10. Mitigating Supply-Driven Imbalance

Gold.

Just the sound of the word is enough to captivate us with grandiose fantasies of power and wealth. Gold’s rare and unique properties have made it one of mankind’s most desired treasures throughout our history. People have hoarded it, traded it, killed for it—and some scientists even found an efficient way to capture more of it. In late 1890s Colorado Springs, a fledgling city nestled in the western Rocky Mountains near the Cripple Creek gold fields, a shrewd businessman named Spencer Penrose formed a partnership with an innovative metallurgist named Charles M. MacNeill. The problem faced by these partners was how to extract a higher percentage of gold from the very hard Cripple Creek ore. Bankrolled by Penrose, MacNeill pioneered new milling methods to extract gold and copper from low-grade ores and, in so doing, paved a path to greater personal wealth and riches. Together with their partner, Charles L. Tutt Sr., they became three of Colorado’s leading industrialists (and among its first millionaires), eventually forming the Utah Copper Company. This company later became Kennecott Utah Copper LLC, one of the 20th century’s largest mining companies, which is now a part of Rio Tinto.¹ Besides fame and fortune, why should this type of partnership, and subsequent innovation, pique our interest? If you listen carefully, you will find that Penrose, MacNeill, and Tutt tell the story of how natural resource scarcity can be triumphantly mitigated with the right kind of innovative thinking.²

¹ Rio Tinto, “Our History,” 2012. www.kennecott.com/our-history.

² Sprague, Marshall. (1953). Money Mountain: The Story of Cripple Creek Gold. Lincoln, Nebraska: University of Nebraska Press.

Business history books are full of stories like this, and they often contain similar instances of science and technology put to perfect use in the right business environment, thereby creating a dominant competitive advantage. Today, businesses are confronting similar metal scarcity challenges yet leveraging innovation in addressing them such that competitive advantage is gained. Honda Motors recently announced that it would partner with Japanese Metals & Chemicals, a firm that developed an improved metal extraction method. Doing so will help Honda recycle and reuse rare-earth metals in its automobile battery supply chain.³ Such a process is dramatically different from the one-way production course Honda followed before. Much like the Penrose, MacNeill, and Tutt example, this story illustrates another successful combination of essential business leadership and scientific innovation.

³ “Honda to reuse rare earth metals contained in used parts,” Honda News Releases. 17 April, 2012.

To understand Honda’s motivation and what it means for the automobile industry, we need to look at how rare-earth metals are used in hybrid automobiles. Experts estimate that by 2008 over 2 million nickel-metal hydride batteries were operating in these vehicles. The total worldwide sales of hybrid vehicles for fiscal 2010 were estimated at just over 900,000, of which 154,000 vehicles were from Honda’s leading models.⁴ As of 2012, Honda had sold over 800,000 hybrids alone; the Fit Hybrid, Freed Hybrid, and Insight Exclusive among them. These cars’ nickel-metal hydride batteries use an alloy of the rare-earth metals lanthanum, cerium, neodymium, and praseodymium. These metals have also been used for many years in certain kinds of lighting and flint igniters. Together they bring unique physical traits to a battery’s design, such as maintaining magnetism at high temperature, but unfortunately they are not very easy to extract from the Earth’s geological deposits. Some geologists admit that rare-earth metals are not actually as “rare” as their name suggests, because they are found in many common ore deposits around the world. However, of those deposits, rare-earth metals are seldom found in ore concentrations higher than 2% to 3%, and they are not always in mineable form. According to a 2010 Reuters article that details the process that a rare-earth metal undergoes from its reserve to its final product (in this case, wind turbines), it can take anywhere from 6 to 86 tons of ore to extract 1 ton of rare-earth metal.⁵

⁴ Schreffler, Roger. (2011). “Hybrid, EV Sales Lag Forecasts, But Plenty More Models on Way.” http://wardsauto.com/ar/hybrid_ev_lag_111129.

