For years, Latin students have been told that circumstances alter cases. Now, business executives are discovering just how true that really is. A currency fluctuation here, a commodity shortage there, and what has long seemed a perfectly sound approach to business suddenly makes no sense at all.
Consider this. It takes roughly nine tons of bauxite to make one ton of aluminum. Much of the world's bauxite comes from South America, but the world's largest producers of aluminum are in Asia. For years, Latin American mining companies have been extracting bauxite from the earth, loading it onto ships, and sending it to low-cost Asian countries, where it's made into aluminum. As much as three-quarters of the finished aluminum is then shipped to end users in North America and Europe.
This all made perfectly good business sense until something changed: the cost of oil. Skyrocketing oil prices translated to sky-high shipping costs. And suddenly, the whole economic justification for shipping ore around the planet so it could be processed in a low-cost country was called into question.
Although the price per barrel of crude oil dropped from its July high of $147 to just under $70 in October, no one's promising that it will stay there. Some market observers see the price settling at around $90 per barrel, but the reality is, prices could remain volatile for weeks, months, even years to come. That volatility is causing many who oversee global supply chains to take a hard look at what is changing and what it means.
It's not just oil. Factors like the declining dollar and rising wages overseas are also changing the economics of offshoring. One result is that most all things that relate to a global supply chain are now back on the table for review. As 2009 unfolds, you may start hearing more about shifts in supply chain strategies—about companies that have had second thoughts about manufacturing in Asia and are relocating production closer to home. Or about companies that are revising their domestic distribution networks. Given the volatility in oil prices, it would be no surprise to see companies that operate a few large, centralized distribution centers abandoning that model in favor of an old-time (1980s and 1990s-style) network featuring more, smaller DCs located closer to customers—a move that would reduce their reliance on increasingly expensive long-haul transportation.
To illustrate the impact of rising diesel costs on logistics and transportation, a recent report from IHS Global Insight offered this nugget: Back in 1999, $500 worth of fuel was enough to get the average fully loaded tractor-trailer from Charlotte, N.C., all the way to the middle of British Columbia, a total of 3,009 miles. By 2004, $500 worth of diesel would get the same rig only as far as Denver, a distance of 1,840 miles. Today, that truck can't even get west of the Mississippi River on $500 worth of fuel. In fact, it can only cover about 740 miles.
Which brings us back to bauxite, aluminum, and global supply chain networks. Let's say, for instance, that some aluminum manufacturers relocated their plants from Asia to Latin America. With that single stroke, they would eliminate the expense of shipping nine tons of bauxite from Latin America to Asia as well as the cost of moving the finished product—one ton of aluminum— from Asia back to markets in the Americas. Imagine how much the price of aluminum could be reduced—and the revenue of aluminum manufacturers enhanced—if those producers could wipe out the costs of shipping both the raw material and the finished product around the world.
It would seem in today's environment, it all make perfect sense, as well as cents.