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Buylines
Oil Futures
Where Do We Go from Here?
By Michael Hlinka
It’s no secret that the price of oil has been very volatile in the past year with a strong upward bias. Some analysts think that this is only a temporary condition and that it will settle back down to the thirty dollar a barrel range in the near future. I’m not quite as optimistic. I believe that the facts suggest that the era of cheap oil is behind us and the world economy will have to get accustomed to oil increasing in price at a rate that far exceeds general inflation.
I am not a doomsdayer who frets that the globe will run out of oil any day now. But objective evidence seems to point to the reality that Middle Eastern production has peaked. We’ve seen this before. In 1956, American geologist Marion King Hubbard predicted that the same thing would happen in mainland America in 1972. Hubbard was a laughingstock… until history proved him correct! Similarly, OPEC’s inability to keep oil in the US$22 to $28 range it established several years ago indicates that it is pumping all that it can.
There’s still lots of oil there. According to OPEC, Middle Eastern countries account for 65 per cent of the world’s proven reserves. (Of course, this assertion in itself is tricky as Shell’s recent over-statement of 4.5 billion barrels attests.) Regardless, it is increasingly difficult and expensive to get at it! It’s reported that the Saudis are pumping 7,000,000 gallons of seawater daily to keep the Ghawar oil reservoir’s pressure sufficiently high to keep the black gold flowing. They’re just not making any more of it… even as it becomes costlier to access.
Of course, the price of anything must be understood in the context of the interplay of supply and demand. Over the past twenty years, world consumption has grown at an annualized rate of 1.4 per cent. But this disguises regional disparities. Use in Asia and the Pacific has more than doubled and if ChinaÂ’s per capita consumption were to be only one-third of AmericaÂ’s, world demand would skyrocket by 33 per cent. And that kind of convergence is less a question of “if” than “when.”
What does all of this mean? A lot of things. More expensive oil requires that business will have to become more and more energy conscious. In long-term strategic planning, it strikes me as naive to project that we’ll ever enjoy the prices we have in the past generation. Because of the political instability in the Middle East, contingency planning for an oil shock should be de rigueur.
My guess is that within ten years oil will be over US$100 a barrel and we’ll be nostalgic for the “good old days” of forty bucks.
Michael Hlinka provides daily business commentary to CBC Radio One and a bi-weekly column that is syndicated across the CBC Network, in addition to instructing in financial planning courses.
MasterCard, Ariba Say EIPP Growing
According to a survey conducted by MasterCard and e-procurement specialist Ariba at AribaÂ’s LIVE event in May, large enterprises are increasingly moving towards electronic invoice presentment and payment (EIPP). Noting that 80 per cent of all B2B transactions are still being completed by paper, the 105 survey responses indicated that cost and time savings are seen as the main benefits of EIPP adoption.
The “B2B Spend Management Survey” found that two out of every three companies with annual revenues exceeding US$500 million already use some form of EIPP system to streamline their financial management processes. The survey defined EIPP as covering the kinds of systems that enable either EDI or non-EDI electronic invoice receipt or presentment, or the ability to accept or make electronic payments.
“Although paper cheques continue to be the dominant payment method for B2B transactions today, the opportunity for electronic payments to displace paper is enormous,” said Alenka Grealish, an analyst at research firm Celent Communications. “Of the estimated 9.58 billion B2B transactions that will be completed in 2004, 7.63 billion, or 80 per cent, will be done with cheques. However, we believe that electronic B2B payments will grow from 20 per cent today to almost 50 per cent by 2010.”
The survey reflects the views of purchasing professionals in a wide variety of industry segments, including financial services, manufacturing, and retailing. Among the significant findings:
• 66 per cent of respondents now use some form of EIPP (that includes both EDI and non-EDI);
• 62 per cent rely on such technology to make electronic payments to suppliers; and
• 35 per cent use the technology to receive payments from customers.
Fifty-one per cent of the respondents cited reduced processing time and resulting lower costs as the primary benefits of using EIPP. According to an April 2003 Gartner research report, “The Big Payoff of Web Billing and Online Customer Service,” by Avivah Litan, vice president and research director, a typical business biller could save US$2.7 million a year if all business bills were delivered over the Web. Others have shaved the costs of processing and delivering paper invoices to an average of US$5 and even as low as US$2, according to Gartner.
