Earlier this year, a report from industry analysts at Goldman Sachs predicted we would be looking at oil prices of $100 a barrel. While a few took the prediction seriously, many characterized it as mostly a publicity stunt.

Now, with oil futures shooting over $70 per barrel, and Katrina and refining problems sending prices at the pump to over $3.00 per gallon, the prediction doesn’t look so whacky any more.

Obviously this impacts our personal wallets, the economy, Wall Street, etc. But if oil goes to $100 per barrel, and gas and diesel prices shoot towards $4.00, what are the likely impacts on supply chain strategy and operations?

Here are some thoughts:

Obviously, transportation and logistics costs are going up. At $2.00 plus per gallon, we saw fuel surcharges by carriers of 10-20%. In a Business Week article last April, plumbing fixture maker Kohler reported it was paying $1 million per month in fuel charges. At this writing, gas is up about 25% since then. ABF Freight’s published fuel surcharge at the beginning of 2005 was 10.4% for LTL freight, and 20.8% for truckload. The numbers for Aug. 31 were 16.8% and 33.6%.

At these levels, especially if the costs cannot be passed on to customers, rising transportation costs can have a real impact on company profitability. At $100 oil, the impact could be substantial. Are you budgeting and preparing management for this continued and/or potential spike in transport costs? Are they being reflected in delivered price quotes being given to customers? Are you putting in place contracts that for delivered pricing that include adding your own fuel surcharge in the event of a continued spike in oil prices?

Raw materials and related supply costs could increase dramatically, not just due to increased inbound freight costs, but the cost of energy used in manufacturing and oil-based products, such as plastics. Already, for example, we’ve seen huge pressure on many suppliers to the auto industry locked into fixed price contracts with their customers.

The higher gas prices go, the greater the imperative to unbundle product and freight costs, and to look for opportunities to consolidate and save on inbound shipments. Long a goal of many transportation groups, perhaps the current and continued spike in fuel prices can be the catalyst to achieve unbundling in the procurement process. Companies should also be looking right now at the degree of energy sensitivity in procured products, and strategizing on alternatives and impact from $100 oil for these commodities and parts (e.g., at some point does steel replace plastic?).

The big question I have is how a spike to $100 oil might impact sourcing, offshoring, and network strategy decisions. At the heart of network strategy is the balancing of trade-offs across inventory, transportation and operating costs while meeting customer service. Almost be definition, the result of that calculation should be different at $100 oil than it would be at $30. Would $100 oil, for example, pull back a decision to offshore certain products when the added cost of transportation is considered? Would the general (but certainly not universal) trend towards smaller, more frequent shipments begin to reverse itself somewhere on the way to $100 oil? At what point am I better off keeping spare parts inventory in the field versus express shipping from a master DC?

I recently had a conversation with Wayne Gibson, former VP of Logistics for Home Depot, and he noted that risk factors are rarely considered adequately in the sourcing and network design strategies of most companies. So, for example, few companies put in a factor that adjusts for the risk of $100 oil (or strikes at the port) when analyzing the alternatives.

What the current environment and potential $100 oil tells me most of all is that we need to use more dynamic analyses of these decisions, use more complex scenario alternatives, and move from using network design tools from a once every few years basis to having them baked into a consistent process of designing and running our supply chains.

I’ve only scratched the surface here.

The Do�s and Don�ts of a Designing a World Class Facility (Part 1)

Before you embark on designing World Class facility it is important to clearly define your strategy. While a strategic design should evaluate the business trends and growth in your business five to seven years into the future, the reality is that few companies can really forecast and predict their annual sales revenue five years in the future. There lies the first don’t: DON’T swag at a sales numbers. Rather, DO take the time to work with your sales and marketing team and understand what the sales trends really are. In addition, consider any potential changes in your sales strategy. For example, is your company planning to use new sales channels (e-commerce or catalogue), or more importantly is your product mix going to change in terms of cube (cubic feet per case) and selling unit of measure? ...

Click here for the full column.

The Value of Real-time Optimization in Transportation and Logistics

September 1, 2005
Ensure Suppliers Don�t Use Energy-Based Price Hikes to Your Disadvantage
Chaotic environment can lead to price increases that outpace real cost creep

September 1, 2005
Here�s a Switch: Wal-Mart Calls for Investigation of Tesco for Market Dominance in U.K
CEO Lee Scott says competitors growing market share is too much; rumors of a Carrefour merger

September 1, 2005
The Seven Keys to Effective Order Picking System Design
Use this framework to maximize effectiveness

View performance details for this past week.

Q. What is the base cost per gallon of diesel fuel generally used to compute fuel surcharges?

A. Click to find the answerbelow

Feedback is coming in at a rate greater than we can publish it – thanks for your response.

