The Oil Prices Should Give Supply Chain Executives Pause

By Hannah Kain, President & CEO of ALOM

As oil prices skyrocket, supply chain executives across the world should pause.

We have built supply chains focused on the cheapest production location and the highest efficiency. But did we remember to include the full cost of doing business? Did our supply chain optimization take into account the systemic changes in transportation cost? Did we remember to factor in not just the dollar cost, but also the cost to the global environment?

Perceptive supply chain executives now realize that globalization brings its own set of complexities. We've gone from a focus on manufacturing cost, to a focus on landed cost. Our modeling has been based on transit time, cash burden, and fluctuating customer demand. However, our models did not anticipate that the very globalization that made the complex supply chain possible would also contribute to driving up oil prices, making some supply chain solutions prohibitively expensive.

International trade has grown 85 percent since 2005.

For almost half a decade, growth in international trade has been twice the growth in GDP. International trade has grown 85 percent since 2000. Supply chain executives are important players in this growth. Growth in trade requires transportation, yet more transportation drives oil scarcity. We've also neglected to factor in the demographic changes that we are driving: As we transfer production to developing countries, a middle class develops. This middle class starts to consume energy for cars and household appliances. While creating a better life for millions, our contributions have also driven up demand for oil and consequently oil prices.

With higher energy costs looming, maybe the time has come to contemplate making your supply chain simpler. It just may turn out to be more economical to have a more focused approach -- one that involves fewer suppliers, less transportation, more vertical integration, less vulnerability and reduced reliance on local subcontractors. The end result may be more sustainable for your business and for the environment.

It is time to ask whether sometimes simple is better than complex.
March 2008
See the recipients of the 2009 Top 25 Supply Chain Executives Award.