Logistics and Supply Chain Management, 4th Edition

CrEATING A SUSTAINAbLE S U P PLY CHA I N

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A further incentive to reduce the transport-intensity arises from the continued

upward pressure on oil-based fuel costs, which will only intensify as oil reserves

become depleted.

Peak oil

The concept of ‘peak oil’ originated as far back as 1956 when Dr Marion King

Hubbert, a geologist at Shell, first coined the phrase. What he recognised was that

all oil production, whether from an individual field, a country or the entire world, fol-

lows a normal distribution, i.e. a bell-shaped curve. All the current indications are

that we have reached the top of that curve, or that we shortly will. Even with new

discoveries, the total amount of oil reserves will still be in decline once the peak

has passed.

At the moment the world demand for oil is approximately 85 million barrels a

day, which by chance is about the current daily output of all the working fields.

However, whilst output will inevitably decline as ‘peak oil’ is passed, world demand

is likely to grow – particularly fuelled by economic growth in countries such as

India and China. The gap between demand and supply will get larger by the day.

Some commentators have suggested that the gap between the demand and

supply for oil will be filled by the discovery of new oil fields or the development of

new fuels (e.g. bio-fuels). However, such is the likely deficit that it is estimated that

we would need to find new reserves of oil (or create alternative fuels) equivalent to

five Saudi Arabias over the next 20 years. Simple economics tells us that the only

way that the gap will actually be closed is by the price mechanism. In other words,

the cost of oil will increase dramatically to reflect the shortfall in supply.

Today’s supply chains are more energy intensive than before because they are

more transport intensive than they used to be. There are a number of reasons for

this including:



Focused factories and centralised distribution – as a result of rationalising

production and distribution, many companies are now having to serve cus-

tomers at a greater distance.



Global sourcing and offshore manufacturing – the well-established trend to

low-cost country sourcing and manufacturing has meant that supply chains

are significantly extended and products travel much further.



Just-in-time deliveries – as more customers demand just-in-time deliveries

from their suppliers, it is inevitable that shipment sizes reduce whilst delivery

frequencies increase.

When many of today’s supply chains were originally designed, the cost of oil was

a fraction of what it is today. For example, in December 1998 a barrel of crude oil

sold for about US$9.64; in July 2008 – ten years later – it rose to an all-time high

of $147.27.

It is quite possible that if oil prices continue to rise over time, current supply

chain arrangements will prove to be too expensive. There is clearly a need for

supply chain strategists to review their network configurations and to ask ‘what if’

questions based upon worst-case scenarios of transport costs.