⁵ Gordon, Julie. (14 November 2010). “From Mine to Wind Turbine: The Rare Earth Cycle.” Reuters. http://in.reuters.com/article/2010/11/14/idINIndia-52767220101114.

Because of the toll taken on their host minerals’ geological deposits, these battery metals are prime recycling candidates. During the early hybrid production phases, the technology needed to implement a mass recycling effort had not been available. However, in April 2012, Honda announced that its partner had successfully come up with a way to extract the metals from returned batteries. The process extracts up to 80% of them, all the while keeping them as pure as their newly mined and refined counterparts. Honda has seen so much early success with the extraction process that it has decided to capitalize on the breakthrough. It will extend the process to other parts that flow through its returns supply chain to recover additional rare-earth metals.

In many ways, the 17 rare-earth metals are today’s gold and silver comparable to their focus in Colorado and the western United States over a hundred years ago. Many of the 21st century’s most technologically advanced products require some quantity of these increasingly scarce metals. Selecting an approach to mitigate such scarcity and create opportunities for competitive advantage is the focus of the remainder of this chapter. Honda capitalized on a strategic partnership yielding innovation to successfully “recover” a scarce material. But recovery isn’t the only option. We also will look at other firm-level employment and conservation approaches and the need to combine them into strategies that allay the supply-driven imbalances described in Chapter 7, “Implications for Sourcing/Procurement: Natural Resource Scarcity.” In doing so, we will look for ways to both identify and take advantage of the dynamic changes in the status of macro-level natural resource scarcity. The goal is to prepare your firm by suggesting timely strategies that, if implemented now, will put your firm in a much better position to succeed in the future.

⁶ Bell, J.E., C.W. Autry, D.A. Mollenkopf, and L.M. Thornton. “A Natural Resource Scarcity Typology: Theoretical Foundations and Strategic Implications for Supply Chain Management,” Journal of Business Logistics, Vol. 33, No. 2, 158-166.

Avoidance techniques describe the strategic decision to prevent engineers from using a scarce natural resource when designing products, services, or processes. This is especially critical for globally scarce materials as they become more difficult to secure and then utilize in production and manufacturing operations. As scarce supplies’ availability shrinks and costs increase, the firm will realize that the advantages of using a particular raw material have vanished. The materials’ quality, quantity, and cost variability have increased the uncertainty in a firm’s operations, making it difficult to derive value and thereby provide valuable outputs for customers. Therefore, to eliminate excessive cost and variability, forward-thinking companies must attempt to reduce the number of these resources they use in their operations, or even remove the resource from a product’s design. Often the ability to avoid using a scarce material depends on how quickly new technologies develop that can produce identical product functionality with less resource consumption, or how feasible it is to substitute a more common, or less expensive, raw material for the resource.

A recent avoidance approach is illustrated in 3M Corporation’s strategic decision to avoid using oil-based materials in many of its products. According to its 2011 sustainability report, 3M is removing petroleum-based films and fibers from its materials to counter unstable petroleum supply.⁷ In 2012, General Motors and Toyota made a similar decision to avoid using rare-earth-based magnets in many of their automobile battery designs. Instead, they chose to use a specific type of induction motor that does not incorporate rare-earth metals into its design. General Electric is taking similar avoidance approaches with its wind turbines and generators by redesigning them to avoid the use of scarce resources.⁸

⁷ “2011 Sustainability Report.” 3M Corporation. St Paul, MN, 25 June 2011.

⁸ Elmquist, Sonja. (28 September 2011). “Rare earths fall as Toyota develops alternatives: Commodities.” Bloomberg. www.bloomberg.com/news/2011-09-28/rare-earths-fall-as-toyota-develops-alternatives-commodities.html.

