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HighFuelCostStrategies2008

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					        Rising Fuel Costs:
The Impact on Supply Chain Design
         December 2008




                                    1
Topics of Discussion

 •   Introduction
      •   Background and General Facts
      •   A Future Look at the Cost of Fuel
      •   Cost Awareness
      •   Now is the time for Planning
 •   Sourcing/Capacity
 •   Mode/Network Strategies
      • Accenture/ILOG study
 •   Consolidation (Mode/Load)
 •   DC/warehouse Location/Inventory
 •   Lead time
      • Highlights from CHRW’s White Paper:
        “INCREASE LEAD TIME, DECREASE COSTS”.
Introduction
Background and General Information
 • The continuing concerns of political unrest in oil-supplying countries
          and the over-forecasting of non-OPEC supplies continue to push prices
          higher. Adding to the problem is the projection that oil consumption will
                                                      1
          grow by one million barrels per day in 2008
 • Oil, which traded around $25 a barrel just five years ago, topped $147
          2
          in July

 • [Consumer] demand levels are down 6.4% from a3year ago and are
          also lower than during the [2008] summer months

 • According to Ben Brockwell, director of Data, Pricing & Information
          Services at Oil Price Information Service in Wall, N.J, gas demand
          during the work week has stayed relatively steady, up only 0.5% to 1%
          since [gas] prices started to drop [in September]. But weekend driving
          has shown a dramatic decrease, with demand falling 7% to 10% from a
                   3
          year ago

1. AMR Research, “Supply Chain Risks, Part 1: Taking the Pulse of Global Supply Chain Risks and Mitigation Strategies,” Noha Tohamy, Fenella
        Sirkisoon, Saturday, July 05, 2008;
2. Investor's Business Daily, “Firms Rethink Shipping On High Fuel Costs,” Friday September 5, 2008 6:49 pm ET, Norm Alster
          http://biz.yahoo.com/ibd/080905/general01.html?.v=1
3. CNNMoney.com, “Drivers not lured by lower gas prices,” Emily Maltby October 21, 2008
A Look at the Future Cost of Fuel
  • oil costs represent about two-thirds of the price of a gallon of diesel
                    4
           fuel

  • oil at $200 a barrel would translate into $7.00-a-gallon gasoline …
                                                                                                  5
           diesel retailing over $8.00-a-gallon

  • A rise from $2.00 per gallon to $5.00 per gallon [for diesel], using a
           moderate 10% empty miles factor, is a $5,294.12 per tractor, per year,
           hit to the bottom line of a truckload carrier.
              – Using average revenue per mile of $1.65 per mile, as an example,
                        generates $198,000 per year, per tractor. This extra fuel cost represents
                        2.7% degradation in income margin. This could be the entire income of a
                                         6
                        marginal carrier


4. Supply Chain Digest, “First Thoughts: Supply Chain and $200 Oil,” By Dan Gilmore, March 13, 2008;
5. “The Impact of Oil”, Brittain Ladd, September 2008;
6. eyefortransport, “The Impact of High Fuel Costs on Mergers & Acquisitions in the Trucking Industry,”
Douglas Christensen, Managing Director with Chapman Assocates, 10/15/2008;
7. AMR Research, “Supply Cost Reduction and Containment Strategies During a Time of Rising Prices,”
Mickey North Rizza, Jane Barrett, Tuesday, June 24, 2008
Cost Awareness
 Cost containment and reduction could be derailed, at least in the near
    term, based on current economic conditions.
             – While guarantees are not available, understanding the baseline, gauging
                     the market, slowing down the arrival of an increase, reducing inventory,
                                                                                          7
                     and increasing cash can mean the difference between profit and loss

 Then:
 • many firms have historically looked at transportation costs as merely
                        8
          the price paid to 3PLs

 Now:
 • Firms are increasingly looking at all components of cost, including
          purchasing price, transportation and logistics costs, customs and
          import duties, inventory carrying costs, overhead and administration,
                                    8
          and risk and compliance.



