In my previous blog, I explored how we socialize, learn, and explore data, and how that will impact natural resources companies in the future. I also identified the following five effects of modern technology trends on individuals:
- How we socialize and what we want to be associated with
- How we learn and explore
- What we buy and how we buy
- How we do things
- Who and what we trust
I pointed out that natural resources companies are not very good at comprehending the second-, third-, and fourth-order effects of these changes in individuals’ lives nor how they might impact the resources industry. In this blog, I will explore how the resources industry will be affected by how we buy and what we buy in the future.
1. The physical supply chain as we know it will be digitized, and machines will do their own procurement.
Modern platforms like eBay, Alibaba, and Amazon have taught us that we can order almost anything from anywhere in less than five clicks. Furthermore, we expect delivery in a matter of days, in some cases in only hours. Smart fridges, smart coffee machines, and smart vehicles are taking that a step further, to the point that things will intelligently and automatically buy what we need.
As consumer insights become better at understanding our buying behavior, it is becoming possible for retail companies to predict what we will be ordering even before we know it.
One of natural resource companies’ most complex systems is the maintenance, repair, and operations (MRO) supply system. Often characterized by large inventories, high logistics costs, ineffective supply chain visibility, and long payment terms, it remains a genuine problem. Natural resources companies, in almost all cases, rely on a replenishment model to maintain inventory. The manufacturing industry moved past that years ago and pioneered flow systems to allow inventory to arrive just in time, such that they have almost zero inventory. Industry 4.0 is driving that one step further by enabling “manufacture to order,” or lot sizes of one.
This basically means that when a consumer clicks “order,” manufacturing begins. This is broadly known as demand-driven manufacturing, and some of the major benefits include almost zero finished goods inventory, much higher levels of flexibility, and far higher customer satisfaction. Harley Davidson’s York, Pennsylvania, facility adopted a new digital supply chain that shortened the planning cycle from “a 21-day fixed plan to a six-hour horizon.” It also increased flexibility and real-time scheduling capabilities to meet new, individualized customer orders. At the same time, it reduced costs by 7%, increased employee productivity by 2.4%, and improved net margin by 19%.
The world of manufacturing and Industry 4.0 has already started to move one step further to what we call distributed manufacturing. This means products are now produced to order at the point of sale (imagine factories in the shops). For example, some shoe manufacturers can now produce the perfect shoe just a couple of hours after you have had a quick fit in the store and while you go about your shopping. The technologies making this possible are 3D printing and high-speed autonomous robotic manufacturing.
The world is heading to a consumption-based economy where the things we use every day will have very short lifecycles at a price point that allows us to upgrade to the latest devices in very short amounts of time. This is becoming necessary to keep pace with the rate of change in technology. Advances in recycling will make this feasible by reducing the cost of raw material. Companies like Apple have developed a robot that can dismantle 200 devices in an hour and make them ready for recycling.
In the future, I see a world where mining equipment becomes smaller and more mobile, thanks to autonomy, and ultimately disposable. Machines will be made to be recycled, and rather than repairing them, they will simply be dismantled by robots that can repair them onsite using a combination of 3D printing and smart manufacturing. The machines will know automatically when it is time for them to be repaired, and they will digitally check themselves into the smart repair center.
2. Commodities will be traded based on spot contracts, rather than long-term contracts, with a high variability in product quality.
Modern stock traders rely on high-tech computers to punch through trades in microseconds. In fact, speed has become so important that some trading firms have relocated their offices right next to the exchanges to gain an advantage by eliminating microsecond delays caused by network latency. As the markets for commodities like iron ore, coal, and gas are becoming more sophisticated, the metrics of how they are traded is changing. For example, the spread (the price difference between low grade and high grade) on iron ore means that producers manufacturing higher-quality grades will get a significant premium over those that don’t. This is being driven by a “green” movement in countries like China that want to reduce the amount of coking coal required to smelt iron ore.
Another major contributing factor is the changing energy and commodity mix. As clean energy begins to accelerate and consumers begin to demand that power is produced from cleaner, renewable sources, we are seeing a shift in demand for commodities like coal and gas to clean energy produced by wind and solar. Companies that have traditionally bought these power commodities on long-term contracts (effectively hedging against long-term demand growth) will need to consider hedging to the short side to anticipate weaker demand.
This normally implies they will be seeking shorter-term contracts. It’s not only power-based commodities that are impacted. Take, for example, the impact of electric cars, which are expected to require less steel and more copper. The effect would be weakening demand for steel. Likewise, the recycling industry, also driven by consumer sentiment, will begin to change the supply balance. The U.S., for example, obtains 70% of its steel from recycled steel, while in China that figure is only 11%. If China were suddenly to focus on recycling, it would have a huge effect on the amount of iron ore required.
In the future, natural resource companies will have to contend with highly volatile markets driven by consumer demand. The spread in price based on grade quality for some commodities (like iron ore) means they will need to get much smarter – not only with how they trade, but also with how they extract these minerals from natural reserves that are becoming less consistent and highly variable. This again will drive the industry to small-scale, autonomous mining equipment that can be more selective in what it mines.
At SAP, we are actively developing new technologies, such as SAP Leonardo, that help natural resource companies manage their supply chain, trade commodities, and deliver smart manufacturing.