Depletion, Rust and History Never Sleep

1

• Depletion, Rust and History Never Sleep Are You
  Awake?
• By
• Michael Regan, Tranzact
• Chuck Taylor, Awake!
• March 31, 2009
• Philadelphia, Pa.

2
Predictable Surprises Part IIThe Impact Of Oil
On Your Supply Chains
3
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

4
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.

5
Predictable Surprises An Overview (cont.)

• The Probability of Predictable Surprises
• Chucks 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

6
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

7
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.

8
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, its unlikely
  that they will be proactive in taking steps to
  mitigate the impact of Predictable Surprises.
• Other issues include
• The If it aint broke, dont 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?

9
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.

10
Chucks 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.

11
What Does All This Mean For Me and My Company?
12
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)
13
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 todays environment, everything (well, almost
  everything) needs to be examined/reexamined.
• Short Term/Long Term Strategic Initiatives (e.g.
  Networks)

14
Facts About Oil

• When it comes to oil youre 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.

15
Dealing With Price Fluctuations

• Hedging (not for the untrained)
• Use of options to cover increases
• Fuel Surcharge Calculations
• Base index
• Spread
• Other considerations
• Capped FSC
• Incentives for increased MPG performance
• Reduce line haul rates as the basis for the FSC

16
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

17
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

18
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?

19
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 isnt if, the question is when

20
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).