Though these decisions seem like the most obvious response to scarcity circumstances, they are not always easy to pull off, and they do have their limitations (for now). According to a 2010 study conducted by Dutch industrial design engineers, the engineering field lacks the necessary scarcity information to make proper design choices.⁹ Design engineers do not always know an intended-for-use material’s current scarcity status. Nor are they always informed of how selecting a particular resource will impact supply chain functions, especially with items that will be produced for many years to come. This study goes on to state that we need to improve our engineering information databases and educate our industrial design engineers so that they can do a better job of employing avoidance and substitution approaches specifically intended to counter resource scarcity. Proactive firms with proper information systems and engineers skilled enough to know how to use them will create a significant competitive advantage as they implement innovative avoidance approaches into their supply chains.

⁹ Kohler, A.R., C. Bakker, and D. Peck. (2010). “Materials Scarcity: A New Agenda For Industrial Engineering.” Knowledge. Collaboration & Learning for Sustainable Innovation ERSCP-EMSU Conference, Delft, The Netherlands, October 25-29, 2010.

A logistics approach to resource scarcity describes purchasing, storing, and transporting resources to a location where they are locally scarce. Chapter 7 mentioned the logistics approach of moving fresh salmon from distant Alaskan supply sources to markets around the world, or of purchasing diamonds from places in Africa and then transporting them to industrial centers in Europe, Asia, and the United States. Logistics approaches to countering scarcity depend on available and economically viable transportation systems.

An example of transportation capability dependence can be seen in the fresh tuna market, where some of the fish is sold to sushi restaurants in Japan. Tuna companies struggled to supply the market in the years prior to 1972 because they lacked the ability to quickly and efficiently transport fresh tuna to the Japanese markets. Their hopes were renewed in that year, when Pan Am airliners brought Tokyo the first Atlantic tuna by air. The supply for Atlantic tuna exploded as Atlantic suppliers rushed to feed the “sushi economy.”¹⁰ Today, nitrogen freezing and frozen-container ships have greatly increased the tuna quantities and have improved the transportation costs involved with shipping to Japanese sushi markets. Worldwide sushi demand has also exploded; it has actually been correlated with an emerging new economy. As countries like Brazil, China, and India have strengthened their respective economies and achieved higher levels of discretionary income, their demand for fatty foods, sushi included, has also risen. Not only does this drive up global demand for a precious supply of tuna, but it also places a bigger burden on firms and global transportation systems to implement logistics approaches that will help transport the tuna to places where it is locally scarce.

¹⁰ Isenberg, Sasha. (2007). The Sushi Economy: Globalization and the Making of a Modern Delicacy. New York: Gotham.

We must always keep in mind that logistics approaches depend on the most efficient and cost-effective energy sources. Today, approximately 96% of the U.S. transportation sector uses some form of fossil fuel for energy.¹¹ As pointed out in Chapters 8 and 9, world populations are demanding more and more of these nonrenewable, organic natural resources, each of which is subject to its own volatility levels in scarcity and pricing. This means that logistics approaches in the future may be limited. Therefore, managers must consider how much of an energy source they need to move available resources from one location to another.

¹¹ The Institute for Energy Research. (2010). www.instituteforenergyresearch.org/wp-content/uploads/2008/05/fossil-transportation-sector.jpg.

A third resource employment approach managers can take is allocation. When a firm realizes that it possesses locally abundant resources that may not necessarily be globally available, it must consider how to use its valuable heterogeneous resources to maximum advantage. Firms can do this by determining how, and when, to ration their available quantities and thereby maximize their long-term profits and competitive advantage. For many decades, economists such as Hotelling¹² have found that the prices and usage rates of today’s finite resources depend on marginal opportunity costs of not having the resource quantities available in the future. It may be unwise for a firm to use up all its scarce resources without considering what those resources will be worth in the future.

¹² Krautkraemer, Jeffery A. (1998). “Non-Renewable Resource Scarcity,” Journal of Economic Literature, Vol. 36, 2065–2107.

