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May-June 2023
If you were dropped onto this planet and landed at McCormick Place in the heart of Chicago in the middle of March, you would probably conclude that planet Earth had been overrun by robots. Everywhere you turned on the ProMat conference floor, there was a robot lifting something, putting something away, or carrying something to another location. But, despite a conference hall overrun by technology, the on-the-ground reality is a bit different. Not so long ago, commercial real estate firm Prologis estimated the number of facilities with any type of automation at about 10%. But that is changing—quickly. A recent report from JLL found that one-in-two… Browse this issue archive.Need Help? Contact customer service 847-559-7581 More options
My March/April Insights column was titled: “Oil update: We need security plans from policymakers.” It represented the latest in a 17-year series chronicling oil pricing starting with my first SCMR column, appropriately titled: “Is your supply chain addicted to oil?” While started because oil pricing was expected to rise over the long term, more recent columns have focused on the impact of global initiatives to develop renewable energy sources to replace the lion’s share of fossil fuels to drastically reduce CO2 emissions and prevent the Earth from overheating.
The recent column discussed how global policymakers have been relatively ineffective in using diplomacy to come up with a coordinated plan toward a world free of fossil fuels. The Russian invasion of Ukraine has made most of them realize that an energy plan is not sufficient. The business world needs plans with less uncertainty and more clarity. We can only get that when policymakers finally develop three coordinated and balanced plans for energy security, economic security, and climate security. These are likely to be developed later, rather than sooner.
Recommendations regarding the oil update
The advice to managers has generally stayed the same during the past few years. That is, it will always be prudent to reduce the use of carbon-based energy sources by making your supply chains as energy
efficient as possible. However, managers ought to be cautiously on the lookout for serious and harsh Green New Deal initiatives from government policymakers in the future. Given their progress to date, when these
policies are established is anybody’s guess.
Policymakers are having difficulties weaning people away from fossil fuels. Why? Because these fuels—in solid, liquid, or gaseous form—can be easily transported and stored to where energy is needed. Meanwhile, the biggest issue with renewable energy—wind turbines and solar panels—is that they are intermittent sources of electricity. Electricity only gets created when the wind blows and the sun shines. Not necessarily when and where there is demand for energy. Thus, energy generated by them needs to be 1) sold to an electric grid, 2) stored (e.g., in batteries) or 3) used to make non-fossil fuels (e.g., hydrogen or ammonia). However, developing technologies for battery storage, as well as for production of non-fossil fuels on a large scale, are nascent at best. As well as requiring massive and uncertain innovation.
Renewables require reliability and rapid repairing
The biggest issue (or the elephant in the room) to replacing fossil fuels with energy based on wind turbines and solar panels is their intermittent nature. Renewable innovation has not kept up with a still-growing thirst for fossil fuel energy from a worldwide population that will continue to grow for quite some time. Over these past two decades, the world’s population increased from about six billion to a current eight billion, on a possible path to nearly 10 billion by 2050 according to the United Nations, further increasing the need for fossil fuels.
I recently met with an entrepreneur who was working on developing offshore floating wind turbines. He wanted to pick my brain on the supply chains that would be needed to support these turbines. When I asked about electricity storage needed, he said that the electricity generated by the turbines would be immediately used to make ammonia—a non-polluting fuel that can be stored, transported, and used on demand.
My advice to him was that he also had to develop a service-parts supply chain with a goal toward achieving 100% uptime while the wind is blowing. Uptime doesn’t matter when it is not. If a turbine malfunctions while the wind is blowing, that would amount to wasted valuable time needed to generate carbon-free electricity.
He ought to design the wind turbines and their service-parts supply chain to support a 100% uptime goal. The turbine itself should be designed to be close to 100% reliable—rarely failing. To support this goal, an excellent preventive maintenance program is required.
When a part fails, it ought to be fixed almost immediately That means he has to have an order fill rate of 100% for those service parts that might fail and cause a turbine to become inoperable. Based on my experience, I believe that service parts inventory management is the most complex and difficult of all inventory management business processes. The complexity is due to various characteristics of the parts themselves, such as the following.
- Myriad numbers of parts to store and manage.
- Some parts are extremely inexpensive and some very expensive.
- Some parts are very small (e.g., nuts and bolts) and some very large (e.g., turbine propellers).
- Some parts are needed often, and many needed only sporadically.
