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 9th 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.