Despite the growing utilization and popularity of EIPP, barriers to its adoption still persist, say Ariba and MasterCard. Respondents cited cost (25 per cent), complexity (22 per cent) and aversion to making changes to their IT systems (19 per cent) as the top reasons for not deploying an EIPP system.
However, 69 per cent of respondents whose companies currently do not have EIPP systems reported plans for a future deployment; 48 per cent of these are scheduled for next year and a further 32 per cent are planned for the next one to two years.
“Purchasing professionals from large companies in virtually every industry recognize just how inefficient paper-based and manual processes are for their business,” says Phil Philliou, vice president, e-Business and Emerging Technologies, MasterCard International. “The majority have seen first-hand that EIPP saves their companies time and money and has a positive impact on bottom line performance. We believe that’s why eight out of 10 respondents from companies that don’t currently have EIPP are planning to implement it within the next two years.”
Free copies of the survey report are available by e-mailing eB2B@mastercard.com. For more information go to www.mastercardinternational. com or www.ariba.com. For similar research recently conducted in Canada, see our report on Visa Canada’s “How Business Buys” study in the July/August issue.
Supply-Chain Council Announces 04/05 Strategic Plan
The Supply-Chain Council (SCC) SCORboard has approved its Strategic Plan for 2004-2005. The plan identifies four strategic goals that are intended to increase the profile of the SCC and its Supply-Chain Operations-Reference-model (SCOR). The formation of a Strategy Committee composed of SCORboard members will be responsible for developing and implementing the plan.
The SCC wants to ensure that SCOR is recognized as the global cross-industry/cross-functional process model for the discipline of supply chain management. Expanding the scope of the model to include the Customer-Chain Operations Reference-model (CCOR) and Design-Chain Operations Reference-model (DCOR) as well as delivering SCOR Version 7.0 are objectives defined in the plan. A collaborative agreement with EAN International will also be pursued.
Giving SCC members around the world easy access to SCOR and other SCC services is another goal. As part of this initiative a Supply-Chain Council-Greater China Chapter (SCC-GC) is being formed and SCOR will be translated into several foreign languages.
Membership growth is another strategic goal, and covers the implementation of SCOR Advisor and Vendor Certification programs. The SCC says that it plan to more aggressively market programs that result in improved member retention and growth.
The fourth major goal is to establish a governance and operating structure to support the SCC in achieving its strategic goals worldwide.
The SCORboard is the governing body of the SCC. Its members are elected by the voting membership with one half of the seats coming open each year. The board represents all membership types including practitioners, consultants, enabling technology vendors, non-profits, government organizations, and educational institutions.
The SCOR process reference model helps companies transform their supply chains by enabling them to map their supply chain processes, determining where weak links exist, employing best practices, and measuring performance against industry benchmarks. Consisting of several increasingly detailed layers, SCOR allows companies to examine their supply chain processes and their relationships between partners, suppliers and customers. The SCC says that companies using SCOR have seen dramatic ROI and savings due to increased supply chain efficiency.
SCC members include Fortune 500 companies, consulting firms, computer systems and solutions providers and educational institutions. A copy of the strategic plan can be obtained at www.supply-chain.org/slides/StrategicPlan.pdf.
WEEE – Ain’t We Got Fun?
By Samuel Tulip
The Waste Electrical & Electronic Equipment (WEEE) Directive became national law across the EU member states in August, although in the UK and most other countries the necessary regulations are not yet in place and there is then a frighteningly short timetable for implementation. The industry is expected to set up and run a National Clearing House (NCH - of which more later) under a contract to be let by government, possibly by competitive tender. This is supposed to be in a position to collect data by January 2005, and the whole system is to be operational by August 2005.
Although the WEEE Directive is an essentially simple piece of legislation, there will be a very fine line between a practical and affordable scheme that will make a significant difference to the amount of electrical waste being dumped to landfill, and an expensive, bureaucratic and ineffective failure.