7. AMR Research, “Supply Cost Reduction and Containment Strategies During a Time of Rising Prices,” Mickey North Rizza, Jane Barrett,
Tuesday, June 24, 2008
8. AMR Research, “3PL Industry Trends: Emerging Markets, Sustainability, and Fuel Costs Weigh Heavily”, Bill Polk, Greg Aimi,
Monday, July 07, 2008;
Now is the time for Planning
Spiking fuel prices on the decline:




Source: http://www.gasbuddy.com/gb_retail_price_chart.aspx 10/28/08
Now is the time for Planning (cont.)
• Past year a time of panic for many companies
      – rising fuel prices caused consumers to change buying habits
      – shippers forced to reassess business practices
                • major reductions in economic activity mean less freight being shipped. 6
      – Much analysis, little action
• Demand destruction - primarily in the U.S. - is likely responsible for
   most of the drop in oil prices that occurred during the third quarter of
   2008.

• With fuel prices falling again, companies able to take a deep breath
   and plan for the next spike.
      –     Sourcing/Capacity
      –     Mode/Network Strategies
      –     Consolidation (Mode/Load)
      –     DC/warehouse Location/Inventory
      –     Order size (economic order quantity)
      –     Lead time

  6. eyefortransport, “The Impact of High Fuel Costs on Mergers & Acquisitions in the Trucking
  Industry,” Douglas Christensen, Managing Director with Chapman Assocates, 10/15/2008;
Sourcing/Capacity
Sourcing/Capacity Stats

• Fuel costs contributed to almost 1,000 trucking bankruptcies in the U.S.
                                                                         10
         in the first quarter of 2008 :
            – 1,908 trucking companies closed their doors and liquidated or gone
                                                                                      6
                    bankrupt first half of the year.
                         • 120,000 tractors leaving the roads.6
                              – 30,000 used tractors and trucks have been shipped overseas6
                              – Prices for [domestic] used tractors and trailers have fallen 6
                         • A 6% drop in trucking capacity 6




6. eyefortransport, “The Impact of High Fuel Costs on Mergers & Acquisitions in the Trucking Industry,”
Douglas Christensen, Managing Director with Chapman Assocates, 10/15/2008;
10. The Impact of Oil”, Brittain Ladd, September 2008;
Sourcing/Capacity Stats (cont.)

 • Wolfe Research: “the truckload market has reached a state of
                                                                                                                               11
         equilibrium… and expectations are for further tightening.”
            – number of carriers and independents exiting the market is having an
                   impact on bringing capacity back into balance even in the face of a slow
                                    11
                   growth economy
            –      While capacity is seen as tightening in truckload market, the same is not
                   true in LTL.
                        • For the seventh straight quarter, more than 50% of [survey] respondents saw
                                                                                                                                    11
                              overcapacity in the LTL market, and 9% reported “extreme overcapacity.”




11. SupplyChainDigest, “Logistics News: Latest Quarterly Shippers' Survey Finds Some Signs of Truckload Capacity Tightening,
Continued Move of Freight from Truck to Rail,” SCDigest Editorial Staff,,September 16, 2008
http://www.scdigest.com/assets/On_Target/08-09-16-2.php?cid=1925&ctype=content ;
Sourcing/Capacity (cont.)
• Consolidation in the 3PL industry
            – In a continual effort to exploit scales of economies the number of players
                    in the industry is shrinking as firms merge.
                         • AMR expects more of this as large global players seek out more regional or
                                                         8
                              niche players.

