Energy Prices Reshaping the Supply Chain

Transcription

1 October 31, 2007 Energy Prices Reshaping the Supply Chain (1) (781) Page 1 This report has been prepared by Boston Strategies International at the request of CLIENT for the purpose of establishing its operating strategies. It may not be appropriate for other purposes or audiences. This report contains forward-looking statements and projections with respect to anticipated future performance of CLIENT, suppliers, customers, and/or general or specific economic conditions and factors that are based on Boston Strategies International s analysis of market trends and external data. Forward-looking statements and projections are not guarantees of future performance and involve significant business, economic and competitive risks, contingencies and uncertainties, which are difficult to predict. Accordingly, these projections and forward-looking statements may not be realized and actual results may vary up or down. This report may not be reproduced or distributed without express written approval from Boston Strategies International.

2 Global Supply Chain Economists Industry Cost and Pricing Strategy Research Analysis Consulting Page 2

3 High and volatile World energy requirements increasing Asia leading the growth Production falling behind Global oil supply vs. demand Higher oil prices here to stay? Risk & uncertainty: the new enemy Material prices gone wild The end of lean? Budgets are off; variance is increasing Energy on the brain Energy economics reversing lean? Stability as important as low cost Inventory: inflection point Low-cost country sourcing reversion Logistics costs increasing consumer prices Eight buying strategies A fragmented buy A large but invisible expenditure Potential strategies Overall strategy performance The best strategies The bottom line Keeping perspective: the long view Manufacturers: stay lean and manage the spend Realign budgets more than once a year Advice for carriers Advice for policy makers Summary Page 3

4 High and Volatile Page 4

5 World energy requirements increasing Energy consumption forecast to nearly double by 2030 Growth in Global Energy Consumption, 2003 vs Quadrillion BTUs OECD Non-OECD Year Page 5

6 Asia leading the growth China accounts for most of the demand growth Developed economies growing at 1% or less Growth in Energy Consumption by World Area Note: Size of bubble proportional to actual energy consumption Page 6

7 Production falling behind Global oil production nearly flat at less than 1.5% per year Many locations declining in production 7 6 US and North Sea Oil Production Million Barrels per day U.S. North Sea Page 7

8 Global oil supply vs. demand Gap Between Oil Demand and Oil Available 12.0% 10.0% 0% $27/bbl $61/bbl 8.0% Percent of Demand 6.0% 4.0% 2.0% 0.0% Page 8

9 Higher oil prices here to stay? Weighted Average World Oil Spot Prices Dollars Per Barrel J-89 A-97 O-97 M-98 S-98 M-99 S-99 F-00 A-00 Page 9 F-01 A-01 J-02 J-02 J-03 J-03 D-03 J-04 D-04 J-05 N-05 M-06

10 Natural gas prices escalating and volatile Natural Gas Price, November 2005-October % 50% 40% % Change in Price 30% 20% 10% 0% Page 10

11 Raw material prices gone wild Selected Producer Price Indices (1994=100) Intermediate Materials Metals Chemicals Plastics Fuel Natural Gas Page 11

12 The End of Lean? Page 12

13 Energy economics reversing lean? Decentralizing operations? Holding more buffer stock? Affecting off-shoring decisions? Indirect economic drag? Page 13

14 Inventory: inflection point? Inventory as a Percent of GDP 6 5 % of GDP Page 14

15 Low-cost country sourcing reversion? Emphasis on Low-Cost Country Sourcing 5 37% 40% Emphasis (1=None; 5=Dominant) % % Percent Sourced 20% from Low-Cost 10% Countries % Retailers CPG Companies All Industries Page 15

16 Logistics cost increasing consumer prices? Logistics Cost as a Percent of GDP % of GDP Page 16

17 Fragmented and Diffuse Page 17

18 A fragmented buy Purchasing Transportation Materials Logistics Distribution Warehousing Percent of Companies Centralizing the Energy Buy Centralized 24% Decentralized 76% Page 18

19 Fragmented [We have]18 regional business units in the US and each one is responsible for its own energy expenditures Bryan Warshofsky, Director of Purchasing Applications. We found that we were spending 20% more at one manufacturing plant than at an identical one in another state. Jacques Lalauze, Gemalto [There is] a lot of gray area. It is often fragmented among Facilities, Transportation, Indirect, Manufacturing, Logistics, and Operations. Corporate Purchasing Manager, US consumer electronics retailer Each plant manages it decentrally Henry Turner, Honda Several folks manage power contracts Rich Walters, Air Products Page 19

