Oil won't stay cheap

[Randy Littleson]

I came across this article in Supply Chain Management Review by one of our favourite supply chain academics, Larry Lapide. It resonated with me because it paralleled what I had been thinking about oil prices; I like that they are low, but I can’t believe that they will stay that way for long. Unlike my gut feeling, Larry backs his assertion with an explanation of the economic drivers that will result in more expensive oil;

• Emerging markets in China and India
• Eventual emergence from the current economic crisis
• More expensive sources of oil (Oil sands)

The skyrocketing oil prices experienced in 2008 should have set warning bells off in the minds of supply chain executives and CEOs; with oil at those high levels, current supply chain practices need to be evaluated. As Larry points out in his article, the current easing in the price of oil provides some breathing room to make the changes needed to be competitive when cheap oil goes away. Larry points out some ways to get more oil efficient;

• Work with customers to negotiate less frequent deliveries so that we have less half empty trucks on the roads. I would also suggest that you work with other companies to set up “milk runs” where a truck from one company picks up and delivers goods for several other local companies. While difficult to negotiate and implement, you get the benefit of more frequent, smaller deliveries while reducing oil usage.
• Work with your suppliers in the same way. Don’t force them to send partial truckloads every day.
• Re-evaluate outsourcing and off-shoring strategies. The benefits of cheap labour will soon be overcome by the cost of the fuel needed to move parts back and forth across the ocean.

To Larry’s list, I’d like to add one additional way to become more oil efficient;

• Improve your supply chain planning and more importantly, improve your ability to respond to changes. How often have we seen extra shipments, transfers between plants, parts moving back and forth because inventory wasn’t where it was needed when it was needed? By improving our supply chain planning and more critically, improving our ability to respond to changes, we can reduce the waste (and the cost!) of moving inventory.

The side benefit that Larry didn’t mention in his article is that by saving money through saving oil, we are also helping the environment, something that every supply chain professional should consider. Do you have a strategy for implementing more oil-efficient prices? Do you think that cheap oil is here to stay? Write back and have your say!

John Westerveld is a Product Manager for Kinaxis, provider of the on-demand RapidResponse service that empowers multi-enterprise manufacturers with the collaborative and integrated demand-supply planning, monitoring, and response capabilities.