By Sean Murphy -- Supply Chain Management Review, 9/1/2008
Anyone who pays to run anything on gasoline, diesel fuel, kerosene or other petroleum-based products knows that the price of oil has skyrocketed in the past year. While it may have slipped from its brutal peak above $140 a barrel in July to hover around $120 a barrel a month later, who knows whereit's going to go next?
This is certainly cause for concern, especially for companies based in North America that have outsourced to China and other offshore locations with the sole purpose of taking advantage of cheaper labor. Now, ballooning transportation costs pushed upward by oil prices are threatening to erase whatever savings those offshoring companies have enjoyed until now.
Manyexecutives in these companies are considering bringing their operations closer to home, relocating to either the U.S. or Mexico. This potential trend—oil prices forcing overseas operations based on cheap labor to come home—is prompting one financial analyst firm to declare that the entire trend of globalization will be reversed by these higher fuel costs.
But experts and practitioners that spoke aboutthe issue to Supply Chain Management Review say not to pull the curtain on globalization just yet. There are more reasons for a company to go global than just to cut labor costs, they say, and globalization as a trend includes benefits that could far outweigh transportation costs, no matter how high they rise.
Companies striving to make the right decision on whether to move offshore, bringoperations back home, or keep things as they are, need to consider multiple factors. This article will explore some of those factors, with particular attention paid to where oil prices fit in to the picture.
Has A Flat World Gone Round?
Many financial experts are calling the current oil price situation a crisis, and according to a report released this summer by Toronto-based CIBC World Markets, part ofCanada's leading banking firm CIBC, it's more than just a bump in the road. The report's authors predict that soaring transportation costs will only get worse, and eventually force an outright reversal of globalization as we know it.
While the report falls short of predicting exactly what oil will cost at any particular time, it warns there is no way that moving operations to a foreign country tocut labor costs will be sustainable when the worst-case scenario of $200-a-barrel oil actually happens.
When the price does hit that mark, the report says, it's going to have effects of landmark proportions on transportation. As an example, according to the report, a 40-foot container shipped from Asia to the east coast of the United States has tripled in price in the last eight years alone, andwill double again as oil marches toward the dreaded $200 per barrel mark. (See Exhibit 1)
“Unless that container is chock full of diamonds, shipping costs have suddenly inflated the cost of whatever is inside,” writes CIBC's Jeff Rubin. “As oil prices keep rising, pretty soon those transport costs start cancelling out the East Asian wage advantage.”
The Council of Supply Chain ManagementProfessionals (CSCMP) made similarly dire assessments about the price of fuel and its effects in its 2008 State of Logistics Report in June. In that report, economist Rosalyn Wilson calls fuel prices “the largest single factor affecting the transportation segment,” and said fuel was the “driving force” behind a number of logistics providers and shippers going out of business.
“These days, itcosts over $1,100 to fill up a big rig with a pair of tanks that hold 250 gallons, compared to about $720 last year,” Wilson writes. “Fuel is close to or has surpassed labor as a trucking company's top expense. At these prices, fuel is eroding profit margins in an industry with historically lean margins to start with.”¹
Jeff Rubin goes even further. Writing in his report under the headline, “Will...