Commodity and futures markets hedging strategies can lead a firm to obtain this kind of competitive supply advantage. Southwest Airlines has done this for many years by purchasing future fuel and oil quantities at a lower cost in advance of rising oil prices. Starting in 1999, analysts at Southwest have locked in as much as 70% to 80% of their fuel costs each year using a hedging strategy.¹³ In doing so, the airline earned huge profits throughout the last decade when other airlines suffered from volatile oil markets. This strategy gave Southwest an advantage as it was able to properly ration its low-cost fuel resources, stabilize operational costs, and keep tickets prices down. In doing so, Southwest created value for its customers and paved the way for profits that its competitors simply could not match.

¹³ Pae, Peter. (30 May 2008). “Hedge on Fuel Prices Pays Off.” Los Angeles Times.

Firms often use an allocation approach by speculating which resources will become scarce in the future and “buying up” those resources in anticipation of future demand. Chapter 7 gave examples of waste management and coking coal companies to illustrate resource stockpiling. Toyota provides a more recent example: The Japanese automaker is trying to secure a solid supply of lithium to meet projected future demand. Toyota is one of several companies that use lithium in their hybrid car batteries. Toyota believes this approach represents a more palatable alternative in comparison to the expensive rare-earth metals currently used in many batteries. However, lithium is also a relatively scarce metal and is not readily available in all locations around the world. Since South America has the majority of the world’s lithium reserves, the company has partnered with international exploration companies to secure some of the lithium reserves there. Toyota also has made significant investments in developing Argentinean lithium deposits and hopes that these investments will secure its future needs. Lithium prices have tripled over the past ten years, and the lithium demand percentage from auto manufacturing has risen from 25% to 40% or more.¹⁴ Therefore, by virtue of such allocation strategies, Toyota (like Southwest) could soon find itself in a significantly better financial position than its competitors.

¹⁴ Kumar, Aswin. (2011). “The Lithium Battery Recycling Challenge.” Waste Management World. www.waste-management-world.com.

Sustainment is the fourth and final employment approach for scarce natural resources. Sustainment recognizes that firms should practice sustainability even if their resources are not yet scarce. Using this kind of wise stewardship is a good way of recognizing the dynamic nature of a resource’s status. As European colonists settled North America in the 15th to 19th centuries, the passenger pigeon was one of the healthiest and most widely populated bird species on the continent. It was an abundant food source for pioneers and explorers conquering the new world. In fact, ecologists believe the passenger pigeon was once one of the most populous bird species on the planet. Historical accounts describe how flocks in Ontario and Michigan were actually measured by the number of miles they stretched across the sky!

Unfortunately, settlers needed food, and passenger pigeons were an easy source. Hunters overharvested the birds, and with commercial exploitation of passenger pigeon meat in the 1800s, the once-abundant natural resource was exhausted without regard for the consequences. With no plan to sustain the species’ existence, the passenger pigeon was decimated by the 1890s and officially declared extinct in 1914, when the last captive bird died in the Cincinnati Zoo.¹⁵

¹⁵ “The Passenger Pigeon.” (2012). Smithsonian. www.si.edu/encyclopedia_Si/nmnh/passpig.htm.

Passenger pigeons show us that just because a resource is currently available does not mean it will exist forever, especially if the resource is excluded from firms’ sustainable planning actions. Firms such as International Paper are taking sustainable approaches by replanting more trees each year than they harvest. Metals and mining companies like Alcoa are trying to balance extraction with new discovery methods and more efficient extraction technologies to ensure that the resources they have available today are not gone tomorrow. With responsible sustainment approaches, companies can ensure current access to critical resources without putting future supply in peril.

First, a protection approach is used when we want to conserve environmental amenities that support resource renewability. Companies have a long-term incentive to ensure that they protect air, water, and ground resource bases to guarantee that they are available for future supply chain uses. As mentioned in Chapter 7, brewing and bottling companies like MillerCoors, Coca-Cola, and Pepsico have partnered with firms around the world to track water availability in their supply chains. Additionally, food growers like ConAgra Foods and timber/paper companies like Georgia Pacific—are companies that derive value from the land—and have boundless incentives to keep erosion, global warming, and ground pollution from undermining the ability to regrow grain and timber.

