Last week, I spoke at the Department of Energy’s Industry to Grid (I2G) Summit, a pre-meeting of the ARC World Industrial Forum. For me, it felt like something of a homecoming. Several careers ago, my biggest customers were manufacturers. In the late 70’s, popular imagination held US manufacturing to be dead, poorly managed and low quality. In a famous Newsweek article, a celebrity athlete boasted of a summer in the UAW, during which he deliberately added rattles to pass the time. As often happens, a renaissance had begun some years before public perception hit bottom.
As a young programmer, I was working with companies trying to improve quality while keeping costs under control. With double digit inflation the norm, the US was beginning its great inventory squeeze. A passing familiarity with the Japanese Kanban system could take you far in industrial consulting. JIT inventory was being supplemented by JIT production. In Toronto, at the world APICS conference, we split MRP (Materials Requirements Planning) into MRP1 and the new MRP2. MRP2 reached beyond the factory floor to incorporate sales budgeting and HR planning. A year later, I first saw AutoCAD, astonishing because it ran on a PC.
Those were the roots of today’s integrated global supply chain management. Eventually MRP2 came to cover all facets of a company, and was re-christened ERP. Time-phased resource acquisition is a critical component of today’s commerce. Executives in every sector now are evaluated based on ratios determined by how lean their inventory is.
Even when it makes no sense, we apply these management principles today. For example, Coal plants used to pride themselves on weeks or even months of supply on hand. Coal is easy to store, and it does not go bad. Still, many utilities today run on same day coal deliveries; any interruption of the supply chain, of the constant stream of trains from mountain to generator, would take a significant portion of US electrical supply off line.
This last week, we saw the effects of a similar lean supply chain in natural gas. The cold snap increased demand and reduced supply, causing affecting electricity supplies in Texas, New Mexico, Colorado, and California. Lean supply chains are brittle. Through ERP, we have made are electricity supplies brittle as well.
Current plans are that we introduce intermittent electricity sources, i.e., solar and wind and tides, throughout the grid. Today, we backstop these with the same natural gas whose supply chain we manage so tightly. Lean supply chains and thin markets demand predictability. When smart grids fail, lean supply chains can make then fail badly, and the effects will be regional.
Pulling this back to my early days in industry, APICS propagated the essential equations for to compute supply chain decisions. In those days before PowerPoint, I used to be able to write these equations, in the style of a grammar school teacher, on the board, behind my back, while facing my clients. Many of them depended upon another, the Cost of Stock-out (COS). The simplest COS was solely lost sales per day. The better ones started with opportunity costs and factory reconfiguration and extended to lost reputation and permanent loss of customers. It is easy to undervalue the COS.
Public Utility Commissions have made affordability their top concern for decades. Utility executives strive to make their financial ratios look like other industries. Volatile energy supplies will increase the likelihood of stock-outs, i.e., shortages of basic supplies. Lean supply chains and renewable energy create a dangerous mix.
The industrial decision-makers in the audience wanted a quick take-away on what smart energy means for them. Many of them generate their own power, and are looking for better ways to bring their excess to market. Others are just beginning to consider the effects volatile prices that swing every day. To me, it was easy, they are already the thought leaders in this area. Industry gave us MRP1 which grew into MRP2. MRP3 is ERP, the dynamic management of resource supply and use that runs our global supply chains and businesses of all kinds. For the end node, smart energy is MRP4, accounting for volatility of supply, and factoring it directly into scheduling on the factory floor.