Reduce Impact of Oil Prices on Logistic Cost by… Wait, Thinking Green Again?

By Vivian Cheung

For most manufacturing companies, it make sense to build big manufacturing plants in low-cost locations, or outsource their production to a country that has lower labor cost. However, that is before when transportation was improving and cost was declining. As supply chain becomes more complex, companies have begun taste the effect of increasing logistic expense due to high oil prices that essentially negates the benefits of manufacturing in a cheap labor area. This issue was the major concern from the Harvard Business Case” The Threat of Global Gridlock” by George Stalk, Jr.

Dr. David Simchi-Levi Professor of Engineering Systems, MIT who is the industry’s leaders on network and logistics designs, had thoroughly studied the impact of rising oil prices using data from real consumer goods company. He concluded that for every $10 increase per barrel of crude oil price, there is an additional 4-cent per mile increase in transportation rates. At some point in the future the rise in transportation costs will impact the trade-off with manufacturing costs and inventory costs. With the supply chain representing 70-80% of total costs for most companies that would be a huge impact to the bottom line, depending on how much sell prices could be increased in the market. [2]

Asides from the effects within organizations, rising oil prices also has a huge impact on globalization. One article in Supply Chain Network blog site stated that “These days, the cost of oil is the equivalent of imposing a tariff rate of about nine per cent on goods coming into the United States. At $150 a barrel, transport costs act like a tariff of 11 per cent. And at $200, all the trade liberalization efforts of the past 30 years are reversed.” [1] The article is claiming that the rising oil price is eventually going to reverse globalization if organizations do not act fast.

Lorcan Sheehan stated in his article “Safeguarding Your Supply Chain Against Rising Fuel Prices” a few things that companies should do to prepare supply chain for rapid fluctuation. Other than the obvious suggestions such as to increase the flexibility of the infrastructure to respond to changes and to consistently re-evaluate the business’s supply chain to ensure network optimality, it also recommended to increase environmental responsibility. This is a very interesting point. Think about this in a bigger picture. Carbon emissions are directly proportional to energy use. If all companies are reducing their carbon emission, they are also reducing the impact of rising oil prices, and reducing the cost of logistics in their supply chain. Therefore, companies should consider using alternative fuel sources for trucks and other vehicles to slow down the rising oil prices.

However, not all companies are able to see past their own benefits to realize that by helping the environment, they are also helping themselves. The effects of such actions are also small and hard to measure, which is why some companies are not too enthusiastic about thinking green. Is your company one of them?




References
[1] "SupplyChainNetwork.com." » Blog Archive » Will High Oil Prices Reverse Globalization? Web. 21 Feb. 2012. .

[2] "Oil Prices and Supply Chain Network Design." Supply Chain Digest. Web. 21 Feb. 2012. .

[3] "Safeguarding Your Supply Chain Against Rising Fuel Prices." - Inbound Logistics. Web. 21 Feb. 2012. .