Some leading companies have even gone so far as to take a “zero waste” approach to ensure that ground and soil renewability is not threatened. Burt’s Bees implemented such a policy by sending absolutely no waste to its landfills at all of its operating locations. The company has goals to, by 2020, drastically reduce how much electricity it uses, eliminate all shrink-wrap packaging from its products, and implement waste-to-energy initiatives. Its parent enterprise, the Clorox Company, has adopted similar goals to achieve zero-waste status for some of its major manufacturing facilities.¹⁶ In California, global mining company Rio Tinto PLC rehabilitated its boron mining sites. There it has renewed over 50 mining acres each year, reduced fuel and hazardous-materials usage, and reintroduced native plant species it may have disrupted.¹⁷

¹⁶ “The Clorox Company.” (2012). www.thecloroxcompany.com/corporate-responsibility/planet/our-progress/operations/solid-waste/.

¹⁷ “Mining reclamation success.” Mineral Information Institute. http://www.mii.org/Rec/RioTinto/RioTBorax.html.

In an effort to ensure continuous access to high-quality water sources, 3M worked during 2001 to 2010 to massively reduce how much water it uses in operations. The company also has started water reduction programs in geographic areas classified as “water-stressed” to make more water available for crops, forests, and fisheries. A company already mentioned for its tree-planting program, International Paper, also has set up aggressive goals to protect air quality. In 2011, the EPA awarded International Paper for reducing greenhouse gas emissions by 40%. But IP has even greater goals: By 2020, the company wants to reduce its emissions by another 20% and shrink its pollutants by 10%.¹⁸

¹⁸ “What Matters Most: 2011 Sustainability Report.” International Paper (2012). www.internationalpaper.com/documents/EN/Sustainability/IP_Sustainability_Re.pdf.

Though IP makes it look easy, protecting a resource base as precious as the air we breathe has been difficult for some companies. In 2010, Exxon Mobil actually saw a 3% emissions increase despite spending over $400 million that year on emissions-reducing technologies.¹⁹ Exxon’s efforts to invest in better technology are steps in the right direction, but they may not be enough to overcome the environmentally damaging impacts of the company’s supply chain operations. For firms that depend on renewable resources, transitioning to protection approaches is a logical decision and may result in a more immediate return on investment, because their bottom lines rely on the environment. Other companies in the nonrenewable sectors may find it more difficult to produce a direct and immediate return from a protection approach.

¹⁹ “Mitigating greenhouse gas emissions in our operations.” (2012). ExxonMobil. www.exxonmobil.com/Corporate/safety_climate_action.aspx.

The second conservation approach is recovering resources from products at the end of their life cycle or from the waste streams where they have accumulated. Many firms recycle packaging and other raw materials to improve efficiency and reduce short-term costs by avoiding the use of new materials. However, there is also a longer-term operational incentive for companies to recover, recycle, and reuse products and resources—especially nonrenewable ones—since global scarcity of some important materials appears to be growing. The Earth has a limited quantity of metals such as iridium, palladium, and indium. As we deplete the most accessible geologic deposits, these materials’ primary sources may soon transition from mining to the returns-management portion of the supply chain. Other minerals, such as gallium (used in solar cells, diodes, and window coatings), are “hitchhiker” or “companion” metals obtained only as by-products when zinc or aluminum is extracted from the parent ore. This means that no commercial mining activity primarily obtains hitchhiker metals. Because mining for the primary metals may not produce enough supply to meet the growing demand for hitchhiker metals like gallium, recovery and recycling may be the only way to balance supply with growing demand.

