IBM Decision Optimization
Matching: oil X
This blog has often commented on the price of oil. Oil prices have a big impact on the supply chain. As oil prices change, it impacts the cost of raw materials, productions, and transportation. The change in these costs impacts the trade-offs that a firm needs to make.
For example, as the increase in oil prices drives up transportation costs, it can change where product should be made, the mode of transportation used, and the inventory strategy.
Several years ago during the big run up in oil prices, we wrote an article for The Wall Street Journal that discussed how the supply chain strategies needed to adjust to the new prices. As oil prices fell, we wrote an reminder that it was still important to analyze the impact on the supply chain. In both cases, it is important to understand the trade-offs between transportation costs, sourcing decisions, and inventory and adjust the supply chain accordingly.
As oil hit $100 a barrel this week, it is worth recalling these lessons. More firms have invested in more flexible operations, but the basic lessons remain. It is important to adjust your supply chain to fit the realities of the market.
The May 22, 2012 edition of the Wall Street Journal featured an article about manufacturing moving back to the US. (Click here for the article-- it may be restricted to subscribers). The article cited statistics from David Simchi-Levi of MIT stating that 39% of companies surveyed were considering moving production back to the US.
Of course, several factors were mentioned for this trend including changes in the relative cost of labor, the price of oil, and the ability to respond faster. Although not touched on in this article, making product closer to the demand can reduce the required inventory.
What is also interesting is that over the last 5 years, China has become a market where companies sell product. It used to be that companies just received product from China. Soon, firms found that their China plants were well-suited to cover the demand in China.
From a network design perspective, this brings up some interesting questions: should you make product for each region of the world in that region? Which products should you make in China and which ones in the US? And, what is the break-point for the price of labor and oil where it makes sense to move product from China to the US?