Category Archives: Energy

Only Half Of Organizations are Concerned They’re At Risk of Greenwashing. What are the other half smoking?

A recent press release from Ivalua over on the Supply Chain Quarterly site stated that nearly half of organization are concerned they’re at risk of unintentional greenwashing and that 48% of US organizations are very confident they can accurately report on Scope 3 emissions.

This falls into the same category as half of Procurement leaders expect their budgets to increase and 9% of companies claim to be ready to manage risks posed by AI … ridiculous.

The 52% that feel that Scope 3 reporting is a ‘best-guess’ measurement have it right. There isn’t a single carbon calculator (service) offering that is accurate. Some aren’t bad, and a subset of these will meet the baseline requirements for carbon reporting, but even those that make the baseline cut for reporting aren’t as good as you think. The majority of these work by using country-industry averages computed by third party institutes and agencies, which are then multiplied by the estimated total volume of product coming from the country-industry average adjusted. It could be totally accurate, or it could be totally inaccurate if your supplier is using a significantly older production line technology and using dirtier energy than its peers or, in the best case, was the first supplier in the region to update its production line, switched to primarily renewable energy sources, and found a way to recycle water and minimize fresh water usage.

Plus, with no clear guidance on how to properly calculate your e-Liability, how do you know that you are truly accounting for all of the carbon you are responsible for (in terms of products, logistics, services, etc.) while not taking on carbon that belongs to your supplier (that they are trying to pass on to you).

Also, if you’re passing on your calculation to a third party, or even worse, to a supplier, how do you know that, if there are multiple potential third party region-industry estimates to choose from, that the third party isn’t choosing the absolute worst (so you will believe you need their carbon reduction consulting services) or that the supplier isn’t choosing the absolute best when answering your RFX (when neither of these estimates are correct).

The reality is that, even if you use a third party, your scope 3 calculations are acceptable (but not necessarily accurate) approximations at best, but likely of little value the majority of the time and your true knowledge of whether or not your supplier:

  • uses renewable energy
  • recycles or minimizes (fresh) water usage
  • uses efficient production processes that minimize direct (production) and indirect (energy and [fresh]water) carbon
  • actively looks for ways to be sustainable

doesn’t exist unless they have been audited on-site by you or a third party service that you trust. And accepting anything less is accepting greenwashing (or some variant of) to some degree.

And the only way you are truly going to reduce your Scope 3 is to:

  • minimize demand for consumables, and use as many renewables as you can
  • focus on renewable, or at least recyclable, content in your products
  • work with suppliers to optimize processes
  • invest in suppliers (possibly through long-term contractual commitments) to upgrade to modern processes that will minimize their carbon production
  • etc.

Environmental Sustentation 20: Oil & Natural Gas

Oil and Natural Gas is an environmental damnation in more ways than one. It’s dirty fuel, that is regularly subject to price shocks, and it’s collection and transport often result in significant disasters to the environment, your bank account, and your reputation.

And even though you should move to greener power, in some cases you can’t. Biofuel is not always a viable alternative for transportation, especially for ocean freight (where it takes a lot of combustion to move those mega-carriers) or air travel. And you still need to power your current energy production systems until the new ones come online. So you are stuck with using oil & natural gas for at least some of your energy needs for the time being. (But hopefully with a plan to use less and less over time.)

And, as a result, have to live with the risks of shortages, price spikes, disasters, and the resulting financial and reputational damage that will result. So how do you survive?

Accurately predict future needs.

If your demand is going to spike because of expected sales spikes, or projected energy shortages in other areas, that is something you want to know in advance so you can be sure to contract for sufficient supply. Similarly, if demand is dropping, that is also good to know as maybe you can cut shorter contracts and buy more on the spot market without serious repercussions.

Acquire expert supply and price projections — from various sources.

Don’t just monitor supply and prices, try to understand where it is going so you can source, or re-source, at the best times. While an unexpected disaster, political decision, or pumping slowdown can change everything, the more informed you are, the better off you’ll be.