• Reverse globalization
            – Shipments from China now have an effective 9% tariff as a result of rising
                    costs throughout the value chain. Companies are looking long and hard at
                                                    8
                    sourcing and producing locally.
                         • In research conducted for Accenture by Logistics Management Magazine,
                              29% of logistics executives said transport costs led their firms to either bring
                              some offshore sourcing or production back on shore, or to cut back on
                                               2
                              offshoring plans




8. AMR Research, “3PL Industry Trends: Emerging Markets, Sustainability, and Fuel Costs Weigh Heavily”, Bill Polk, Greg Aimi,
Monday, July 07, 2008;
2. Investor's Business Daily, “Firms Rethink Shipping On High Fuel Costs,” Friday September 5, 2008 6:49 pm ET, Norm Alster
http://biz.yahoo.com/ibd/080905/general01.html?.v=1
Mode/Network Strategies
Mode/Network Strategies
• In the first half of 2008, Eyefortransport surveyed nearly 900 shipping,
         carriers and third-party providers (3PL) to explore how the industry is
                                         15
         responding to high fuel costs.*
             – moving freight along coasts and inland waterways to reduce road
                    transportation.
                         • "Moving freight along coasts and inland waterways is helping 3PLs, shippers
                               and carriers cutting fuel costs and improving their green credentials," the
                               report said.
             – turning to new technology to optimize routes and supply chains
             – called adopting more fuel efficient modes of transportation very important.
             *The survey included executives from Smithfield, Samsung, Caterpillar, Pacific Sunwear, FedEx,
                 GE, Solutia, Aerobox and Celestica, among others.


• Brooks Bentz, a senior executive and partner with Accenture:
         “[manufacturers and retailers are] shifting from air to ocean, from truck
                   2
         to rail.”


15. GreenBiz.com, “High Fuel Costs Leading to More Efficient Supply Chains: Report,” GreenBiz Staff,
August 27, 2008 http://www.greenbiz.com/news/2008/08/27/high-fuel-costs-more-efficient-supply-chains ;
2. Investor's Business Daily, “Firms Rethink Shipping On High Fuel Costs,”
Friday September 5, 2008 6:49 pm ET, Norm Alster http://biz.yahoo.com/ibd/080905/general01.html?.v=1
Mode Strategies: The Shift to Intermodal
  • The graphic below is from the Q2 2008 report released by Supply
                                           12
           Chain Digest.




  • With a shift of almost 5% shift from truck to rail, that's substantially
                                                                                                                  12
           more than the 3% or so that went from rail to truck

12. Supply Chain News Bites “Supply Chain Graphic of the Week - More Freight Moving to Rail from Truckload,”
SCDigest Editorial Staff, September 10, 2008 http://www.scdigest.com/assets/newsviews/08-09-10-1.php?cid=1917 ;
Mode Strategies: The Shift to Intermodal (cont.)

 • Industry is seeing a shift back to cheaper modes of transportation such
                 13
          as intermodal
             – These modes had been abandoned due to poor lead time performance.

 • Paul Bergant(chief marketing officer and president of intermodal, J.B.
          Hunt): “Intermodal, which typically has a fuel surcharge of about half
                                                           14
          that of truck, has become a viable alternative.”
             – Bergant: “… railroads have continued to invest capital into their networks
                     to the point that service is at an all-time high for the industry.”




13. Manufacturing Insights, “Will Rising Fuel Costs Drive Changes in Supply Chain Strategy?”,
Simon Ellis, July 09, 2008 http://www.supplychainbrain.com/Will Rising Fuel Costs Drive Changes in Supply Chain Strategy? ;
14. Global Logistics & Supply Chain Strategies, “Soaring Fuel Prices Are Driving Shippers to Embrace The Intermodal Option,”
Robert J. Bowman, August 14, 2008
http://www.supplychainbrain.com/Soaring Fuel Prices Are Driving Shippers to Embrace The Intermodal Option ;
Mode Strategies: The Shift to Intermodal (cont.)

 • Steve Branscum, group vice president of consumer products for
         Burlington Northern.
            – "The higher the fuel prices, the bigger the savings from integrating rail with
                                   2
                    truck.”
                        • Branscum cited Wal-Mart (NYSE:WMT - News), Target (NYSE:TGT - News),
                              Sears (NasdaqGS:SHLD - News), Home Depot (NYSE:HD - News) and Best
                              Buy (NYSE:BBY - News) as some of the retailers who've stepped up their use
                              of intermodal transport.




