Supply chain: Energy

Meeting the energy challenge

Richard Schooling, chief executive of multi-marque car leasing and fleet management company Alphabet, explains how companies can leverage innovation to fuel the supply chain.

 

Liquid fuel oils the wheels of the global supply chain. Worldwide, transportation burns through 8.5 billion litres of petroleum products a day, using up 62 per cent of the world’s oil production and 25 per cent of its total energy consumption.

Around a third of this fuel is used to move freight; and while passenger journeys account for the rest, many of them are for the purpose of delivering business products and services—so they can justifiably be included within the supply chain.

It’s a vast, intricate and incredibly proficient machine which, despite its overwhelming dependence on a single source of energy, has so far proved to be reassuringly resilient to sudden shocks. Of course there were inevitable disruptions to just-in-time deliveries after the Icelandic volcano and Japan’s tsunami. But natural phenomena on that scale are rare: it seems that nothing can slow the machine down as long as its fuel tank is kept topped up. 

However, fuelling the supply chain is becoming increasingly problematic. In recent years, the Paris-based International Energy Agency (IEA) has cut its forecast for future oil production by 20 per cent. Although the IEA maintains that supply will meet demand for the next 20 years, there is also no shortage of indications that economies, as well as individual businesses, are struggling with unexpectedly high energy costs, especially for liquid fuels. Indeed, it’s become clear that the global supply of conventional crude oil peaked and went into decline four or five years ago, leaving a gap that’s being filled with by-products like natural gas liquids (NGLs) or from non-conventional resources such as Canadian tar sand.

But while NGLs provide volume, they deliver less energy per barrel than conventional oil. Tar sand liquids are extremely expensive to produce; they deliver a lot less ‘net’ energy than even NGLs; and they will never be available in large volumes.

In effect, the global transport system has been asked to go on a diet—and an expensive one at that. Nor is oil production the end of the story: as every purchaser knows, what matters isn’t how much of something is produced but how much of it is actually available to buyers.

When it comes to liquid fuels, the critical factor is net exports—what gets on to the market after oil producing countries have taken out what they need for domestic consumption.

Jeffrey Brown, a Texan geologist, and Samuel Foucher, a physicist, have been researching the issue for several years. They point out that total oil production from the top 33 oil-exporting countries has been flat since 2005, while their internal consumption has been rising by 2.7 per cent per year. Brown and Foucher estimate that if China and India—the two fastest-growing oil importers—maintain their current rate of oil consumption growth, net available exports to the rest of the world could decline by as much as 40 per cent by 2020.

Even the US isn’t immune. Despite the American public’s antipathy to high gasoline prices, the US became a net exporter of refined petroleum products (not crude oil) for the first time in 62 years in October, as overseas buyers in more buoyant economies outbid domestic consumers. With the oil export market already running increasingly lean, 2011 is shaping up to be the most expensive year in history (in inflation-adjusted terms) to buy oil. 

So far, transport users and providers have mitigated this huge run-up in oil costs by increasing the efficiency of their equipment and processes. For example, the average new company car in the UK now uses 25 per cent less fuel per mile than its 2005 counterpart, which has helped to offset much of the increase in road fuel prices. At sea, as high fuel costs have eroded the commercial advantages of rapid shipment, ship owners introduced ‘slow steaming’ to cut fuel use—albeit at the cost of longer delivery times.

These changes have impacts beyond supply management itself. Last year, the insurance giant Lloyds warned in a white paper that less reliable and more expensive energy supplies mean that “businesses run an increasing risk of vulnerability to reputational damage and potential profit losses resulting from the inability to deliver products and services.”

Meeting these challenges calls for out-of-the-box thinking by both suppliers and customers. Transport is only just beginning to transition away from its reliance on liquid fuels, and such transitions take many decades. One energy expert, Canadian professor Vaclav Smil, believes that 70 per cent of transport will still rely on high-cost oil in 2050.

This has profound implications for supply chains—whether we’re talking about materials or people. But businesses are already learning to be more agile in the way they manage mobility. For example, one of the world’s biggest software businesses saved $97 million over a year by holding meetings online instead of having its executives travel 100 million miles by air. And a major pharmaceutical business replaced 38 million flight miles with teleconferencing, saving £60,000 on one meeting alone.

But physical movement often can’t be avoided. That’s why, in my business, we’re combining IT and automotive technologies to offer companies smarter mobility options.

It’s all about creating innovative alternatives to the traditional ‘one driver, one car, one key’ approach to car schemes—for instance by giving employees an app that lets them easily hire unused fleet cars at the weekends, so that vehicles carry on earning their keep even when staff aren’t working.

It’s also about looking beyond an either/or choice between new-style virtual meetings and old-style travel. There are brilliant new communications technologies that can be leveraged into entirely new mobility solutions designed for tomorrow’s cost-reducing, increasingly flexible, working practices.

Above all, it’s about enabling businesses to get more productivity from their vehicles and from their people. Nobody can wave a magic wand and transport the world of travel back to the days of cheap oil. The future, for fleets of all kinds, will be very different from the past. And it belongs to those who prepare for it today.

Alphabet is a multi-marque fleet funding company and part of the BMW Group. Operating in 18 countries, the company manages a fleet of over 100,000 vehicles in the UK and more 530,000 vehicles worldwide. Alphabet has unrivalled and award-winning experience of delivering sophisticated company car and employee ownership solutions for some of the UK’s largest companies, such as the BBC, McDonald’s Restaurants, Oracle, Royal and SunAlliance, Yell, Shell and Unilever. http://www.alphabet.co.uk/