20 A large but invisible expenditure Energy as a Percent of Sales 30 Percent of Sales In other purchased materials From energy suppliers 0 Mfg. Retail Carriers Page 20

21 8 Buying Strategies Page 21

22 Potential strategies Supply Chain Strategies 1. Centralize purchasing 2. Join a buying consortium 3. Sign long-term contracts at forecast rates 4. Reduce consumption (value engineering) Financial Strategies 5. Buy in advance at the current price 6. Buy options Pricing Strategies 7. Pass costs on via a floating surcharge 8. Pass costs on and embed in the product price Page 22

23 Overall strategy performance Cumulative Cost of Each Strategy, October 2005-October Most strategies have similar results Millions of US Dollars Pass-through pricing scenarios -40 Centralized Purchasing Price Increase Surcharges Stockpile Options Contracts Buying consortium Value Engineering Page 23

24 The best strategies Buying consortium Centralized Purchasing Value Engineering Options Stockpile Gas Oil Contracts Surcharges Price Increase Spot -100% -50% 0% 50% 100% Page 24

25 Hybrid strategy saves significantly Cumulative Difference Between Managed and Unmanaged Approaches Total Costs (Millions of Dollars) Unmanaged Managed Month Page 25

26 Policy Issues Page 26

27 Policy issues Alternative fuel vehicles Could exert downward pressure on fuel prices Modal infrastructure subsidies Provide cheaper but slower shipping CAFE standards Trade-off between fuel economy and safety Funding trade-offs Subsidizing new technologies comes at the cost of traditional infrastructure Page 27

28 Policy supports adaptation to change Evolution of U.S. Energy Page 28

29 The Bottom Line Page 29

30 Shippers: stay lean and manage the spend Don t reverse lean Energy costs dwarf vs. benefits of being lean Establish a program to manage energy spend Any strategy % better than none Re-assess mode, frequency quarterly Unpredictable fuel prices and surcharges need alerts When off-shoring, consider whether a doubling of oil prices would change the decision Dual sourcing may become necessary at higher oil prices Page 30

31 Carriers Don t rush to develop alternative fuel vehicles. Most AFV technologies are in their infancies and many companies cannot justify investing in them at present. Actively manage fuel spend. Carriers, especially airlines and ocean shipping lines, that proactively manage fuel expenditures, save 10-15% on fuel. Reduce dependence on petroleum. Airports and airlines can cost-effectively modify or replace ground handling equipment to operate on LPG, ethanol, or electricity. Assess routes and services for profitability. Carriers should analyze the profitability of routes and services to determine when, where, and how much to refuel based on regional fuel cost advantages. Page 31

32 Policy makers Consider supply chain costs and benefits when setting gpolicy for infrastructure and alternate fuel technology. Policy affects, and could reduce, the efficiency, speed, and convenience of supply chains, engendering an unforeseen economic cost. Don t jeopardize infrastructure programs to fund alternative fuels. Currently, US tax breaks for ethanol are funded at the expense of the Federal Highway Trust Fund, while highway infrastructure gaps cause increasing congestion. Page 32

33 Global Supply Chain Economists Boston Strategies International helps supply chain executives make critical supply chain decisions that involve investment and risk by forecasting the evolution of supply markets and technologies. Our mission is to help our clients develop globally competitive supply networks that maximize Supply Chain Value. Our products and services include: Industry Research that helps investors and policy makers identify emerging issues that affect their supply chains, and quantify the impact that they will have Cost and Pricing Analysis that helps financial and operational managers plan and budget by providing benchmark, best practice, and forecast data tailored to their companies' supply chains Strategy Consulting that helps supply chain leaders make high-stakes decisions related to mergers & acquisitions, market entry, capital investments, outsourcing, off-shoring, and make-or-buy Boston, MA, USA 445 Washington St Wellesley, MA USA Dubai, UAE Executive Suite P.O. Box Sharjah, United Arab Emirates (U.A.E.) Shanghai, China 31F Jin Mao Tower 88 Shi Ji Avenue Shanghai , China David Jacoby: Page 33