For companies to be profitable, demand and supply must be closely aligned. When they are not, inefficiencies, excess inventory, missed shipments and margin erosion follow. In this Supply Chain Byte, Lisa Anderson explains why aligning demand and supply is key to an efficient supply chain—and why the most effective way to achieve it is through a disciplined SIOP (Sales Inventory Operations Planning) process.
A timely example of the critical importance of maintaining alignment between demand and supply is represented by the California fuel markets. The end-to-end supply chain for fuel breaks down into several steps: getting crude oil from the ground or importing it, transporting crude oil to refineries (via pipeline, trucks, rail) and then refining the oil according to the unique California formulation, requiring specific formulation and methods. Since the mid 80’s, the market has changed dramatically. California used to produce crude oil at 1.1-1.2 million barrels per day (bpd) at its peak. Over the years, production has been replaced with imports (keeping demand and supply in alignment), and so current production is around 300-350,000 bpd. Thus, the crude oil link in the supply chain remains intact from a production standpoint.
Transport is creating a significant issue for the Bay Area currently. The San Pablo Bay pipeline that takes crude oil from Central California to the Bay Area has ceased operations as of mid-December. The CEO said that they had been losing $2million per month for many months and won’t be able to continue operations beyond February unless something changes. As imports replaced crude oil, the demand for the use of the pipeline is not enough to cover the fixed cost base. Demand and supply are out of alignment. This puts the California fuel markets in a conundrum. Since pipelines deliver oil at scale at the least cost and in the most environmentally friendly manner, there is no way to replace transport at scale efficiently and supporting environmental objectives.
In addition, the third tier of the end-to-end supply chain, the refineries, are in serious trouble. Due to increased regulatory burdens and high costs, refineries are deciding they cannot afford to sustain operations. At its peak, California had 40 refineries. In December, Phillips 66 closed a Southern California refinery, bringing the total to 7 refineries. In addition, the Valero refinery in the Bay Area plans to shut down by April 2026. With California’s unique formulation, it is not simple to replace with additional refineries in other states. If you do, you must transport the fuel to California as well.
Prior to these shutdowns, California is dependent on 80% imports of which 63% is foreign based, largely from Asia. Thus, geopolitical risks, transport costs and environmental impacts run high. Demand and supply are quickly going out of whack. Thus, although prices of gas are significantly lower in most states as oil and gas production increased in the U.S., the prices in California and the states dependent on California’s energy supply chain (Nevada, Arizona) are increasing. However, increasing prices will not reduce demand by a significant amount as manufacturers, logistics organizations, transport (including the ports and surrounding infrastructure), and the population’s (electricity and fuel) requirements are remaining intact. There was a dip during COVID, but requirements have returned to normal since the recovery. In addition, artificial intelligence is escalating the needs for energy.
Proactive, forward-looking planning is a must! SIOP provides a predictive, resilient, and adaptive view of demand and provides a heads up for required changes in supply. For example, the SIOP process will highlight the need to increase or decrease capacity/ staffing, reallocate production throughout the plant network, adjust outsourcing requirements, evaluate make vs buy alternatives, assess production alternatives, source additional suppliers, and repositioning of inventory. In essence, rolling out a SIOP process will alert executives to changing requirements, potential margin opportunities, and maximize service, operational performance and cash flow. To learn more about how to rollout a successful SIOP process, download our complimentary eBook, SIOP: Creating Predictable Revenue and EBITDA Growth.
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Maximizing Performance and Margins with SIOP