the bottom is harder to get out. 


Hubbert used the curve in the 1940s to not only predict output from individual sites, but the U.S. as a whole. He suggested that U.S. domestic oil output would peak sometime in the 1970s. At the time, he was severely criticized. As it later turned out, he was quite correct.


Now, observers that range from well-respected geologists to somewhat crackpot end-of-the-world types are looking at this from a global perspective. Here’s one view, suggesting peak oil production in the next couple of years.





Forbes quotes Rainwater as saying, “In 1988 there were 15 million barrels a day of shut in production [meaning surplus that could be tapped] and the world was using about 55 million barrels of oil. Today, the world is using 80 million, and there is no shut in-production.”   “Peak Oil” is another term used to describe this theory – global production is at or near the peak, and will soon move to a long, inevitable decline.


The graphic above is taken from the web site If you’ve never seen it, take a look (it's sometimes overhwelmed though). Rainwater has it at the top of his favorites list. Yes, it’s apocalyptic, end-of-life-as-we know-it stuff, but even if it’s partly right, as an increasingly number of serious observers believe, we could be in for some serious times.


Myself, I am more optimistic. Brazil, for example, has largely eliminated need for any foreign oil through its ethanol vehicle program. As energy expert Peter Huber recently wrote in the Wall Street Journal, the real problem is almost only related to transportation. The “grid” of electricity and natural gas is actually in good shape all told, has true competition among buyers from different energy sources, and can be powered by U.S. domestic energy materials (natural gas, coal and uranium). There also seems to be much promise at these prices for oil from shale and tar, with abundant North American reserves of each.


But will all that happen in time to avoid the big shortage and squeeze? Rainwater says No. He in fact believes the coming energy crisis will produce a “long emergency” that will wreak havoc for years until a better solution emerges.


I am much less worried in the middle-term, believing that technology, ingenuity, and the various alternative fuels will eventually solve the problem (Peter Huber favors vehicles running on natural gas, by the way, which more than I realized are already doing right now).


Bringing it back to supply chain – should you be thinking about what a spike like this might mean? Should our network and supply chain strategies take scenarios of $120 or $200 per barrel oil into account? And how much should you hedge your bets – since there’s always a cost to hedging, and if oil doesn’t spike you’ll pay that price?


I asked Jeff Karrenbauer of Insight (supply chain network planning software), who is known for his thinking about SCM network issues, about this subject. He agreed this possibily changes the game.


“Now, when you're planning, you really have to forecast not just demand but cost,” Karrenbauer told me. “Many companies use static or gradually incrementing cost models, but now  you have to think in terms of say 10 discrete one-year periods, and estimate some different cost scenarios across those years and the probabilities of each. At certain levels of the cost of oil and hence transportation, domestic supply sources, for example, start to be the better choice than offshore. So, should I maintain, under current costs, a domestic supplier with say 20% of the volume, so that I can more easily switch back here if transportation costs sky rocket?” (Karrenbauer made a number of other interesting observations we don’t have room for here, but will cover next week in more detail).


I think it’s smart investing to have a reasonable percentage of your portfolio in oil related stocks. And I’d be making sure I understood how my supply chain would most effectively adapt and respond if Richard Rainwater is right.

Are we at "peak oil?" Do we need to start forecasting logistics costs the same way we forecast demand? Are companies doing enough to give themselves options in the future?

Let us know your thoughts.

Dan Gilmore

New SCDigest Research Report:

High Volume, Multi-Modal Shipping - What Executives Need to Know

An increasing number of companies must ship across multiple modes, including growing parcel volumes.

We provide insight into how to reduce costs and improve performance.

Click here to download the report.

Report made possible in part by:Irista - An HK Systems Company


The 2006 Supply Chain Risk Map

Guest Speaker:

Bryan Squibb

Manager, Trade Credit Group


Play Viewpoint nowPlay Now
Coming soon in SCDigest:
Defining a Demand-Driven Supply Chain
What Happened to the Supply Chain Planning Market?
RealRFID Newsletter
Task Interleaving Report

February 10 , 2006
2006 Forecasting, Demand Planning Benchmarks Released

Annual survey from Journal of Business Forecasting

February 9 , 2006

Procter & Gamble on RFID/EPC – Three Categories of Products, Three Main Benefits

P&G's Jamshed Dubash says company categorizes products by RFID potential

February 8 , 2006

Alien Technology Ups the Ante with New RFID Solutions Center

SCDigest was there as new 23,000 sq. ft. facility unveiled; we even have pictures

January 3, 2006
Logistics Cost Increases Hit Hard; Free Shipping Program Takes Toll on Profits as Stock Drops

How e-merchants handle shipping costs sure to be subject of on-going debate


Q.  How many gallons of gas are produced from a barrel of oil?

A. Click to find the answer below


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  Softeon -

Feedback is coming in at a rate greater than we can publish it - thanks for your response.

