Three Industries Going Through Dramatic Supply Chain Transformations

Three industries are going through dramatic supply chain transformations:  retail with their omni-channel initiatives; health care because of new Affordable Care Act regulations; and shale oil because of the price pressures caused by booming production.

In retail, e-commerce retailers, and Amazon in particular, have been stealing market share from traditional brick and mortar retailers for years.Omni-channel is traditional retailers’ initiative to turn their stores into a competitive weapon to achieve more convenient or faster fulfillment. The goal of omni-channel is to better integrate their stores and e-commerce channels. So a retailer might support buy online, pick-up at store; or order online, deliver to home from a store; several other fulfillment paths are also possible.

This industry’s attempt at transformation has been well covered in the press (Should Retailers Partner with Google to Beat Amazon?; Amazon vs. Walmart: E-Fulfillment vs. Omni-Channel Logistics; Driving Omni-channel Efficiencies).  However, there is no guaranty these initiatives will succeed, or at least succeed fast enough.  Sears has been very active in their omni-channel efforts and yet they continue to hemorrhage cash.

The healthcare industry is also undergoing a transformation driven by the Affordable Care Act (Obamacare) and the increasing impact of consumerism. Healthcare providers historically have had prepaid plans where the cost of care was paid up front and the more procedures a hospital did, the more they got paid. Consequently providers felt little need to practice even the basic tenants of supply chain management or even understand the total cost of particular procedures.

Now reimbursements are not only going down, they are becoming incentive based. If a hospital does a procedure and the patient is released but then has to be readmitted, the provider takes a major hit on what they are paid. That means the industry needs a lower cost structure even as they improve the quality of patient outcomes. The article Leading Healthcare Systems Respond to Obamacare by Making Supply Chain a Critical Differentiator details how two healthcare systems, including Kaiser Permanente -the U.S.’s largest, are turning supply chain management into a competitive weapon in response to the new regulatory environment.

Finally, the shale oil & gas industry is at the beginning of their journey to transform their value chain. The new shale oil and gas production processes were developed by independent owner operators. The “majors” have been conspicuously late to the game.  The independent owner operators focused on shale have spent far more on securing land rights and developing new production techniques than the majors.  They are often highly leveraged and bringing oil online quickly is critical to servicing their debt.

Shale petroleum is transforming the US into a leading producer of oil and gas.  But the production boom also puts added pressure on margins for individual shale oil and gas companies. It is not just production growth in North America that is a burden, declining production costs, and the spread of shale gas and tight oil production globally suggest declining petroleum prices for the foreseeable future.  According to a recent report by Goldman Sachs Group, shale oil producers often break even around $80 to $85.  In recent weeks, a barrel of WTI crude has been trading at close to $80, Brent at about $85.  This has led to plummeting stock prices for several shale oil companies.

On the natural gas side, Ed Morse, the global head of commodities research at Citi, is forecasting a sustainable price of around $5.50 per thousand cubic feet for natural gas in the U.S.  In inflation adjusted dollars, this means a drop in the price of gasoline by about 30 percent.

Containing costs will not be easy: wells decline quickly; shale basins are operate over very large areas; this is a long value chain both in terms planning horizons and lead times; and this value chain relies heavily on outsourcing, but their trading partners are poorly integrated into their planning processes.

However, there are significant possibilities for margin – and more importantly in such a fast growing industry – cash flow improvements:

• Industry specific enterprise applications for upstream shale oil have emerged from Oracle and SAP;

• Most integrated business planning has focused on product centric supply chain industries.  Shale oil & gas is a project centric value chain.  However, there is an increased understanding of how to do integrated business planning in project centric industries like shale oil & gas.

• In product centric industries one will rarely come across a company with a highly functioning supply chain that does not have a robust integrated business planning process; because of this, it is easy to see how a highly functional IBP process in a shale oil & gas firm could be a core differentiator.

In terms of the transitions, retail is furthest along, shale oil & gas has the furthest to go, and health care has the biggest upside from a supply chain transformation.