Governments around the world are beginning to recognize the need to improve and increase recovery efforts. In 2009, the Japanese government published its “Strategy for Ensuring Stable Supplies of Rare Metals.” This plan asked companies to recycle scarce metals from their supply chains’ scrap and called for an improved national recycling system. This was followed by $1.2 billion of research and development funding for firms to develop new recycling technologies that mitigate scarcity. The United States and European Union have created similar rare-earth metals strategies. In 2011, the U.S Congress asked the Department of Defense to identify and implement solutions to improve rare-earth metal availability. In April 2012, the United Kingdom issued a “Resource Security Action Plan” to directly confront the rising threat of resource scarcity. According to the plan’s survey, over 80% of UK manufacturing firms’ chief executives believed resource scarcity would impact their 2012 operations. To counter the threat, the government challenged firms to improve product designs and optimize recycling practices. The UK report also lauded the GE approach for assessing scarcity risks and impacts (described at the end of Chapter 7). Finally, the report stated that the government planned to offer greater incentives for companies to extract and recycle more scarce resources.

In addition to the Honda example, other companies, like Hitachi, Ltd., have started using recovery approaches in their supply chains. Hitachi has invested Japanese government funds toward developing a process to recycle rare-earth metals from discarded computer hard drives, an effort termed “urban mining.” Hitachi separates rare-earth magnets from obsolete hard drives using an automated shaking process and then uses a dry heating process to separate metals, such as neodymium, from the magnets. Hitachi plans to implement this recycling capability in 2013.²⁰

²⁰ Messenger, Ben. (2011). “Recycling: Rarely so critical.” Waste Management World. PennWell Corporation.

However, recapturing and recycling precious, nonrenewable metals from products at the end of their lives is not always easy. One problem is that many of the metals are widely dispersed in small quantities, making it difficult to build mass production recycling processes. Experts estimate that hundreds of millions of obsolete cell phones that exist in the returns supply chain could be recycled. But each cell phone contains only minute quantities of the metals (a phone typically has .034 grams of gold).²¹ Although this might not amount to much in one phone, when 250 million obsolete cell phones contain a total of 9.37 tons of gold worth over $531 million (based on September 2012 prices), the incentive to recycle builds quickly. The problem arises of how to build a logistics recovery approach that can physically extract small quantities and combine them into economically valuable lots.

²¹ Bishop, C.A. (2009). “Dwindling Resources, a Molehill Out of a Mountain.’’ Vacuum Technology & Coating, Vol. 10, No. 12, 49–52.

Technological difficulties also complicate recovery efforts. For example, future battery and energy storage capabilities for hybrid cars and wind turbines will depend on lithium supply. However, technologies to recycle lithium are still in their infancy, and prices for recycled lithium still greatly exceed the price of newly mined quantities. Producers expect the demand for lithium to increase greatly by 2015 and beyond, and so will the need to recycle this metal, because its reserves will not last forever (as discussed in the earlier Toyota example).²²

²² Kumar, Aswin. (2011).

Another complication arises with recycling rare-earth metals: They exist in products as alloys or as ingredients of other metals. For example, magnets may consist of one-third rare earth and two-thirds iron. In this type of mixture, the rare-earth metal neodymium gives the magnet stronger magnetic forces, and the metal dysprosium helps make it heat-resistant. But when the magnet becomes useless, separating and then recovering these two metals is hazardous and inefficient. The current process uses chemicals and boiling acids and takes far too much time, resulting in safety concerns, environmental hazards, and increased costs.

Recovery is an important approach for mitigating the scarcity of nonrenewable metals. It may be our only option when new metal deposits are exhausted, or when energy and pollution costs are too high to extract virgin materials. This presents a bevy of opportunities for companies to get ahead of their competitors, like Honda and Hitachi did, by developing processes and technologies that will recover scarce resources in their closed-loop supply chains. Proactively designing a supply chain that leverages scarce-resource recovery will make firms more competitive in comparison to slower-moving competitors as scarcity levels grow and competition for raw materials increases. Though developing recycling technologies still has risks, the rewards of doing so are great. Proactively building both recovery and protection approaches will help position a company for success in the coming decades.