The Directive’s aims are simple enough: encourage reuse, recycling and recovery, save on scarce landfill resources, and cut the amount of interesting chemicals, from heavy metals to polybrominated flame retardants, gently leaching into the environment. Like the existing Packaging Waste regime, the rules adopt the ‘producer pays’ principle and the main job of the NCH will be to devise and run a scheme whereby manufacturers finance the bulk of the collection, treatment, recycling and recovery activities, based on market share, even though retailers and distributors will often be the first point of contact for the take-back of old equipment. Producers’ liabilities will be based on market share, and the NCH will have to devise a comprehensive reporting system whereby manufacturers can prove that they have collected and treated their quota, or more likely financed collection and treatment through some group compliance scheme. Domestic users must be able to put WEEE into the recovery stream free of charge: therefore retailers are obliged to offer free in-store take-back of WEEE where there is a like-for-like sale (the Directive applies equally to distance sellers, although how that will work out in practice is less than obvious).
There are some hefty IT implications in all this. (An added complexity for producers is that because each EU country will have its own way of complying with the Directive, firms supplying more than one market may have to deal with several radically different approaches). But if the IT is problematic, the physical logistics are equally so. Few retailers have the space or facilities (or planning permission) for the long-term storage of waste, so this will have to be cleared in uneconomic penny packets. There is not much obvious scope for back-loading. Collection of waste goods from households by firms delivering replacement items is superficially attractive, but creates obvious operating difficulties in the multi-drop situation – how do you reach Mrs Brown’s new TV when the back of the van is taken up by Mrs Jones’ greasy old electric cooker? The siting of collection facilities, and indeed of treatment/recycling plants, of which there are certainly too few in most European countries, will inevitably be governed more by the NIMBY (‘not in my back yard’) principle than by the requirements of efficient transportation.
All this will add cost – the UK government estimates additional annual costs to business in the UK at anywhere between £190m and £390m to hit the target of 4kg of WEEE recovered per head per year.
Although the NCH should ensure that manufacturers pick up their share of direct costs, it is hard to see where small retailers and distributors are going to recover the additional burden of administration and IT, not to mention physical collection and storage. No doubt the Tescos and Wal-Marts will successfully pass these costs back to the manufacturers in supply negotiations: not many others will manage that. Curiously, it is explicitly illegal to advertise how much (or how little) it costs to recycle a product.
The lawyers may have fun in other ways. Defining a ‘like for like’ sale could be challenging, given the infinitesimal product life of most electronics. The rules cover almost any piece of electrical equipment, apart from large fixed machine tools and filament lightbulbs, but the key word is “equipment.” So it is argued that a spare computer hard drive isn’t covered – it’s a spare part, not a piece of kit – but an extra hard drive as a peripheral device would be covered. And for a really fun conversational gambit over an after-office drink, some of the finest minds in the country are debating the status of novelty greeting cards – the ones that play an irritating jingle when they’re opened. The case will hinge, Your Honour, on whether the little electronic gizmo is ‘essential to the function’ of the greetings card.
ItÂ’s a tough one, but such are the priorities of the modern European economy.
Samuel Tulip is a U.K.-based journalist who reports on the European Union.
Nosiness Pays
According to new research from Aberdeen Group, “nosy buyers are the best performers.” In a research perspective issued in August, Aberdeen says that two recent surveys showed that the more closely retailers and manufacturers monitor “supplier events” – raw material delivery, transit of goods from one shipment mode to another, customs clearance, etc. – the more likely they are to enjoy supply chain benefits such as decreased lead times, increased perfect order rates and reduced data errors.
But that vision remains very much an ideal, according to authors Beth Enslow and Paula Rosenblum. “Most manufacturers and retailers are lagging far behind best-in-class performance,” they say.
Among the steps they advocate for companies who want to improve their monitoring of supplier events are the following:
• identify key supplier events where glitches can be most easily corrected;
• monitor advance shipping notice creation and make sure ASNs match purchase orders;
• deploy an improvement program for data quality; and
• speed data flow and improve supply chain reaction time.
The report is titled “Be Nosy with Your Suppliers If You Want to Be Best in Class.” More at www.aberdeen.com. b2b
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