Have disaster recovery plans in place.

If there is a shortage due to a disaster, you want an alternate source. Don’t sole source if you can avoid it, and make sure you include a provision with the provider who gets the smaller award to increase business over time and that they can support a spike if you need it. If there is a transportation disaster, hopefully you don’t take possession or responsibility until it’s in your storage tank, but either way, you better have a plan to get another shipment sent through an alternate carrier, possibly from your other supplier, ASAP.

Start sourcing clean power and building your own power plants.

Most places in the world can produce a lot of power from wind, solar, or hydro-power, and not only should you be looking to buy from energy companies that produce this power, which can power your equipment, buildings, and even short-haul transportation (that run on battery packs), but if you are a large factor or office building that uses the equivalent of a small power plant of energy, you should be building your own, and only taking off the grid when you need supplemental. With so many regular failures in overtaxed and antiquated power grids, this is just good planning.

While we can’t rid our dependence on oil and natural gas just yet, we can certainly reduce our need for it and this type of planning will not only make it more affordable (if demand lessens), but also make energy consumption and transportation safer and more reliable.

Economic Sustentation 09: Oil & Gas Price Shocks

For the last twenty (20) years or so the West Texas Intermediate Crude Oil Price chart has been bouncing up and down like a yo-yo in the hands of a novice who doesn’t know how to work it, but doesn’t stop trying. And any other chart you pull up for international oil and natural gas prices is going to look similar. In other words, as we stated in our damnation post, within a one-year period, prices can double or be cut in half with little or no warning. And either situation will run havoc with your supply chain.

If prices double seemingly overnight, your costs are going up — way up. If you have a contract, you might be able to insist that your supplier absorb the increase since they were, at signing, charging you higher than market cost since they were taking a risk over a predefined period. But, at some point, their margins go to zero, and soon after that, the supplier is not going to put up with it anymore, especially if they are struggling financially. Then the shipments stop.

But it’s not much better when prices drop. While the first to cry foul when prices rise, suppliers are the last to play fair when the prices drop. Arguments that the deal was so good they were losing money on delivery, arguments of higher overhead costs, and arguments of temporary blips are brought to the table whenever you ask for a price concession, even if the contract guarantees you one.

So what can you do?

1. Tie Prices to an Index – Updated Daily, Averaged Weekly or Monthly

Base the contract on index prices, averaged weekly or monthly, and tie the price to that cost on the purchase order date. You’ll pay more if prices rise quickly, but you’ll also pay less when prices fall faster than expected. Then, you can simply acquire good prediction algorithms that have performed well over the long term, and plan for the shocks and not waste time arguing when they happen, leading to much more cordial relationships that can be focussed on service and customer service.

2. Master Predictive Analytics

Don’t just acquire an algorithm, understand it, and run models with slight market changes to see how oil prices shift when other correlated indicators shift. Get better than the competition and over the course of years, you will always, always, always come out ahead.

OR, if this is too mathematically advanced for you, and you are willing to accept sub-optimal outcomes (which will still be better than what you get now)

A. Always Lock Prices in for the Long Term.

So the cost stays the same unless a ceiling or floor, defined as a price percentage, is met. If the average price over a month goes up or down more than, say, 10%, then the price shifts by a fixed percentages, such as half of that. In addition, negotiate for clauses that allow the organization to auto-renew automatically at the current price at an time in the last six months, for the same time-frame.

B. Make sure the ceiling and floor shifts with every price change.

While the cost shift will be absolute, the price should only change every time the price changes by more than a fixed percentage from the price being paid, not the locked-in price.

C. Reduce Oil and Natural Gas Dependence.

Invest in renewable power sources such as solar, hydro, and geothermal so that, over time, you become less dependent on oil and natural gas and the price uncertainty they bring.