- Some parts are critical to the malfunctioning of a product that they are a part of (e.g., a broken turbine propeller).
- Some parts are safe from hostile environments, and others are not (e.g., off-shore turbines in a hurricane).
Learnings from the pandemic
In my November 2022 SCMR column, “Respect ‘good’ inventories,” I stated that “good” inventory has a deliberate deployment purpose; while “bad” inventory is often just-in-case. As an aside, just-in-case inventory has a purpose in chaotic business environments when demand is uncertain, and you can only sell what you have. When supply chains broke down during the COVID-19 pandemic, a business could generally sell whatever it had available. In some business environments, fortunate companies did not miss sales of high-margin products. So, what kind of inventory is good for renewable energy sources?
In my September/October 2020 column, “Supply chain heroes and lessons from COVID-19,” I discussed that the pandemic exposed the fact the United States was not self-sufficient in personal protection equipment (PPE) supplies needed by medical personal —especially masks. The United States relied on low-cost Asian labor to produce these inexpensive supplies—often of poor quality. When the global pandemic hit, the sourcing countries did not send the United States what it had ordered because they needed it for their own citizens (something the United States would have done if the shoe were on the other foot). The COVID-19 shortage of PPE exposed the fact that the United States wasn’t self-sufficient here.
I also suspect that the use of standard Pareto-based A/B/C inventory management practices might have also been complicit in the PPE shortages. These practices put the most inventory focus and resources into A items, less so into B items, and the least into C items. The ranking criteria for items are often predicated on revenue, usage, and inventory value. Pre-pandemic, masks were likely viewed as a C item based on these criteria. During the pandemic, the criteria should have been drastically changed.
Human life as we know it is at stake
During my work in service parts logistics, I learned about another important ranking criterion termed “criticality.” It is based on the cost of shortage—to the user, not the supplier. Per the Newsboy Problem, the cost-of-shortage (e.g., lost sales) and the cost of surplus (e.g., excess inventory) determine the optimal supply/inventory ratio to have on hand to meet customer demand. I discussed this in my November 2018 column “e-tailing Update: Lessons from the newsboy.”
Criticality uses the costs (e.g., lost revenues) to a customer, not the supplier, when operations are shut down for lack of a part. For example, Caterpillar offers next-day delivery on critical parts because these part failures would shut down construction and mining operations around the world, thereby negatively affecting revenues of the customer. Similarly, in computer services, there are parts whose failure would shut down computerized transactional systems such as airline and hospitality reservations, and banking and other financial operations. Critical parts (by their nature) are A parts irrespective of revenues, usage, or inventory value.
During the pandemic, inexpensive PPE supplies should have been viewed as critical A items requiring a lot of focus, and should not have been outsourced to other countries. Shortages of medical PPE supplies—especially for workers in hospital intensive care units (ICUs)—might have degraded the healthcare provided to patients and led to more deaths. A very high cost-of-shortage.
Observing what is happening with renewable solar panels, the world is largely outsourcing manufacturing to low-cost countries such as China. Treating them like C items. This, in the long run, might put climate change security at risk. Will these panels be reliable enough and will they be able to be rapidly repaired. I have my doubts. Solar panels should be treated as A items.
Why? Because the cost of shortage is much higher than the cost of surplus inventory for renewable energy sources. The cost of surplus is relatively straightforward to determine because it is basically the monetary costs of developing and operating a reliable electric grid fed by non-fossil fuel energy sources to replace fossil fuels—and developed in time to keep the Earth from overheating. On the other hand, the cost of shortage involves a failure to stop the Earth from overheating—with unimaginable costs from the negative effects on the lives of the human race as we know it. Therefore, the renewable energy service part supply chains should ensure that all parts that might cause a malfunction, are treated as A inventory items, with extremely low failure rates and rapid repair processes in place to shorten any downtime. These parts supply chains should not be lean just-in-time (JIT) ones. In fact, they should be brimming with lots of “good” inventory.
As they should, entrepreneurs like the one I met certainly need to be innovative on the renewable technologies to be deployed. However, they ought to make sure to design products and support services that reduce downtime to an
absolute minimum. Because if the wind is blowing and the sun is shining, mankind needs all the electricity that can be generated during that precious period, when renewables are replacing fossil fuels.
SC
MR
Sorry, but your login has failed. Please recheck your login information and resubmit. If your subscription has expired, renew here.