2. Investor's Business Daily, “Firms Rethink Shipping On High Fuel Costs,” Friday September 5, 2008 6:49 pm ET,
Norm Alster http://biz.yahoo.com/ibd/080905/general01.html?.v=1
Network Strategies

 • Traditionally network design has been done reactively or as a periodic
                        9
        exercise

 • While modeling tools like simulation and optimization software are used
        extensively to quantify risks and conduct what-if analysis, they don’t
                                                            1
        offer an effective risk mitigation strategy for many




9. AMR Research, “2008: Logistics Best Practices Are More Important Than Ever,” Jane Barrett, Greg Aimi, John Fontanella,
Monday, February 25, 2008 ; 1. AMR Research, “Supply Chain Risks, Part 1: Taking the Pulse of Global Supply Chain Risks and
Mitigation Strategies,” Noha Tohamy, Fenella Sirkisoon, Saturday, July 05, 2008;
Network Strategies-modeling tools

• The success of modeling tools in risk management is hindered by a
         lack of required skills to use them.
            – effective use in risk management requires a mixture of industry domain
                    expertise, global experience, cost and financial skills, and an analytical
                                1
                    background
            –       CHRW has the skill necessary to analyze transportations
                        • A typical CHRW Transportation Analysis includes mode selection, order
                              consolidation and multi-stop truckload optimization.
                        •     Average savings recognized through a Transportation Analysis is 8-15%.




1. AMR Research, “Supply Chain Risks, Part 1: Taking the Pulse of Global Supply Chain Risks and Mitigation
Strategies,” Noha Tohamy, Fenella Sirkisoon, Saturday, July 05, 2008;
Accenture/ILOG: Fuel’s impact on DC Network

• As crude oil price increases, transportation costs become more
        important relative to production and facility fixed costs.

• Oil price vs. inventory carrying cost:
            – Additional DC’s are more attractive:
                        • As outbound transportation becomes more expensive, it becomes increasing
                              important to minimize the distance of the final leg.


• Oil price vs. production costs:
            – Production moves nearer to demand
                        • Cheaper manufacturing in Mexico is offset by higher transportation costs.




“Accenture-ILOG Green Logistics Part II - Best Practices 4.23.08” Copyright © 2008 Accenture All Rights Reserved. / © ILOG, All
rights reserved
• Moving from $125/ barrel to $150/ barrel changes the optimal number
        of DC’s from 5 to 7. In particular, you can think of Las Vegas being
        replaced by Los Angeles, Albuquerque, and Portland.




“Accenture-ILOG Green Logistics Part II - Best Practices 4.23.08” Copyright © 2008 Accenture All Rights Reserved. / © ILOG, All
rights reserved
Accenture/ILOG key observations

• Crude oil price increase has a significant impact on network strategy
             – Rising energy prices increase the importance of initiatives to reduce
                    carbon footprint
                         • End-to-end supply chain optimization

             – Rising oil prices will force companies to rethink business strategies
                         • Lean manufacturing, just-in-time, offshoring and frequent deliveries

             – With increasing costs and changing markets, companies must monitor
                    and re-evaluate their network on a consistent basis
                         • A change from static to dynamic supply chain strategies




 “Accenture-ILOG Green Logistics Part II - Best Practices 4.23.08” Copyright © 2008 Accenture All Rights Reserved. / © ILOG, All
 rights reserved
Consolidation: Mode/Load
Consolidation: Mode/Load

• Paul Bergant : “People are looking at the whole manufacturing and
         warehousing cycle, trying to get more product in a load. [Mode
         consolidation from] LTL to truckload, but it doesn’t stop there. It
                                               14
         continues to go on down the modes.”