Economic Damnation 9: Oil & Gas Price Shocks

Take a look at the West Texas Intermediate Crude Oil Price chart for the last twenty (20) years over on Macrotrends.net. It’s bouncing up and down like a yo-yo. And any chart you pull up for international oil and natural gas prices is going to look similar. In the chart, we see oil goes from a high of about $38 in 1997 to a low of about $16 in 1998 to a high of about $47 in 2000 to a low of about $26 in 2002 and then a series of gradually increasing perturbations until it reached a high of about $145 in 2008 before it crashed down to about $43 in the same year. And so on.

In other words, within a one year period, prices can double or be cut in half without almost any warning. And either situation can run havoc with your supply chain. Let’s tackle the obvious situation first. Prices double seemingly overnight. Your costs are going up – if not right away, very very soon. If you have a contract, you might be able to insist that your supplier absorb the increase since they were, at signing, charging you higher than market cost since they were taking a risk over a predefined period. But, at some point, their margins go to zero, and soon after that, they are not going to put up with it anymore, especially if they are struggling financially. They are going to insist upon fuel surcharges, or simply stop honouring your contract and fail to pickup. Now, of course, you can try taking them to court, but in the interim, no shipments, no sales, and screaming customers which cost your organization much more than it could recover in a legal battle years down the road. If you don’t, you are buying on the spot market, paying 10%, 20%, 30% or more than expected for transport, eroding your margins, and possibly even losing on every delivery to your customers if you are working on thin margins to a competitive marketplace. You can either try to pass the costs on, and risk angry customers, or try to ride it out.

The non-obvious situation is when prices drop. Suppliers are the first to cry foul when prices increase rapidly but the last to insist on being fair when the drop. When was the last time they voluntarily dropped a fuel surcharge after fuel prices dropped back to the levels they were when they cut the contract to begin with? Never! You will have to spend a lot of time and effort to negotiate prices down to reasonable levels, and even more time tracking prices to benchmarks to know when you need to start those negotiations — this takes resources, and that costs money. This is a situation where you’re damned if prices rise and you’re damned if prices fall. It’s damnation all around.

And that’s just the short term damnation. If prices drop too much, the first thing the producers are going to do is pump less oil, reduce production, and wait until demand nears (and maybe even exceeds) supply, so that prices will start to rise again. In other words, as soon as you manage to successfully negotiate the price reduction, you’re only a few months away from the supplier coming back with a new surcharge request. The pendulum always swings and knocks you in the head upon every return.

One Hundred and Forty Five Years Ago Today

One of the earliest US monopolies, as ruled by the US Supreme Court in 1911 under the Sherman Antitrust Act of 1890, was formed.

Until its dissolution into 33 smaller companies, Standard Oil, formed by John D. Rockefeller, was the largest oil refineries in the world. By 1890, it controlled 88% of the refined oil flows in the U.S. The company, which almost single-handedly innovated the business trust, mastered horizontal and vertical integration, streamlined production and logistics, lowered costs, and consistently undercut competitors. This alone is not a bad thing, as all supply chains should strive for this, but, as noted by the US Department of Justice, Standard Oil offered

Rebates, preferences, and other discriminatory practices in favor of the combination by railroad companies; restraint and monopolization by control of pipe lines, and unfair practices against competing pipe lines; contracts with competitors in restraint of trade; unfair methods of competition, such as local price cutting at the points where necessary to suppress competition; [and] espionage of the business of competitors, the operation of bogus independent companies, and payment of rebates on oil, with the like intent.”

and did what they could to force the competition out of business. This is monopolistic, illegal under the Sherman Anti-trust act, and, to be blunt, unfair. If your processes are efficient enough, your products good enough, and your costs low enough, the public will choose you on their own — there is no need for discriminatory practices or a refusal to work with suppliers that will also work with your competition. Plus, as some of us know all too well, some customers aren’t profitable and monopolies get stuck with those problem customers, but lean, mean, supply-chain machines don’t.

Standard Oil is a good business case to keep in the back of your mind. They did a lot right, and a lot wrong. Take the good, and leave the bad, and your business — and supply chain — might be better for it.