Fox River APICS Chapter Peak Oil: Hit or Myth? Mike Sheahan, CLM, CIRM, CFPIM [email protected]...
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Fox River APICS Chapter Peak Oil: Hit or Myth? Mike Sheahan, CLM, CIRM, CFPIM [email protected]Transformance Advisors, Inc. www.transformanceadvisors.com
Fox River APICS Chapter Peak Oil: Hit or Myth? Mike Sheahan, CLM, CIRM, CFPIM [email protected] Transformance Advisors, Inc
Fox River APICS Chapter Peak Oil: Hit or Myth? Mike Sheahan,
CLM, CIRM, CFPIM [email protected] Transformance Advisors, Inc.
www.transformanceadvisors.com
Slide 2
Background & Predictions What is the impact on supply
chains? What can we do to prepare, respond? Peak Oil
Slide 3
Oil is a finite resource The critical question is: when is the
date of the maximum daily amount of world oil production the peak?
After that, oil will be an irreversibly declining resource facing
increasing demand which cannot be met. Walter Youngquist
Slide 4
Oil Production U.S. Finite Natural Resources
Slide 5
Worlds foremost oil producer & exporter Worlds foremost oil
producer & exporter Worlds largest exporter of manufactured
goods Worlds largest exporter of manufactured goods Worlds foremost
creditor nation Worlds foremost creditor nation Self-sufficient in
nearly all resources Self-sufficient in nearly all resources Worlds
foremost oil importer Worlds foremost oil importer Worlds foremost
importer of manufactured goods Worlds foremost importer of
manufactured goods Worlds foremost debtor nation Worlds foremost
debtor nation Jobs fleeing to other countries Jobs fleeing to other
countries U.S. in 2008U.S. in 1950
Slide 6
M. King Hubbert In 1956, M. King Hubbert predicted U.S. oil
production would peak in the early 1970s. In 1956, M. King Hubbert
predicted U.S. oil production would peak in the early 1970s. Was
widely criticized by many oil industry experts and economists. Was
widely criticized by many oil industry experts and economists. In
1970, the U.S. oil industry celebrated its biggest production year
in history with no end in sight. In 1970, the U.S. oil industry
celebrated its biggest production year in history with no end in
sight. In 1971, Hubbert's prediction came true. In 1971, Hubbert's
prediction came true.
Slide 7
U.S. Oil Production Peak
Slide 8
Oil Production World
Slide 9
US Energy Information Administration www.eia.doe.gov
Slide 10
Slide 11
What worked before Following U.S. oil production peak, the U.S.
maintained economic growth by importing more oil from other
nations. Following global oil production peak, world will not be
able to compensate by importing more oil from other planets.
Saudis, Kuwait, Iran, all major fields now in production have
increased the stated reserves since 1971 even though there have
been NO NEW discoveries. How Accurate?
Slide 17
Shedding Light on Saudi Arabia 5 super giant oilfields make up
90% of oil output and 3 giant oilfields make up another 8%. 5 super
giant oilfields make up 90% of oil output and 3 giant oilfields
make up another 8%. These oilfields are between 40 and 60 years
old. These oilfields are between 40 and 60 years old. All are
reaching point of decline. All are reaching point of decline. Half
of proven reserves are questionable. Half of proven reserves are
questionable. Remaining oil is harder to produce. Remaining oil is
harder to produce. 2005
Slide 18
Out of Gas: The End of the Age Of Oil Peak output occurs as of
supply is gone Peak output occurs as of supply is gone No viable
new sources No viable new sources Proven reserves are questionable.
