October 14, 2008

Higher oil prices = new supply chain strategy

By DC Velocity Staff

As companies wrestle with rising energy costs, they need to need to know their "tipping point"—the level at which higher prices will necessitate changes in their supply chain strategy, proposed Massachusetts Institute of Technology (MIT) Professor David Simchi-Levi. Addressing an educational session in the Future Trends track at the conference, Simchi-Levi noted that every $10-per-barrel hike in crude oil prices results in a transportation rate increase of four cents per mile in the United States.

As fuel prices and transportation rates rise, companies need to rethink their manufacturing and distribution strategies, the MIT professor explained. In the past, companies based their strategies on cheap oil prices and low labor costs in developing countries. But higher energy prices are forcing companies to add warehouses to their distribution network to shorten deliveries and lower transportation cost. They are also being forced to switch from making a single product at their plants to making multiple lines in order to increase manufacturing efficiency.

To save on transportation expenses, companies also will have to consider making and sourcing products closer to the point of consumption, especially heavy goods like refrigerators or televisions. "Higher transportation costs will force companies to continuously evaluate their networks and make adjustments," he contended.