Below you'll find a last group of letters (whew!) on our review of the University of Arkansas study of RFID and the effect on out-of-stocks at Wal-Mart, and all the subsequent dialog. We've had a number of letters commenting on other letters, which is great. Our feedback of the week is from Nick Turner of Columbis on this topic. There are several more, and one agreeing with our observation that retailers were playing it conservative with inventory this Christmas.


Keep the dialog going! Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedback of the week - Wal-Mart RFID Study

This paragraph says it all:


“The main driver of this improvement was a change from traditional methods of replenishing store shelves, which rely on workers noticing a shelf spot is empty, or scanning an item in the back store room and querying the system about room on the shelf to accept the product. With RFID, the store system uses data about store receipts and movement to the store shelf from RFID scans, combined with POS data, to drive "autopick" lists of what needs replenished. In short, this is a change from associate-driven replenishment to system-driven replenishment.”


The benefits stem from better visibility and control of the inventory within the store and how the shelf replenishment process is managed. This could be achieved without RFID by simply recording when items move from back of store to shelf, reducing shelf quantity from POS scans and creating replenishment tasks when a shelf approaches a trigger point. The use of RFID in store to record a product move from back room to shelf simply eases the data collection. Recording the arrival at the store by reading RFID tags doesn't help here at all.


In fact the process as described sounds strange as well. Why not automatically create the tasks and simply send them to the users RF device as a group of tasks. Just like a WMS would if it was replenishing a group of pick faces in one walk by having the user collect several cases in a walk and then empty them in to pick faces in a convenient sequence.


The process of having a user scan an item in the back room and then have the system tell him it can be picked for a replenishment seems odd - unless the store system doesn't actually know what is in the backroom!

Nick Turner

Columbus OH


More on RFID study :

I enjoyed your piece on Wal-Mart and reducing OOS. That 0.054% is worth a measly $162 Million - not exactly chump change.


That's 0.054% of their current sales of $300 Billion, since you took 0.54% increase in total sales, at a profit of 10% of sales.


And that's before the other benefits of clearer demand visibility, DC labor productivity, and traceability for food and drugs. So, if the pilot is valid, and there is limited Hawthorne effect, this might be a pretty decent idea after all.


Nick Seiersen


Dave Schneider [Pep Boys – Letter to the Editor, Jan. 26, 200 issue] is right on about the retail issue of on-shelf out of stocks being more order fill rate related that RFID.  RFID is not a panacea for out of stock.  Recent benchmarking studies of customer service stated that on-time and complete are, far and away, the key metrics for manufacturers.  This is what retailers’ demand of their suppliers.  Manufacturers would do well to fix their fulfillment issues as their number one supply chain investment and chase RFID as reliability / costs come into line.  For retailers, RFID may have a larger impact on the consumer shopping experience then fixing out-of-stocks on the shelf.


Richard A. Carman

Dechert-Hampe Consulting

On lean retail Christmas inventories:

I saw the exact same thing at Best Buy.   I created a fund raiser car raffle of an old Mustang for my children’s school and the local Best Buy offered discounts for our raffle ticket buyers and we had a big “Best Buy” night.  So I was in the store for about 6 hours one evening and just like you given some time I started studying the “inventory” and asking questions.   What I found for example was 8 days before Christmas this store had sold all their allocation for good MP3 players (all not just iPods ?? ) and were not get replenished and were NOT going to be replenished.   With all the manufacturers and variety of MP3 players I think they were playing what you described… have the buyer buy something else.  I just went to Fryes and bought a Creative player at a nice in store discount Creative sponsored.


My observation at the time was like your iPod plastic car was MP3 players are cheap, light, quick to replenish and I would guess a decent margin so why not have a surplus pooled in a regional warehouse to replenish key stores in order to not lose sales? 



Jon Kirkegaard




Q.  How many gallons of gas are produced from a barrel of oil?

A. A little bit of a trick question - there are about 42 gallons of oil per barrel, but when processing only about 19 gallons of gas is refined. The rest is used for other oil-based products.

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