Predicting the Unpredictable
If you work in supply chain management, you understand the importance of predictive analytics. Predictive analytics may help predict demand, price, and maintenance needed on future products. But what about when the unpredictable happens, say a war, natural disaster, or act of God? To find the answer, let’s discuss supply chain management further.
What is supply chain management? When you are talking about supply chain management, you are referring to the range of activities from procurement to customer delivery. Although many use “Procurement and Supply Chain” interchangeably, they are different. How? From a high level perspective, procurement is the process of acquiring the goods a company needs. Supply chain management, however, is the extensive infrastructure needed to get you those goods.
To describe supply chain management in more detail, it is the active management of supply chain activities to maximize customer value and achieve a sustainable competitive advantage. It represents a conscious effort by the supply chain firms to develop and run supply chains in the most effective & efficient ways possible. In other words, a good supply chain means that quality, delivery, customer satisfaction, and profits are all maximized.
The Unpredictable Effects
Companies may use the help of predictive analytics to set prices for goods and services based on historical data and forecasted demand. However, not all things can be predicted accurately and all predication’s have some degree of risk associated with the prediction. Some would describe the COVID-19 pandemic as a “Black Swan Event”. A black swan is an unpredictable event that is beyond what is normally expected of a situation and potentially may have severe consequences. Black swan events are characterized by their extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight. Reliance on standard forecasting tools can both fail to predict and potentially increase vulnerability to black swans by propagating risk and offering false security.
When the pandemic hit the United States, the economy was hit like never before. Industries, including oil and gas, suffered from a sudden lack of demand. US demand for energy consumption fell to its lowest level in more than 30 years (Graph 1). The demand for crude oil in turn dropped, which caused a decrease in prices. As an example, the reduction in demand in turn affected how crude oil was being transported from Canada. A disruption in the supply chain may set off a chain reaction for better or worse.
A Perspective on Transporting Canadian Crude
Heavy Crude (WCS) coming out of landlocked Alberta does not have the competitive edge that coastal cities like Houston or Baltimore have. This is primarily driven by the quality of the Canadian crude (WCS) relative to U.S. WTI, as well as the transportation component to move it to the U.S. either via pipeline or rail. There are cost differentials associated with each mode of transportation.
When the pandemic hit, consumption of energy dropped to historic levels. There was no longer a need for Canada to be exporting the amount of crude oil it had in the past. As a result, falling Canadian crude production reduced the amount of oil needing to be transported via trains or pipelines. Prior to the pandemic, there had been no spare pipeline capacity and thus as much as 400,000 barrels per day was being exported via rail in January, 2020. By April 2020, crude by rail exports fell 55% to about 156,000 barrels per day. Several companies are now stuck with investments in rail that they will not need until demand for exports from Canada increase once again.
The Bottom Line
Disruption in the supply chain can happen from natural disasters, pandemics, product problems, cyber-attacks, and price fluctuations. Companies and industries have tried to combat the unpredictable in a few ways. Some of these include:
- Building up inventory.
- Identifying backup suppliers.
- Diversifying the supply base.
- Adopting risk evaluation tools.
Although not failure proof, each of these is an option to try and balance out the negative effects of what can happen during a supply chain disruption.
A good supply chain management system is essential to any company or industry. Disruptions in the supply chain, including natural disasters and pandemics, can have negative effects lasting decades after the fact. Some companies invest in measures to prevent the negative effects of these disruptions, including adopting risk evaluation tools. With the pandemic continuing for an unknown period of time, it has yet to be revealed which strategies and tactics will allow companies to be successful in their respective industries going forward.
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