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Power Supply and the Supply Chain - Part 2

In one of my earlier blogs, I had drawn a hypothetical comparison between a power production process and a best-in-class supply chain. We saw how supply and demand situation can result in a stable equilibrium. A stable equilibrium is defined as an interplay of balancing forces where any deviation from normal, results in greater propensity for self-restoration.

In this blog, we will focus on certain key differences between these balancing forces in supply chain and in power production.

1. The Bullwhip Effect: A power grid is similar to a supply chain. There is a power factory that converts raw material like coal or a nuclear fuel or gravitational hydro energy into power in the grid. Distribution of power is much like a distribution in supply chain. Institutional consumers like railways or factories require bulk power unlike retail customers. A power distribution center has to constantly guage the requirement in terms of this loading mix and accordingly manage their transformers. In a supply chain, lack of collaboration could result in speculation  in terms of inventory hold in the nodes of the network resulting in wide fluctuations of stock levels as one moves downstream. Thankfully such a situation never happens in Power generation and distribution. By its very design, each and every node is interconnected. The upstream node proactively reacts to changing demand supply situation. If a downsteam node gets overheated in terms of demand, it could island that node to restore balance in rest of the network.

2. Inventory - a boon or a bane: Thankfully by its very design (or atleast so far), it is not possible to stock up energy. What flows into a node has to flow through or get consumed in some way instantly. Some of us though, specifically in developing countries, do use inverters for stocking and using energy due to unreliable power supply. The cost of doing this activity is exhorbitant due to the equipment yield factor. In the traditional supply chain though, inventory is essential. The fillrates, an essential KPI for supply chain, directly correlate with the inventory. Inventory consumes a sizable proportion of working capital and in some cases is subject to different kinds of market risks.

3. Cost Structure: In setting up a power supply chain, (read the networks), it is more about a fixed parameter of cost rather than a variable one. This results in a general long term view instead of sometimes a myopic view by a traditional supply chain. The costs are somewhat proportional to the flow-through volume in both cases though again variable parameters are predominant in the traditional supply chain.

All in all, these two seemingly different sectors have both differences and similarities.

The overall intent of these blogs was to understand challenges being seen by existing supply chains. From a modelling perspective, the power supply process is one of the interesting parallels that can be drawn. In not so unforeseen future, it is very likely that the supply chains would be akin to - a switching ON of a button inside a customer's dwelling that results in a virtual though automated procurement, production, distribution and delivery right at the doorstep - all in a flash just like power.

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