May-June 2023
If you were dropped onto this planet and landed at McCormick Place in the heart of Chicago in the middle of March, you would probably conclude that planet Earth had been overrun by robots. Everywhere you turned on the… Browse this issue archive. Access your online digital edition. Download a PDF file of the May-June 2023 issue.My March/April Insights column was titled: “Oil update: We need security plans from policymakers.” It represented the latest in a 17-year series chronicling oil pricing starting with my first SCMR column, appropriately titled: “Is your supply chain addicted to oil?” While started because oil pricing was expected to rise over the long term, more recent columns have focused on the impact of global initiatives to develop renewable energy sources to replace the lion’s share of fossil fuels to drastically reduce CO2 emissions and prevent the Earth from overheating.
The recent column discussed how global policymakers have been relatively ineffective in using diplomacy to come up with a coordinated plan toward a world free of fossil fuels. The Russian invasion of Ukraine has made most of them realize that an energy plan is not sufficient. The business world needs plans with less uncertainty and more clarity. We can only get that when policymakers finally develop three coordinated and balanced plans for energy security, economic security, and climate security. These are likely to be developed later, rather than sooner.
Recommendations regarding the oil update
The advice to managers has generally stayed the same during the past few years. That is, it will always be prudent to reduce the use of carbon-based energy sources by making your supply chains as energy
efficient as possible. However, managers ought to be cautiously on the lookout for serious and harsh Green New Deal initiatives from government policymakers in the future. Given their progress to date, when these
policies are established is anybody’s guess.
Policymakers are having difficulties weaning people away from fossil fuels. Why? Because these fuels—in solid, liquid, or gaseous form—can be easily transported and stored to where energy is needed. Meanwhile, the biggest issue with renewable energy—wind turbines and solar panels—is that they are intermittent sources of electricity. Electricity only gets created when the wind blows and the sun shines. Not necessarily when and where there is demand for energy. Thus, energy generated by them needs to be 1) sold to an electric grid, 2) stored (e.g., in batteries) or 3) used to make non-fossil fuels (e.g., hydrogen or ammonia). However, developing technologies for battery storage, as well as for production of non-fossil fuels on a large scale, are nascent at best. As well as requiring massive and uncertain innovation.
Renewables require reliability and rapid repairing
The biggest issue (or the elephant in the room) to replacing fossil fuels with energy based on wind turbines and solar panels is their intermittent nature. Renewable innovation has not kept up with a still-growing thirst for fossil fuel energy from a worldwide population that will continue to grow for quite some time. Over these past two decades, the world’s population increased from about six billion to a current eight billion, on a possible path to nearly 10 billion by 2050 according to the United Nations, further increasing the need for fossil fuels.
I recently met with an entrepreneur who was working on developing offshore floating wind turbines. He wanted to pick my brain on the supply chains that would be needed to support these turbines. When I asked about electricity storage needed, he said that the electricity generated by the turbines would be immediately used to make ammonia—a non-polluting fuel that can be stored, transported, and used on demand.
My advice to him was that he also had to develop a service-parts supply chain with a goal toward achieving 100% uptime while the wind is blowing. Uptime doesn’t matter when it is not. If a turbine malfunctions while the wind is blowing, that would amount to wasted valuable time needed to generate carbon-free electricity.
He ought to design the wind turbines and their service-parts supply chain to support a 100% uptime goal. The turbine itself should be designed to be close to 100% reliable—rarely failing. To support this goal, an excellent preventive maintenance program is required.
When a part fails, it ought to be fixed almost immediately That means he has to have an order fill rate of 100% for those service parts that might fail and cause a turbine to become inoperable. Based on my experience, I believe that service parts inventory management is the most complex and difficult of all inventory management business processes. The complexity is due to various characteristics of the parts themselves, such as the following.
- Myriad numbers of parts to store and manage.
- Some parts are extremely inexpensive and some very expensive.
- Some parts are very small (e.g., nuts and bolts) and some very large (e.g., turbine propellers).
- Some parts are needed often, and many needed only sporadically.
- Some parts are critical to the malfunctioning of a product that they are a part of (e.g., a broken turbine propeller).
- Some parts are safe from hostile environments, and others are not (e.g., off-shore turbines in a hurricane).