We’re still really backed up, and are just going to catch up this week on some of the letters we haven’t had room to publish, before next week running many of the dozens of letters we received around our piece on “Supply chaining and a flat world.” Our feedback of the week is a letter nominally on our piece on ”the 50% problem,” but which mostly has nice things to say about SCDigest. Ok, as we’ve said before, we are fond of compliments. You’ll also find letters on data synchronization, “cutting out the middleman,” Chrysler’s flexible manufacturing strategy (good thoughts), the proposed RFID patent pool, and SCDigest contributing editor Mark Fralick’s piece on blended consulting rates.

Keep the dialog going! Give us your thoughts on this week's Supply Chain topics.

Just want to congratulate you on an excellent magazine. Your article on "The 50% Problem" and in particular Mark Holifield's response hit a very responsive chord with me. In fact I forwarded the letter to several friends and co-workers. (including on friend who is a doctor)

I receive many logistics magazines and newsletters. (both print and via the web) Most of the stuff I get is puff or composed of vendor authored image pieces. (though sometimes of use) Two or three have thought provoking articles - your weekly email ranks up with the best.

Congratulations! I hope you can keep in the "top 50%" in the future!

James Potsch

On "Cutting Out the Middleman"

Beyond this, as a consultant to established vendors, I can say that many vendors are their own worst enemies and they make it easy for retailers to “just say no” to dealing with middlemen. Retailers have become much more sophisticated yet many vendors are not keeping up and they operate in reactionary mode most of the time. Unfortunately as part of that, many are also reacting to shrinking margins and increased competition by cutting corners in staff quality (and numbers) and, unlike their retail partners, they aren’t evaluating their organizations for efficiency. According to surveys we took with retail buyers (and subsequently compiled in a CD we published “Ten Supplier Mistakes”), this leads to poor communication, duplication of effort, and lots of buyer frustration! In essence, retailers are being placed in the position of training the very people who should be anticipating their needs. It may be too late for many vendors to regain their go-to status.

Thank you for your excellent ezine.

Carol Spieckerman
President
Newmarketbuilders

On "The Proposed RFID Patent Pool"

I do support the pool concept, but if Intermec and/or pool wants to continue with positioning then the Chinese will adopt there own standard and they will have lost any competitive advantage… and more importantly any US momentum.

Ted Ng
McKesson

I am keen observer of auto OEM manufacturing and supply chain practices.

Even with one single model production, US manufacturers are having tough time in synchronizing supply chain and following lean manufacturing principles. Imagine the chaos and inefficiencies that will be created with multiple models within a single factory.

Just following one best strategy will have huge negative impact in other operations within the company.

To make “flexible manufacturing strategy” to work, first they need to make current supply chain practices efficient. They also need to follow other best supply chain practices, which could be totally new to them in many areas (packaging, logistics etc.).

Delegating major assemblies could reduce the complexity in the plant, but they still need to remember that efficiency and quality of suppliers will have direct impact on the final price and products!

Name withheld by request

On "'Blended Rate' Consulting Pricing"

How about going fixed fee plus actual expenses, period!? 

A large portion of the I.T. and SCE implementation industry (Consultants & Software providers) is receiving a bad reputation because it insists on “billing by the hour” and charging beyond what was quoted in the proposal.  Blended Rate or not, the client sees no end in sight and realizes that the fee amount proposed in the original proposal was really just an “estimate”.  As an MHE consultant that focuses on engineering services (planning, design, and engineered workforce performance management), one might argue that it is easier for us to use the fixed fee route.  I say that may be true, but it leads to happy clients.  And, isn’t that what it is all about, anyway?

Steve Johnson
Principal
Johnson Stephens Consulting, Inc.

On "Data Synchronization "

I am curious as well about the priority companies are placing on data accuracy and synchronization. In our company's experience ( data inaccuracy is costing companies very significantly in terms of inaccurate pricing, bloated inventories, duplication, obsolescence, etc. My sense is that the adoption rate is slow for four reasons: 1) unsynched and unclean data are "hidden" problems. The system still functions even it is very inefficient and costly, 2) manual corrective processes have been put in place. Because the problem is "invisible" and because there is some fix, there is an acceptance of the condition, and 3) companies don't know how or don't have the internal resources to address the causes, especially if there are multiple data bases in play, and 4) data issues, as costly as they are, just don't get the attention of the C-level officers.

Thanks for the article.

Steven de Laet
PartsRiver, Inc.

This week's open opportunity is:

Supply Chain/WMS Consulting positions
Immediate hire for the ideal candidate

Click here for the full job description.
Click here if you are an interested candidate.

(NOTE: Any inquiries will be handled with complete confidentiality.)

Q. What is the base cost per gallon of diesel fuel generally used to compute fuel surcharges?

A. $1.10 per gallon is the benchmark used by many � but not all � carriers to determine fuel surcharges