Know your client’s supply chains plans for the future

Roger OakdenGlobal Logistics, Supply Chains & Supply Networks

highway with wind turbines

There will be a target to aim for.

Thinking forward over 15 years is not so difficult. Remember back to 2000 – it was only 15 years ago. The challenge then was the number of business options about the future to select, rank and plan. In 2015 the ever more likely scenario is that governments of the world will be actively moving to an upper limit of 2 degrees warming in the climate.

The momentum for international agreement on climate change by the end of 2015 means that actions will be progressively implemented to reduce carbon and other emissions by at least 30 percent, through to 2030, with much higher reductions by 2040 and maybe zero emissions by 2050. Targets like this provide a focus for organisations to plan for the future. What does your organisation need to do to meet this challenge?

For example, the global miner BHP Billiton has identified its assumptions concerning a carbon price, enacted by countries through a carbon trading scheme or carbon tax. It assumes an initial price under a global accord of U$24 per tonne of emissions, rising to U$50 per tonne (by 2030?) and U$80 per tonne (by 2050 or earlier?). Although there can be discussion about the most likely price, by identifying a target price, the company has a base for its plans and can adapt the plans as conditions change.

Conversely, coal fired power companies seem to not address an issue that is in the ‘hard’ basket. For example, a power company in Australia has recently published a report stating that it will close its coal fired power stations in 2050! Thankfully, active shareholder groups have stated that “2050 is so far out, it is meaningless”. So the company will revise its business plan; starting with a believable scenario of the emissions reduction required by 2030 and the likely effect on the business. Maybe they will realise their business should be energy delivery, not coal fired power stations!

Your client’s supply chain strategy

Organisations with  a broader world view will base their plans on sustainability, with emissions reduction being but one factor. Sustainability means taking actions that are not harmful to the environment nor depleting natural resources. For logistics service providers (LSPs) must be in a position to respond to changes in future contracts, whatever approach their clients take to future planning – and it should be of concern if they do not plan!.

Sustainability is underpinned by risk – what level of risk will an organisation accept of a current or future situation before it changes its behaviour (culture and strategy) to reduce vulnerability of its supply chains? If change may happen, then LSPs (and other types of supplier) need to know the changes expected. A client’s supply chain strategy may consider:

  1. The risks of buying items from suppliers in particular countries or regions, dependent on the likelihood and consequences of man-made or natural disasters
    1. On what basis has the risks been established and with what rigour have they been evaluated?
    2. How responsive are the client’s LSPs expected to be in responding to disasters?
  2. Location of nodes in a client’s supply network:
    1. Measures such as ‘food miles’ will increasingly influence from where organisations buy materials, components and finished goods
    2. There will still be items purchased on a global, regional or local basis, but the mix is likely to change. To reduce the distance that items travel to reach end-users, there could be an increase in regional distribution centres or even local finishing centres, to provide a ‘postponement’ service. However, the extent of this decision will depend on the industry and supply market(s)
    3. Will the location(s) change from where clients purchase their:
      1. higher value specialised or time critical items and
      2. commodity items
  3. Will the procurement policy change with regard to low cost countries (LCC):
    1. The total cost of ownership (TCO) for items purchased from low cost countries (LCC) will increase as wages and conditions improve, new infrastructure is built that must be paid for and transport costs increase
    2. Will other LCC be considered for commodity items and over what period?
  4. Main driver for supply chain decisions:
    1. Reducing energy consumption through supply chains could become a greater driver of supply chain plans and decisions than cost, efficiency or speed of delivery considerations
  5. Minimising transport costs:
    1. Although fuel costs are currently low, the futures market is factoring future price increases and global politics can quickly change the pricing model
    2. Congestion costs in the transport modes will become a more critical factor
    3. Could clients be willing to receive a lower level of delivery service (i.e. selection of transport mode) for a lower cost?
    4. Minimising transport and distribution costs can be obtained through improved collaboration along a supply chain. How likely are clients to embrace this concept?
  6. Change the emphasis of logistics from physical movement to information technology. If clients have this view, what investment is being considered over what time frame?
    1. Track and trace capability. To what extent will this be at the ‘each’ item level? Will the data collection capability be used to enhance co-operation between parties in the supply chain and inform governments, insurance companies and banks?
    2. Investment in the ‘Internet of Things’ to gather data from intelligent logistics objects
    3. Investment in ‘pull’ applications as current planning applications are generally deficient in responding to changes in demand patterns
    4. Invest in upgrading skills so that planners can effectively analyse and plan using the new applications
    5. How will LSPs interface or integrate with the new approach

Initially, governments will target major emitters for action, but those organisations will share the pain with their suppliers. LSPs need to comprehend how flexible and ‘agile’ could your client’s supply chains become, in response to the identified risks – especially climate change. Designing supply chains that are infinitely flexible and responsive is unrealistic, so there are judgements required and LSPs should be a part of the conversation – starting this year.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...