Purchasing Transformation

Today hit the oil price 142 dollars and the stock exchanges react as predicted: they were going down. (It did not even help to stabilize the oil price, that 30.000 brand-new Volkswagen were destroyed by a hail storm) . The background stories, on how companies are going to react, are however missing.

More Companies localize their production

Vertically integrated production called it underwear producer American Apparel. Already in May Jason Bush was blogging about the localization of Wal-Mart. One of the main aspects in this post was that this is good marketing. As a marketing person I agree, it is, indeed. And I think that this will also pay off on the long term by reducing costs. It is pretty obvious, what possibilities purchasing functions have short- and mid-term, to react on the given challenges:

• - Shorten Supply Chains
• - Localize Production
• - Localize Supplier Base
• - Review “oil contribution” to the main products

Central purchasing will become hard, central led the standard, especially with qualified local purchasers. I dare to predict, that Franchise concepts will be on the rise. Delivery and production standards are defined centrally; as well as the specifications from purchasing, production will be done locally. (Of course it will help if you have a sophisticated e-Sourcing solution in place, to guarantee still global standards on quality)

Personally, I am more afraid of small products, which will have major impact and which are hard to foresee, similar as the donkey story in the very beginning of this series. An open ear for supplier innovations will be in the next years a deciding factor to succeed. Perhaps the style of Germany’s leading retail discounter Aldi could be there a role model: rumor has it, that every interested supplier has just to drive to the headquarter and he will get, without arranging an appointment, at least 5 minutes with a purchaser to present his product.

An Urban Legend

Originally I wanted to end with another story: End of the 60ies, during the race to the moon, the Americans realized, that their pens do not work in outer space because of the missing gravity. They invested 11 million Dollar to invent the so called space pen, which works under water, in the vacuum and in zero-gravity. And what did the Russians do? They took pencils. Unfortunately this is an urban legend. (Read the real story here) But the true story gives me even more hope to cope with peak oil. Ordinary capitalism found the right answer to the zero-gravity problem. Paul Fisher succeeded with his company to develop the right writing instrument, and as a true capitalist he sold them to both: Russians and Americans. Anyway: The right mixture of capitalism, inventive talent, reasonable politics and smart purchasers will hopefully lead to a good answer to the peak oil problem. 

During the last decade shareholder value was the big driver for big companies. With the oil price peak I expect that purchasing will face the next big challenge … perhaps the biggest challenge ever. Especially big companies, who are not too good in reacting fast on the changing environment, will have big problems. It is a little bit like the evolution and the dinosaurs.

I remember a speech eight years ago from Heinz Traudt, the former Director International Purchasing of BMW. It was about the e-procurement project of BMW and he also explained the value chain of airbags. Until the airbag was mounted into a car in Munich or in the US, the drapery was produced in Africa, then it was delivered to South America to be sewed and after that the bags were at last mounted in Germany or in the U.S. The airbags were traveling approximately 10.000 miles, until finally assembled into a brand new BMW. 

There are thousands stories like this. For instance about our delicious shrimps: They are trawled in the Northern Sea. Then they are shipped to Tunisia for peeling. After that, they return to the Northern Sea to the Northern European harbors. After a short stop for packaging in another factory the shrimps are finally distributed to the super markets. This means an additional 4.000 kilometer journey for the crustaceans, instead of 10 to 700 kilometers. I guess that we can celebrate a big misgiving, when we tell these stories someday our grandchildren (perhaps we should make a pact to never tell them).

When it comes to logistics, we were not too innovative lately. 95 % of global logistics is based on petrol. There are concepts rising like the company Skysails, who tools up vessels with large towing kites. Perhaps there will arise also the cargolifter concept again. Cargolifter was offering logistic services with zeppelins.

What about power supply?

The energy sector does not look as bad as the logistics. At least on the first view. Depending on the countries between 30 to 60 % is depending on oil. But when you have a closer look on the sources: most of it is based on gas, uranium and coal. These resources are as finite as oil. In Europe the spend of renewable energy is currently on a level of 6.5 %. The role model countries for using renewable energy are Austria and Sweden. Austria copes with more than 20% of its demand by renewable energy sources. The problem is the scalability. Although the big countries like France or Germany are taking some effort to become less dependent on fossils, they are stuck on a level between 5 to 10%. The good news is: innovation is going on in this sector, using wind, wood, bio resources, etc. The question is: is it enough to feed the enormous appetite for power of our societies? Another problem arising is that we risk famines, as too big agricultural crop lands are used for biodiesel production.

Purchasing can drive change

To talk about abstinence was in the past not too popular. But we have to think about our behaviors and as you can see already now, the high gasoline price makes at least private consumers think. Purchasing is in charge to drive the change in companies. Companies, focusing on smart purchasing and supply chain strategies will be prepared for the changes created by peak oil. They will adjust and fit faster to the new environment. Darwin was once getting his inspiration from an economist to come up with his evolution theory and now evolution comes back to economy. Once more: the fittest will survive.

Today another discussion about oil exploration was in the media. The conservative U.S. candidate McCain wants to get hands on potential oil resources nearby Alaska.

Tomorrow I will come up in the last part of peak oil, how some companies are preparing already for the further rise of oil prices.