Proven reserves are questionable. Remaining oil is harder to
produce. Remaining oil is harder to produce. 2004
Slide 19
ScenarioResult Wait for peaking Shortages are large and long
lasting Start crash program 10 years before peaking Delays the
peaking, but still produces shortages Start program 20 years before
peaking Avoids the problem and provides a smooth transition
Slide 20
Responses to Peak Oil Someone will find more oil Technology and
substitutes will arrive We are in for a bumpy transition Major
disruptions & profound changes Expectations for Change End of
civilization as we know it
Slide 21
The Hirsch Report The world has never faced a problem like
this. Without massive mitigation the problem will be pervasive and
will not be temporary. Previous energy transitions were gradual and
evolutionary. Oil peaking will be abrupt and revolutionary. The
Hirsch Report U.S. Department of Energy February 2005
Slide 22
Out Of Oil Alternatives? Oil sands / Tar / Shale Bio-Mass /
Bio-Fuel - ethanol Natural Gas/LPG Coal / Coal to Oil Geothermal
Pros: on-going / sustainable / renewable / available / cost
effective when oil is high
Total Landed Cost The sum of all costs associated with
producing and delivering products and services to the place where
they generate revenue your customer's door or point of use. Survey
at the APICS 2007 International Conference: Only 14% have used
total landed cost analysis with various scenarios of future energy
costs
Slide 26
The Trade-Offs The big question I have is how a spike to $100
oil might impact sourcing, offshoring, and network strategy
decisions. At the heart of network strategy is the balancing of
trade-offs across inventory, transportation, and operating costs -
while meeting customer service. Almost by definition, the result of
that calculation should be different at $100 oil than it would be
at $30. Dan Gilmore Supply Chain Digest Summer 2005
Slide 27
Transportation Costs International: 40 container, Asia U.S. $
20 per barrel = $ 3,000 $135 per barrel = $ 8,000 $135 per barrel =
$ 8,000 $200 per barrel = $15,000 (projected) Domestic: $10
increase in oil per barrel = 4 per mile increase in
transportation
Slide 28
Labor vs. Energy A high tech hardware contract manufacturer
found offshore cost savings of only 0.8% on a product where
significant revenue losses might arise if supply chain disruptions
occurred. The reason is that labor costs, as a proportion of total
costs, were small. The far lower average wages were almost
completely offset by increased logistics costs
Slide 29
A New Paradigm We have a paradigm that manufacturing will go to
Asia and we are faced with the reality of managing complex supply
chains with long lead times. Could it be that sound strategy
coupled with rigorous total landed cost analysis will favor lean
supply chains that support customers in local markets? Follow the
leaders like Honda and Toyota. Mike Loughrin July 2006
Slide 30
Rethinking Network Optimization Dynamically Costs WILL increase
until suitable alternate for petroleum is found Network
Optimization skill-set becomes competitive advantage Managing for
Minimum Cost Increase Competing for Maximum Service Level Protocol
= Dynamic vs. Static
Slide 31
Potential Impacts Consolidation of freight Rail, Water + fewer
small loads Rail, Water + fewer small loads Move from air to ground
/ truck to rail Fewer shipments/less JIT Longer lead time to market
Economies of scale/larger lot sizes
Slide 32
Potential Impacts contd More frequent re-alignment of
distribution networks & supply chain optimization Shared SCM
resources - 3PL Higher inventory at DCs Improved service/less
expediting Flexible supply chain strategies
Slide 33
Potential Impacts contd Pressure on profit margins Trade off
product cost for transportation cost More segmentation of markets
More segmentation of markets > Mass Customization more important
> Mass Customization more important > Limiting
Options/Features > Limiting Options/Features Integrated
packaging/product design Integrated packaging/product design
Slide 34
Potential Impact contd Deglobalization Local sourcing
strategies Near/On-Shoring instead of Off-Shoring Manufacturing
more near customer Increase in Capital Costs Squeeze small
firms
Slide 35
Potential Impact contd US Made Mexico Made China Made India
Made Vietnam Made Korea Made Mexico Made US Made EU Made SA
Made
Slide 36
Supply Chain Management is a core competency Lean Supply Chains
Supplier Relationship Management Customer Relationship Management
Lean Enterprise
Slide 37
Call to Action 1.Continue learning - Peak Oil 2.Routinely
assess total landed cost (data accessibility) 3.Craft a lean supply
chain 4.Dynamic Management 5.Focus - SCM skills in your org
Slide 38
Bibliography Twilight In the Desert Matthew R. Simmons, 2005
Matthew R. Simmons, 2005 The Long Emergency James Howard Kunstler,
2005 James Howard Kunstler, 2005 Out of Gas: The End of the Age of
Oil David Goodstein, 2004 David Goodstein, 2004 The Coming Economic
Collapse The Coming Economic Collapse Stephen Leeb, 2007 Stephen
Leeb, 2007 Beyond Oil Kenneth Deffeyes, 2005 Kenneth Deffeyes,
2005
Slide 39
More than any other time in history, mankind faces a
crossroads. One path leads to despair and utter hopelessness. The
other, to total extinction. Let us pray we have the wisdom to
choose correctly. Woody Allen, 1980 Side Effects: My Speech to the
Graduates
In light of this newfound high-cost fuel reality, firms must
rethink their supply chain strategies by questioning long-held
assumptions about transportation costs and putting management
decisions through new economic equations Supply chain executives
must prepare for the new realities. Mike Kilgore & Gary Girotti
Chainalytics Aug. 26, 2006 Rethinking Strategies
Slide 42
Today, rail will move a ton of freight an average of 410 miles
on just one gallon of diesel fuel. One gallon of diesel fuel will
move a ton 59 miles by truck