In early June, I utilized Supply Chain Matters to pose a question, namely that with the sustained high prices of energy, have we reached an inflection point in the energy vs. global product sourcing equation.  (See Energy Prices- Have We Reached That Inflection Point for Global Supply Chain Strategies?).  I offered my view that we have reached a point where the unabated higher costs of crude oil, diesel and aviation fuels will result in structural change in the interrelationships and flow of goods across global supply chains.

Over on Spend Matters (no affiliation), Jason Busch recently made reference to my post and added the following advice to his readers: “While I don’t think that we’ll ever go back to a Spend Management environment focused just on local sourcing, I do believe we’re about to enter a new era where global price equations don’t necessarily make sense-that is, unless the impact of rising global prices is simply inflated away…” 

And in the blog Purchasing Transformation, a European site sponsored by IBX, author Andreas Bernhard in his last post on this subject made the following observation: “The right mixture of capitalism, inventive talent, reasonable politics and smart purchasers will hopefully lead to a good answer to the peak oil problem.”

 To add further specific corporate evidence, I ran across a Financial Times article last week (Oil costs force P&G to rethink supply network) which outlines that fact that consumer goods leader Procter and Gamble has already launched a comprehensive review of the existing design of its entire supply chain in response to rising energy costs. The vice president of global supply chain, Keith Harrison made the following observation: “I could say that the supply chain design is now upside down.  The environment has changed.  Transportation costs are going to create an even more distributed sourcing network than we would have otherwise”.  The study is reported to include the assessment of trends for sustainability and packaging, regional consumer demand patterns, and expected changes in the global operating environment under various scenarios of energy costs.

Summer brings certain vacation and down time to reflect on the year thus far and to ponder strategy for the second half of the year.  If your organization has not already done so, I urge you to influence the “C-suite” to sponsor a new evaluation of global supply chain network and sourcing strategies that were developed in previous times of cheaper energy.  Scenario planning and response management may well be one of the keys to surviving unprecedented times. The “tipping point” for global distribution has arrived, and organizations need to be prepared.

Bob Ferrari

One of the most obvious top-of-mind topics these past few weeks has been the impact of the current high price of energy on the global economy as well as global supply chain strategies.  Over the weekend, I read the June 9^th edition of Business Week Magazine, with a cover story of Oil and the Economy.  There were a number of good articles on the impact of the unprecedented high prices of energy on current sectors of the U.S. economy, including the U.S. consumer, the airline industry, and the Internet. One of the articles, Diesel’s Unintended Spillover, provides one of the better explanations I’ve read of late, describing the current economics impacting the high price of diesel fuel, and why there is such a wide premium between the market price of gasoline vs. that of diesel. Within the Business Week site there is also a video where CIBC chief economist Jeff Rubin predicts a level of $200 per barrel oil in order to bring the current market into balance.

 I believe that this is just the beginning of fundamental structural changes that will occur in the interrelationships and flow of goods across global supply chains.  In addition to the Business Week article on the dour outlook for the U.S. airline industry in reduced capacity, an article in the New York Times last week described what appears to be the biggest shakeout in the U.S. trucking industry since it’s deregulation in 1980. The article points out that more than 3 percent of the U.S. tractor fleet has been eliminated since early last year and that many independent small truckers are but “one major breakdown away from bankruptcy”.  The NY Times article further points out that while the large fleet carriers such as J.B. Hunt, Yellow, C.R. England and others can take advantage of some efficiencies, their overall margins are shrinking. There is an obvious limit as to how much, or how often fuel surcharges can be passed along to customers, and UPS has noted a general shift to slower and less expensive ground shipments vs. air.  This is not just a U.S. issue, since there have been multiple reports of protests across Europe among truckers, fisherman, and others in the supply chain on their inability to make a living at these levels of prices.

 With increased speculation in world energy markets, an obvious imbalance in the global supply vs. demand for oil, and more predictions for increased global energy prices, it seems to me that we are quickly reaching a fundamental inflection point where supply chain business and global sourcing strategies are going to become structurally altered.

 I’d be interested in reader and blogsphere comments on this post. Are procurement, logistics and supply chain strategy groups re-visiting current product or supplier sourcing involving large distances of global transportation?  Are manufacturing and retail organizations actively assessing overall risk areas or fundamental global inventory stocking strategies?

 Structural change is underway and supply chains are going to look much different.

 Bob Ferrari