Depletion, Rust and History Never Sleep – Are You Awake?

ByMichael Regan, Tranzact

Chuck Taylor, Awake!March 31, 2009

Philadelphia, Pa.

Predictable Surprises Part IIThe Impact Of Oil On Your Supply

Chains

Predictable Surprises – An Overview (cont.)

• Three years ago, we had the opportunity to look at this topic of Predictable Surprises. Two of the things we looked at were:

Definition of Predictable Surprises

Attributes of Predictable Surprises

What Is A Predictable Surprise? Predictable Surprises Are…

• Warning signs of disasters or crises which people did not want to see or face.

• Events that catch leaders off guard, even though they had all the information necessary to anticipate them.

• A pervasive failure of leadership which holds grave consequences for individuals, organizations, and society.

• The Probability of Predictable Surprises Chuck’s presentation looks at what is happening with

the oil and fuel markets• What shippers need to pay attention to and

understand about oil, and the factors that can cause price spikes.

• Preventing Predictable Surprises The importance of accessing and sharing information

throughout an organization to prevent Predictable Surprises

Looks at the importance of scenario planning in analyzing supply chain options

Predictable Surprises – An Overview (cont.)

Attributes of Predictable Surprises

• First Feature: People knew a problem existed that would not solve

itself

• Second Feature: Predictable surprises can be expected when factors

point out that a problem is getting worse over time

• Third Feature: Fixing the problem would incur significant costs in

the present with delayed benefits

Attributes of Predictable Surprises (cont.)

• Fourth Feature: Typically requires incurring a certain cost, while the

reward is avoiding some cost that is uncertain, but likely to be much larger.

• Fifth Feature: Decision-makers and organizations often fail to

prepare for predictable surprises because of tendencies to maintain the status quo. Acting to avoid a Predictable Surprise requires a decision to act to change the status quo.

How Predictable Surprises Occur in The Supply Chain

• When companies ignore critical information, or when they fail to understand what is occurring that could impact their business, it’s unlikely that they will be proactive in taking steps to mitigate the impact of Predictable Surprises.

• Other issues include: The “If it ain’t broke, don’t fix it” philosophy accentuates

the illusion that we can maintain the status quo. Predictable Surprises usually produce “Blowouts” instead

of slow leaks. Slow leaks can be hard to detect. Who determines priorities in an environment where change

is constant and the need for multiple actions is required?

How Predictable Surprises Occur

in The Supply Chain

• Assumptions and The Impact Of Mental Models. If you assume that: There is a relatively stable and ample supply of oil The price of oil will be reasonable for the foreseeable

future Your ability to ship and receive products without

interruption is not at risk, and Everything can be managed and will be “OK.”

• Then, you have an environment that is susceptible to experiencing Predictable Surprises.

Chuck’s Presentation Highlights Facts About The Oil Markets So You Can Recognize The

Warning Signs

• Signs to consider:

The Oil Crisis is far from over.

Things are happening today that will impact how your company ships and receives product in the future.

Your job requires that you understand what those “things” look like and how they will impact your company.

What Does All This Mean For Me and My Company?

Factors For Managing In The Gathering Storm

Acts of God Factors Beyond Your Control

Factors You Can Influence

Factors You/We Can Change

Hurricanes/Natural Disasters

Infrastructure Issues

Legislative Policy Initiatives (e.g. HOS, Port Sec.)

Daily Tactical Processes

Per Barrel Price of Oil/ Gas Prices

Geopolitical Events and their Impact on GLSC

Governmental Involvement in Global SC Issues

Creating/Managing Capacity

Terrorist Event/Security Incident

Unforeseen Vs. Predictable Surprises (e.g. Ins - post 911)

Changes Driven by Allocation of Assets - Expenditures

Short Term/Long Term Strategic Initiatives (e.g. Networks)

Factors You/We Can Change

• Daily Tactical Processes How you do business on a day to day basis makes a

big difference. Look at the changes in the transportation marketplace

in the last three years. Compare that against the supply chain changes you have made within your organization.

• Creating / Managing Capacity In today’s environment, everything (well, almost

everything) needs to be examined/reexamined.

• Short Term/Long Term Strategic Initiatives (e.g. Networks)

Facts About Oil

• When it comes to oil you’re looking at price and consumption.

• There is not much you can do about the world price for a barrel of oil.There are strategies to manage the impact

of price.

• That leaves us with a focus on consumption issues.

Dealing With Price Fluctuations

• Hedging (not for the untrained)• Use of options to cover increases• Fuel Surcharge Calculations

Base index Spread Other considerations

Capped FSCIncentives for increased MPG performance

• Reduce line haul rates as the basis for the FSC

How do we impact the consumption issue

• Shipment size Customer, purchase and intra-facility orders

• Shipment frequency – scheduled sailing dates• Mode shifting

Minimize express/air shipments Minimize circuitous miles on multi-stop shipments

• Align with “Smart-Way” carriers• Manage dock waiting time

How do we impact the consumption issue

• Supply Chain Network DC Network Outbound pool distribution Inbound vendor consolidation

• External Sales Policies Customer pick-up/will-call strategies Order ship complete to avoid multiple shipments for

an order

Cost Benefit Analysis

• What is the cost if the problem occurs?

• What is the likelihood that the problem will occur?

• What will it cost to create a solution that either keeps the problem from occurring or mitigates the impact of the problem?

• What are the short and long term consequences associated with the problem. How does it impact our company on a short and long term basis?

Doing Nothing Is Not An Option

• Supply issues are not going to be resolved in the foreseeable future As Chuck has highlighted, there are structural

issues affecting the supply of oil.

• Price fluctuations are a reality They are entirely predictable The issue isn’t if, the question is when

Managing In The Gathering Storm Reality Getting Safely To Shore

• Most companies are and will continue to operate under tight manpower constraints. Key challenge: Scan the environment and

challenge your assumptions.

• Engage in scenario planning exercises.

• Look at what it will take to manage in 2009 and beyond?

• Communicate, communicate, communicate (The best time to share bad news ... before it happens, when you have alternatives).