Drilling deep into energy efficiency

Rising prices of--well, everything--are causing food processors and distributors to take a long, hard look at their operations:

Since 2007, Papa John's has been able to reduce inventory levels by 17% and decrease the amount of outside warehouse space it needs to rent by 33%. "The more the costs go up, the more important it becomes," Ms. Larner says.

This isn't the first time that businesses have had to take a closer look at their supply chains. In the late 1990s and early 2000s, many companies in the food industry bought large software systems from the likes of Oracle Corp., SAP AG, i2 Technologies Inc, and Ariba Inc., as well as more-targeted systems from smaller vendors, to give them better insight into inventory levels and demand.

But during the last few years, "many businesses said, 'We've squeezed the supply chain as hard as we can,' " says Bill Bishop, chairman of Willard Bishop, a consulting firm that advises food companies. Instead of investing in new supply-chain systems, businesses are using the technologies they bought earlier in the decade to look for further improvements.

Industry analysts expect that this will soon change. They predict that rising commodity costs will make it easier to justify buying new software that can help plan manufacturing cycles and optimize delivery routes.

AMR Research forecasts that spending on supply-chain software will rise to $3.9 billion by 2011 from $2.7 billion in 2007. Technology-research firm Gartner Inc. predicts that the subset of this software focused on transportation management will expand from around $500 million in 2007 to nearly $800 million by 2011.

Few businesses have managed to get new technology in place in order to deal with the current commodity-price crisis. So they are taking the same systems they have bought and enhanced since the late 1990s and early 2000s, and rethinking how they operate with them.

That is the case at Hannaford Bros. Co., the supermarket chain that is a subsidiary of Belgium-based Delhaize Group. Hannaford stores used to receive two shipments a day, a load of fresh groceries such as dairy products and meat first thing in the morning, and a load of nonperishable items like canned soup and boxed cereal at night. The split delivery made it easier for store managers to process fresh items before the store opened and let them restock the rest of the store after closing.

Rising fuel prices has made the grocer "reconsider all the rules," says Gerry Greenleaf, the company's vice president of distribution.

Hannaford used its transportation-management system and other planning software to analyze how much the split-delivery schedule cost the company and to see if there was a more cost-effective way to make deliveries. Earlier this year, Hannaford began combining the two deliveries for some of its 160 stores. It is less efficient for the store managers, but the added expense at the stores is offset by the savings on fuel, which the company says will be between $500,000 and $1.5 million chainwide this year.

Hannaford has also made other changes with the aid of supply-chain technology, such as a system that helps drivers maximize fuel efficiency that is says should save the company $500,000 this year.

Nestlé USA Inc., a subsidiary of Nestlé SA, is also changing established practices. Previously, it was cheaper for the food company to purposely overfill some bottled beverages than to spend money on the machinery, computer systems and staffing necessary to ensure that a 16-ounce bottle was filled precisely. Rising sugar, cocoa, dairy, and other food prices have convinced the company to "wage a war on waste" and make many of those investments, says Jeff Kurtenbach, Nestlé USA's vice president of supply chain.

This is what OPEC has to fear--these kinds of improvements last. If there's a dip in the global demand for oil, prices won't just recede; they'll crash.

This is why Saudi is trying to ease things off a bit by adding an extra 200,000 barrels per day to the mix. But in a world that's pumping about 85 million barrels per day (bpd), this is not super-helpful--and it's not clear Saudi can pump much more.

The good news is that we have information technology that people in the 1975 couldn't even have dreamt of, which is grinding away at the problem of making our economy incrementally more efficient. If the price of oil does come down, we'll emerge from this substantially more productive--good for us, good for our descendants, good for the planet.

Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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