Figure 10.1. Resource scarcity mitigation approaches²³

²³ Bell, J.E., C.W. Autry, D.A. Mollenkopf, and L.M. Thornton. (2012). “A Natural Resource Scarcity Typology: Theoretical Foundations and Strategic Implications for Supply Chain Management,” Journal of Business Logistics, Vol. 33, No. 2, 158–166.

Combining different approaches for a resource’s scarcity and renewability attributes implies that different mitigation strategies are available to a firm, depending on the resource’s current and future availability. For example, when a resource is locally scarce but still renewable, a firm should concentrate on a mobilization strategy, which uses logistics and conservation actions. Firms using this approach should transport quantities of the renewable resource from locations where it is available to those where it is scarce. All the while, they should actively conserve the air, water, and soil quality needed to maintain the resource’s renewability.

One example of this type of strategy is in the U.S. fruit-growing industry. Local producers work hard to maintain their orchards’ growth and renewability but are forced to import fruit supplies from other locations when their crop output decreases. It is not surprising to find South Carolinian or even Chilean peaches on Georgia growers’ fruit stands after all of their own crops have been harvested and sold.

In contrast, for nonrenewable resources that are locally available, firms should concentrate more on a utilization strategy, where they wisely allocate local supply for future use and implement recovery actions to recycle as much local supply as possible. An example of this type of strategy comes from Japanese firms that use rare-earth metals. Since 90% of the global rare-earth metal supply originates in China, firms in Japan must wisely ration and allocate how they use their locally available supply sources. These companies simultaneously concentrate on recovery and recycling strategies since many of their locally available resources exist in the product returns supply chain.

Perpetuation strategies for globally abundant renewable resources advise firms that grow crops to simultaneously protect their resource bases with a sustainment approach to manage their supply. For example, International Paper might try to avoid using chemicals that could damage the land, water, and air it needs to grow future timber crops while also replanting trees and training workers how not to damage saplings.

Figure 10.1 shows similar combinations of mitigation approaches. Although this figure provides the best way to combine two approaches for different resource statuses, this does not mean that a strategy cannot include three or more approaches aimed at mitigating scarcity. A firm suffering from global depletion may allocate scarce resource quantities by transporting them to locations where they are needed while also concentrating on its primary avoidance and recovery approaches.

As resource statuses fluctuate, we need to recognize that our current strategies regarding them may have to change as well. For instance, if a firm is using a cultivation strategy for a locally renewable resource, but macro-level forces make the resource nonrenewable and, in turn, locally scarce, this strategy may have to change to compilation. As shown in Figure 10.2, consumption over the next several decades may increase a resource’s global demand while depleting its supply. Additionally, pollution and environmental damage can create resource degradation that has the potential to destroy renewability. Such an occurrence is a perfect storm for creating an imbalance among the seven forces described in Chapter 7 and could put a firm’s resources in a state of local depletion. If that happens, a firm that recognizes the change early and adopts a compilation strategy before its competitors do will have a couple of distinct advantages.

Figure 10.2. Resource degradation and consumption imbalances

First, compilation strategies will allow the firm to secure top-of-the-line transportation agreements that give it the best way to get resources to where they are not locally available (logistics). It will also give the firm the distinct advantage of being the first to develop improved recycling capabilities (recovery approach). Building intangible supply chain capabilities that are difficult to replicate will help put a firm in the best position to succeed, relative to its competitors, in terms of how it secures and uses scarce tangible resources.²⁴

²⁴ Bell, J.E., D.A. Mollenkopf, and H.J. Stolze. (2013). “Natural Resource Scarcity and the Closed-Loop Supply Chain.” International Journal of Physical Distribution & Logistics Management. Forthcoming.

