Seven “Coping Skills” for High Fuel Prices
By Ian Hobkirk, Director of Consulting, Supply Chain Optimization, FORTE
Connect, Summer 2008

There are many reasons for rising consumer prices, including increased demand for commodities in developing countries, and the weak U.S. dollar. However, both Kraft and P&G cited increasing fuel costs as a major reason for their decision to boost prices. Indeed, today’s supply chains are especially vulnerable to volatility in transportation coasts. Tom Friedman’s now-famous book, The World is Flat, published in 2004 (Farrar, Straus and Giroux, New York), eloquently chronicles the chain of events that began with the fall of the Berlin Wall in 1989 and culminated in the geographically extended, geo-politically interconnected global supply chains that we have today. Most supply chains that rely on low-cost-country sourcing to drive profits also count on low-cost fuel to rationalize transporting goods halfway around the world to link supply with demand. As fuel costs have doubled in the last two years, and tripled since 9/11, the modern, international supply chains that emerged after 1989 are challenged in ways that their less complex predecessors never were.

Figure 1: Crude Oil Price per Barrel, 1985-2008

As consumers have become ever more cost-conscious in response to rising prices, that same cost consciousness has rippled its way up the supply chain. In June of 2007, the Aberdeen Group surveyed supply chain executives and asked them to list their top transportation related pressures. As recently as last summer, companies still cited broad issues such as using transportation management to improve overall supply chain performance, and the need for better supply chain visibility as their top pressures. Rising costs came in third. However, the results of a new Aberdeen report, published in July, reveals that in a little over twelve months, rising costs have leaped to the top of the list of concerns that are troubling supply chain professionals.

Not all companies are able to go the way of consumer goods giants like Kraft and Proctor & Gamble. Manufacturers and distributors tempted to raise their prices can be in a doubly-precarious position: while rising costs have already eaten away at margins, market share can also be eroded if customers are able to find alternate suppliers who have managed to hold the line on price. In reflecting on a title for this piece, I was reminded of an early episode of The Sopranos where the character “Paulie Walnuts” confesses to Tony that he once saw a therapist. “I learned some coping skills,” Paulie tells him. It turns out that supply chain executives do have something in common with neurotic mobsters (besides doing a lot of business in North Jersey): we can all use some good coping skills in this economic environment.

Seven ways to cope with high fuel prices in the supply chain:

1. Re-rationalize your supply chain network: While an act like this should not be undertaken on a whim, FORTE has encountered more and more companies that are moving away from sourcing goods in Asia in favor of suppliers in the Western Hemisphere. This writer just spoke with a manufacturer last week that was in the process of moving portions of their operation from Asia to Central America as a result of high fuel prices.
   
   
2. Re-evaluate your transportation network: As a strategic exercise, wholesale network re-engineering is infrequently practiced by most companies. But, it may make sense to model your company’s cost and service levels based upon using or not using 3PL’s and freight forwarders, or utilizing private or dedicated fleets. Significant savings can be realized by making changes at the highest levels.
   
   
3. Reduce the need for expedited freight: Needless freight expediting costs companies millions each year. Reducing reliance on expediting usually starts with more effective order management, and can involve technologies like Distributed Order Management which more effectively links supply with demand.
   
   
4. Practice mode optimization: Companies shipping large amounts of goods via less-than-truckload (LTL) carriers should consider whether some of this freight can be shipped in full truckload shipments using continuous moves, or even via rail in some instances. Identifying linked movements and opportunities for backhauling can be a challenge in itself; executing the moves is even more complex. Today’s transportation management software (TMS) has made great strides in this respect and made this form of optimization more feasible.
   
   
5. Run more effective bid processes to procure freight contracts: A surprisingly high number of multi-national organizations do not have the ability to bid their freight contracts in one process, leveraging freight spend in all divisions and regions. Still more companies lack the tools to effectively analyze carrier bids against multiple shipping scenarios. Companies should investigate spend analytics tools as well as online bid management technology to reap greater savings from this process.
   
   
6. Improve rate of first choice carrier acceptance: Sadly, many companies that run an effective bid process leave money on the table in the execution when they are forced to use second and third-choice carriers to handle loads more often than is necessary. A company can’t fix what it can’t measure, so improvement here starts with accurate tracking and reporting of tender acceptance rates, followed by appropriate remedial action with carriers.
   
   
7. Audit and pay invoices more efficiently: Many companies with otherwise efficient shipping operations spend excess dollars in administrative costs in the freight-bill audit and pay process. Outsourcing can be an effective interim solution, but many world-class companies have reported outstanding results by bringing this process in house and automating it through electronic communication with carriers.

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