• It is the opinion of Manufacturing Insights that supply chain
         organizations will have to re-look at the tradeoffs they make in
                                        13
         balancing cost versus service
            – potential implication: extended customer delivery windows to allow higher
                    levels of order consolidation and truck-load shipments.




14. Global Logistics & Supply Chain Strategies, “Soaring Fuel Prices Are Driving Shippers to Embrace
The Intermodal Option,” Robert J. Bowman, August 14, 2008
http://www.supplychainbrain.com/Soaring Fuel Prices Are Driving Shippers to Embrace The Intermodal Option
13. Manufacturing Insights, “Will Rising Fuel Costs Drive Changes in Supply Chain Strategy?”, Simon Ellis, July 09, 2008
http://www.supplychainbrain.com/Will Rising Fuel Costs Drive Changes in Supply Chain Strategy?
Consolidation: Mode/Load (cont.)

• [Wal-Mart and other retailers are] Putting more goods on each truck:
        The key is to make sure every cubic inch is taken.
          – "It's like building blocks or pieces of a puzzle," says Chris Sultemeier, Wal-
                Mart's senior vice president of transportation. Their push for suppliers to
                reduce packaging has made it possible to ship more products per truck,
                                                                                        16
                adds Johnnie Dobbs, Wal-Mart's executive vice president of logistics.




16. USA TODAY “LOWERING FUEL COSTS BECOMES A TOP PRIORITY,” Jayne O'Donnell, 9/5/2008 11:53
AM http://www.usatoday.com/money/industries/retail/2008-09-04-free-shipping-holiday_N.htm
DC/Warehouse Location & Inventory
DC/Warehouse Location & Inventory
•        Eyefortransport : respondents in "The Impact of High Fuel Prices on
                                                                 14
         Logistics Report 2008" survey (see slide 13)respondants :
            – Traditionally companies tried to minimize inventory costs by speeding
              inventory through the supply chain but some are now considering keeping
              a larger inventory
                        • shipping larger loads, boosting inventory
            – transition from consolidating distribution centers and warehouses to an
                    increase in individual sites
            –       Low-cost countries closer to home are becoming more attractive

• Manufacturing Insights speculates13:
            – A possible reinvigoration of the ES3 shared-manufacturer warehouse
                    model
            –       Further pressure on SKU proliferation, particularly packs performing on
                    the margin




15. GreenBiz.com, “High Fuel Costs Leading to More Efficient Supply Chains: Report,” GreenBiz Staff,
August 27, 2008 http://www.greenbiz.com/news/2008/08/27/high-fuel-costs-more-efficient-supply-chains
13. Manufacturing Insights, “Will Rising Fuel Costs Drive Changes in Supply Chain Strategy?”, Simon Ellis, July 09, 2008
http://www.supplychainbrain.com/Will Rising Fuel Costs Drive Changes in Supply Chain Strategy?
DC/Warehouse Location

• [Companies are] also rethinking the rationalization of distribution
         centers and lean inventories in favor of more DCs located closer to
                                              8
         clients and higher inventory levels.
•        U.S. companies that went to Asia to tap cheap labor now look to
                                                                                 2
         relocate operations closer to their customers to save on fuel expenses.




8. AMR Research, “3PL Industry Trends: Emerging Markets, Sustainability, and Fuel Costs Weigh Heavily”, Bill Polk, Greg Aimi,
Monday, July 07, 2008
2. Investor's Business Daily, “Firms Rethink Shipping On High Fuel Costs,” Friday September 5, 2008 6:49 pm ET, Norm Alster
http://biz.yahoo.com/ibd/080905/general01.html?.v=1
DC/Warehouse Location (cont.)

