Executive Briefings

Will Rising Fuel Costs Drive Changes in Supply Chain Strategy?

Will the precipitous rise in fuel costs cause manufacturers and logistics service providers to fundamentally change their supply chain strategies? We have talked extensively about Profitable Proximity sourcing and the need to look at total cost as the primary driver of network planning and sourcing strategies, so we will not revisit that here. However, there are some more fundamental tradeoffs that companies make, particularly in the balancing of cost and service, that $150 per barrel for oil may require a redress.

Most supply chain organizations have been chasing cost optimization for years, and while it is not unreasonable to assume that cost savings will continue to be realized, fundamental changes in supply chain cost will require changes in strategic tradeoffs. Companies have, for example, been looking closely at transportation cost savings by focusing carrier networks, driving levels of truck-load shipments, and reducing shipping weights through both primary and secondary packaging optimization. But, and it's a BIG but, this has been done at the same time that service requirements have tightened (largely as a result of optimizing inventory levels) prompting manufacturers to reduce order lead-times, deliver smaller and more frequent shipments, and reduce case sizes.

Certainly one recourse from rising fuel costs is for manufacturers to take price increases, and while this will certainly happen, it is also true that in many industry segments price increases have been historically difficult to make stick. Fanatical cost control has proven to be a more popular and, frankly, effective way to offset input cost increases.

Therefore, it is the opinion of Manufacturing Insights that supply chain organizations will have to re-look at the tradeoffs they make in balancing cost versus service. Some of the potential implications might be:

1. A return to less expensive transportation modes like intermodal that were largely abandoned for customer shipments due to extended and unreliable lead-time performance.
2. Extended customer delivery windows to allow higher levels of order consolidation and truck-load shipments.
3. A re-evaluation of customer and order prioritization to more significantly incorporate shipping cost.
4. A reinvigoration of the ES3 shared-manufacturer warehouse model.
5. Further pressure on SKU proliferation, particularly packs performing on the margin.

Table-stakes here is a fundamental improvement in the collaborative demand and supply planning between suppliers, customers, and logistics service providers. Collaboration has become something of a buzzword, and while its ubiquity in the supply chain lexicon is unfortunate, it remains perhaps the single most important facilitator for improving supply chain performance. As we have mentioned frequently in Manufacturing Insights research, supply chain organizations are rapidly evolving to distributed global supply networks servicing an increasingly global customer/consumer, and when the 'cost to move' (and to a lesser degree 'cost-to-make' as well) climbs as rapidly as it has done recently, the ability make collaborative planning decisions quickly and seamlessly across the supply network becomes even more critical.

And it is not just manufacturers who are feeling this pinch, retailers--particularly those who operate their own fleets--are also looking for ways to optimize total cost. Retail will certainly look at many of the same transportation opportunities, optimizing truck routes, minimizing 'empty miles', maximizing truck weights, but it will be interesting to see if they begin to re-look at 'economic order quantities' in light of the changing 'inventory cost vs. delivery cost' dynamic. Rising fuel costs are poised to 'change the supply chain game' in many ways. We have looked at some of these cost implications in our paper on profitable proximity sourcing (Profitable Proximity: Product Sourcing in the Modern Supply Chain, June 2008 Doc # MI212760), and now some further potential implications on service level agreements/terms-of-sale. As with all topics discussed in Theory & Practice, we will continue to follow these developments in further detail within our ongoing research.
http://cl.exct.net

Will the precipitous rise in fuel costs cause manufacturers and logistics service providers to fundamentally change their supply chain strategies? We have talked extensively about Profitable Proximity sourcing and the need to look at total cost as the primary driver of network planning and sourcing strategies, so we will not revisit that here. However, there are some more fundamental tradeoffs that companies make, particularly in the balancing of cost and service, that $150 per barrel for oil may require a redress.

Most supply chain organizations have been chasing cost optimization for years, and while it is not unreasonable to assume that cost savings will continue to be realized, fundamental changes in supply chain cost will require changes in strategic tradeoffs. Companies have, for example, been looking closely at transportation cost savings by focusing carrier networks, driving levels of truck-load shipments, and reducing shipping weights through both primary and secondary packaging optimization. But, and it's a BIG but, this has been done at the same time that service requirements have tightened (largely as a result of optimizing inventory levels) prompting manufacturers to reduce order lead-times, deliver smaller and more frequent shipments, and reduce case sizes.

Certainly one recourse from rising fuel costs is for manufacturers to take price increases, and while this will certainly happen, it is also true that in many industry segments price increases have been historically difficult to make stick. Fanatical cost control has proven to be a more popular and, frankly, effective way to offset input cost increases.

Therefore, it is the opinion of Manufacturing Insights that supply chain organizations will have to re-look at the tradeoffs they make in balancing cost versus service. Some of the potential implications might be:

1. A return to less expensive transportation modes like intermodal that were largely abandoned for customer shipments due to extended and unreliable lead-time performance.
2. Extended customer delivery windows to allow higher levels of order consolidation and truck-load shipments.
3. A re-evaluation of customer and order prioritization to more significantly incorporate shipping cost.
4. A reinvigoration of the ES3 shared-manufacturer warehouse model.
5. Further pressure on SKU proliferation, particularly packs performing on the margin.

Table-stakes here is a fundamental improvement in the collaborative demand and supply planning between suppliers, customers, and logistics service providers. Collaboration has become something of a buzzword, and while its ubiquity in the supply chain lexicon is unfortunate, it remains perhaps the single most important facilitator for improving supply chain performance. As we have mentioned frequently in Manufacturing Insights research, supply chain organizations are rapidly evolving to distributed global supply networks servicing an increasingly global customer/consumer, and when the 'cost to move' (and to a lesser degree 'cost-to-make' as well) climbs as rapidly as it has done recently, the ability make collaborative planning decisions quickly and seamlessly across the supply network becomes even more critical.

And it is not just manufacturers who are feeling this pinch, retailers--particularly those who operate their own fleets--are also looking for ways to optimize total cost. Retail will certainly look at many of the same transportation opportunities, optimizing truck routes, minimizing 'empty miles', maximizing truck weights, but it will be interesting to see if they begin to re-look at 'economic order quantities' in light of the changing 'inventory cost vs. delivery cost' dynamic. Rising fuel costs are poised to 'change the supply chain game' in many ways. We have looked at some of these cost implications in our paper on profitable proximity sourcing (Profitable Proximity: Product Sourcing in the Modern Supply Chain, June 2008 Doc # MI212760), and now some further potential implications on service level agreements/terms-of-sale. As with all topics discussed in Theory & Practice, we will continue to follow these developments in further detail within our ongoing research.
http://cl.exct.net