• Build appropriate mitigation approaches that match your supply chain’s important natural resources’ scarcity and renewability levels. Identifying risk is only the first step toward managing it. To be truly successful, companies need to collaborate with their supply chain partners to implement the best approaches to managing resource scarcity levels. This gives the firm the opportunity to build internal business policies that control how, and when, to use scarce resources.

• Combine employment and conservation approaches into multifaceted strategies that effectively mitigate a particular resource’s growing scarcity. Firms should consider building closed-loop supply chain capabilities that recover scarce resources and protect renewable resource bases. They should combine conservation approaches with well-designed avoidance, logistics, allocation, and sustainment methods to balance scarce resource demand and supply.

• Implement forward-thinking strategies by anticipating growing scarcity levels to build capabilities and secure advantageous positions. Firms should understand that the world is transforming and that future resource scarcity challenges are transforming with it. As population growth, urbanization, global connectivity, economic leveling, and geopolitical conflict change how we meet demand, the resulting consumption levels and resource degradation can only become more pronounced. Designing supply chain networks and products around these anticipated challenges will best position a company for sustained future success.

These are not revolutionary concepts for the companies described in this chapter. They have already taken action to manage resource scarcity in their supply chains. They are striving to meet their governments’ challenges by developing metal recovery technologies and securing long-term access to future important supplies of global resources. They have even started to build multifaceted strategies to augment their efforts. They understand what’s coming, and they’re doing something about it.

As this chapter comes to a close, we would like to take a look at one more critical example of a company that has devoted time, energy, and capital to its scarcity mitigation efforts. General Electric uses a discretion strategy for rhenium, a metal used in its aircraft engines.

Rhenium is used in steel to maintain its hardness under higher pressures and temperatures, such as those seen in aircraft engine designs at GE. Rhenium is the by-product of molybdenum, which itself is a by-product of copper production. Because rhenium is a hitchhiker of another hitchhiker metal, there are not primary mining operations for the extraction of rhenium around the world. This makes the supply of rhenium very inelastic in response to changes in demand (supply scarcity and short-term prices rise in response to increasing demand levels).

In the past, GE might not have seen how much rhenium, or the lack of it, would adversely affect its operations. However, in 2006, increased global demand sent rhenium prices shooting up tenfold (a single pound cost over $6,000).²⁵ This gave GE a major incentive to figure out ways to cut back rhenium use in its aircraft manufacturing operations.

²⁵ Shumsky, T. (12 September 2011). “Testing their metals.” The Wall Street Journal.

When GE woke up and started its risk identification method, it targeted rhenium as a high-impact scarcity risk and set out to build a strategy that allowed it to adjust to inflated prices and resource scarcity. First, from 2006 to 2011, GE scientists and engineers were able to avoid using two-thirds of the amount of rhenium they had used previously through design and process changes. But avoiding using rhenium did not completely solve GE’s problem, so it had to come up with another method to create a multi-approach strategy. Thus, GE helped start a worldwide aircraft-manufacturing group that urged member companies to do a better job of recycling this scarce metal. Thanks to GE’s efforts, parts containing rhenium are now removed from steel scrap piles, and the recycling partners recapture the metal in a closed-loop system that returns the metal to partner organizations. In doing so, the rhenium supply for GE has stabilized, driving down its demand for newly mined resources.

GE has learned from its success with rhenium and now actively looks for ways to recycle, reduce, and substitute many of the other critical metals it uses in its product designs. This includes developing nanotechnologies to reduce neodymium use in wind turbine magnet manufacturing. Such a proactive style has led GE to adopt multi-approach strategies to manage scarcity in its current products. These technologies and strategies will help the company be successful well into the future and also will prepare it to operate its supply chain in a transforming world.

GE and the Colorado gold tycoons from our opening example should make us ask the following: “When resource scarcity strikes us in the future, whenever that may be, will we be ready?” By taking to heart the strategies presented in this chapter, your company should be able to answer that question with a resounding and assured “yes.”