  • As the cost of a gallon of diesel fuel rises rapidly, this creates a major
           impact on the costs of certain products which will result in significant
           changes in those supply chains… will result in more locally grown 6
           produce and other lower value products being warehoused locally

  • Warehouse management: Today warehouse management practices
           are expected not only to improve efficiencies within the four walls of the
           warehouse, but also contribute to building a more comprehensive
           capacity plan at the corporate level, support accurate and real-time
           data collection for initiatives such as E-pedigree, and make inventory
                                                                              9
           status and information available to whatever function requires it.




6. eyefortransport, “The Impact of High Fuel Costs on Mergers & Acquisitions in the Trucking Industry,” Douglas Christensen,
Managing Director with Chapman Assocates, 10/15/2008;
9. AMR Research, “2008: Logistics Best Practices Are More Important Than Ever,” Jane Barrett, Greg Aimi, John Fontanella,
Monday, February 25, 2008
Inventory
 • Manufacturers who adopted just-in-time systems to lower inventory
                                                                                                                              2
          costs are backing off because of high transport costs.
             – “Just-in-time programs need to be revisited,” said Larry Lapide, a
                    professor at the Massachusetts Institute of Technology’s Center for
                    Transportation and Logistics. “For the last two decades, it was the right
                    thing to do under cheap oil. [A just-in-time program] tends to favor smaller,
                    more frequent shipments to meet customers’ demands, which sometimes
                                             17
                    means unfilled trucks.”
             –      While frequent delivery of small lots might lower inventory costs, it raises
                    fuel bills. In today's market, fuel is the more important cost, Accenture's
                                           2
                    Brooks Bentz says.

 • will [retailers] begin to re-look at 'economic order quantities' in light of
                                                                                                                                  13
          the changing 'inventory cost vs. delivery cost' dynamic?


2. Investor's Business Daily, “Firms Rethink Shipping On High Fuel Costs,” Friday September 5, 2008 6:49 pm ET, Norm Alster
http://biz.yahoo.com/ibd/080905/general01.html?.v=1
17. Financial Week, “Diesel weasels its way into costs, supply-chain strategy,” Frank Byrt, April 14, 2008 12:01 AM ET
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080414/REG/233262334/1003/TOC
13. Manufacturing Insights, “Will Rising Fuel Costs Drive Changes in Supply Chain Strategy?”, Simon Ellis, July 09, 2008
http://www.supplychainbrain.com/Will Rising Fuel Costs Drive Changes in Supply Chain Strategy?
Lead time
Lead time


       Highlights from CHRW & MIT’s White Paper:
       “INCREASE LEAD TIME, DECREASE COSTS”.


 About This Study
 C.H. Robinson Worldwide, Inc. and MIT have established a relationship to
    research subjects of interest to the transportation industry. This year,
    C.H. Robinson sponsored a thesis by Erik Caldwell and Bryan Fisher,
    graduate students of MIT’s MLOG Program, entitled, “Impact of Lead
    Time on Truckload Transportation Rates,” from which this summary is
    drawn. This thesis won the MIT Master of Engineering in Logistics
    Outstanding Thesis Award for 2008.
AVERAGE TENDERS PER LOAD
Loads that had shorter lead times had a much higher level of tender
     rejections. Loads with lead times longer than two days were the least
     likely to be rejected by carriers.




The more lead time a carrier has between the tender and
     the pickup day, the more likely the first carrier in the
     routing guide is to accept the load.
LEAD TIME IMPACT IN TRANSPORTATION MODEL




• Short lead times (0-8 hours) incur a $24.26 penalty per load.

• Increasing lead time from less than two days to over three days would
   improve the carrier acceptance rate and save an average of $15.34 per
   load.
    – While this might seem a modest savings, if applied to a shipper’s 40,000
        loads per year, the shipper would save $613,600 on their annual
        transportation costs.
    –   If a company can afford more than two days lead time, there’s
    –      even more potential savings to be had, as a stretch goal.
The Flip Side of Being in Demand…

  • Demand destruction - primarily in the U.S. - is
    likely responsible for most of the drop in oil prices
    that occurred during the third quarter of 2008.




 Source: Wikinvest

				
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