Learnings from the pandemic
In my November 2022 SCMR column, “Respect ‘good’ inventories,” I stated that “good” inventory has a deliberate deployment purpose; while “bad” inventory is often just-in-case. As an aside, just-in-case inventory has a purpose in chaotic business environments when demand is uncertain, and you can only sell what you have. When supply chains broke down during the COVID-19 pandemic, a business could generally sell whatever it had available. In some business environments, fortunate companies did not miss sales of high-margin products. So, what kind of inventory is good for renewable energy sources?
In my September/October 2020 column, “Supply chain heroes and lessons from COVID-19,” I discussed that the pandemic exposed the fact the United States was not self-sufficient in personal protection equipment (PPE) supplies needed by medical personal —especially masks. The United States relied on low-cost Asian labor to produce these inexpensive supplies—often of poor quality. When the global pandemic hit, the sourcing countries did not send the United States what it had ordered because they needed it for their own citizens (something the United States would have done if the shoe were on the other foot). The COVID-19 shortage of PPE exposed the fact that the United States wasn’t self-sufficient here.
I also suspect that the use of standard Pareto-based A/B/C inventory management practices might have also been complicit in the PPE shortages. These practices put the most inventory focus and resources into A items, less so into B items, and the least into C items. The ranking criteria for items are often predicated on revenue, usage, and inventory value. Pre-pandemic, masks were likely viewed as a C item based on these criteria. During the pandemic, the criteria should have been drastically changed.
Human life as we know it is at stake
During my work in service parts logistics, I learned about another important ranking criterion termed “criticality.” It is based on the cost of shortage—to the user, not the supplier. Per the Newsboy Problem, the cost-of-shortage (e.g., lost sales) and the cost of surplus (e.g., excess inventory) determine the optimal supply/inventory ratio to have on hand to meet customer demand. I discussed this in my November 2018 column “e-tailing Update: Lessons from the newsboy.”
Criticality uses the costs (e.g., lost revenues) to a customer, not the supplier, when operations are shut down for lack of a part. For example, Caterpillar offers next-day delivery on critical parts because these part failures would shut down construction and mining operations around the world, thereby negatively affecting revenues of the customer. Similarly, in computer services, there are parts whose failure would shut down computerized transactional systems such as airline and hospitality reservations, and banking and other financial operations. Critical parts (by their nature) are A parts irrespective of revenues, usage, or inventory value.
During the pandemic, inexpensive PPE supplies should have been viewed as critical A items requiring a lot of focus, and should not have been outsourced to other countries. Shortages of medical PPE supplies—especially for workers in hospital intensive care units (ICUs)—might have degraded the healthcare provided to patients and led to more deaths. A very high cost-of-shortage.
Observing what is happening with renewable solar panels, the world is largely outsourcing manufacturing to low-cost countries such as China. Treating them like C items. This, in the long run, might put climate change security at risk. Will these panels be reliable enough and will they be able to be rapidly repaired. I have my doubts. Solar panels should be treated as A items.
Why? Because the cost of shortage is much higher than the cost of surplus inventory for renewable energy sources. The cost of surplus is relatively straightforward to determine because it is basically the monetary costs of developing and operating a reliable electric grid fed by non-fossil fuel energy sources to replace fossil fuels—and developed in time to keep the Earth from overheating. On the other hand, the cost of shortage involves a failure to stop the Earth from overheating—with unimaginable costs from the negative effects on the lives of the human race as we know it. Therefore, the renewable energy service part supply chains should ensure that all parts that might cause a malfunction, are treated as A inventory items, with extremely low failure rates and rapid repair processes in place to shorten any downtime. These parts supply chains should not be lean just-in-time (JIT) ones. In fact, they should be brimming with lots of “good” inventory.
As they should, entrepreneurs like the one I met certainly need to be innovative on the renewable technologies to be deployed. However, they ought to make sure to design products and support services that reduce downtime to an
absolute minimum. Because if the wind is blowing and the sun is shining, mankind needs all the electricity that can be generated during that precious period, when renewables are replacing fossil fuels.
SC
MR
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About the Author
Larry Lapide, Research Affiliate
Dr. Lapide is a lecturer at the University of Massachusetts’ Boston Campus and is an MIT Research Affiliate. He received the inaugural Lifetime Achievement in Business Forecasting & Planning Award from the Institute of Business Forecasting & Planning. Dr. Lapide can be reached at: [email protected].
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