6.19.2008

Just in Time Philosophy Could Be a Casualty of Fuel Costs
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For the first time in two decades or more, supply chains are threatened by the explosive cost of fuel. About a decade ago, the just-in-time movement flowered, meaning that organizations strove to reduce inventories by having product delivered exactly as needed. The justification was that (a) corporate real estate and plant investment would be reduced (b) product would be fresher and (c) stock-outs in the economy would be reduced through the application of intelligent systems and complete visibility, meaning demand was visualized, actual inventory was visualized, and both inbound and outbound materials were bar-coded and scanned creating a data stream enabling the complete visibility point.

However, the need for immediate gratification on the part of every leg of the supply chain tripod (accelerated by CRM solutions and the Internet) created the consumption market for the use of time-definite services. Not only did you have the FedEx initiated overnight service, but AM/PM selectivity, one day, two day, three day, guaranteed ground, a portfolio of international services, as well as trucking and forwarding. The major supply chain providers vertically integrated into every area of transportation through acquisitions.

These services have been growing unimpeded ever since the first gasoline crisis in the 1970s when these trends were first observed and the move towards high consumption became a fixture of Western life.

However, rampant excessive fuel costs doesn't fit into the product cost of suppliers, wholesalers, and retailers. They can't pass off the entire cost since their competitors won't. As a result, there will be a contraction in the demand for higher cost services and a move towards lower cost, slower methods. The result, macroeconomically, might be a deceleration in consumption and slackening of demand, which in the case of UPS and FedEx can be calculated as a percentage of overall GDP.

While alternative power sources is something the supply chain industry has been working on to fit with the overall greening of business, radically different modes of transport might be called for, which will create new opportunities.

The overall business model, consolidation of many small shipments with coordinated line-haul operations, sorting, air and ground movements, and local hub-based delivery was worked out in the 1920s into a fundamental scalable operating model. The management philosophy it turned on borrowed from Frederick Winslow Taylor, the creator of scientific management and time and motion studies.

Since the 1950's, the overall model has been getting more efficient while the operations it underlies have grown to a massive size, linked by a neural net of information technology. this development is largely responsible for your ability to get whatever you want, whenever you want it, at any store, anywhere.

It may be that as an economy we have reached an efficiency frontier bounded by the cost of one of the inputs - fuel, which necessitates a re-thinking of the this synchronous model, which has functioned like a clock with infinite parts, 24x7.

If so, both demand and available supply of services will need to adapt to keep functioning in an altered economic landscape. In the case of extreme fuel shortages, complete substitutes might have to be developed, such as a solar or battery-powered vehicles, dirigibles instead of aircraft, using less energy but probably lacking the overall lift capacity of conventional fuel-powered aircraft.

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