Plan today, Survive for Tomorrow

Despite this week’s Bank of England MPC (Monetary Policy Committee) forecast that risks of ‘a bigger and more sustained downturn’ have increased as a direct result of the severe stresses in the UK and global financial systems (October 14th), supply chain consultants Barloworld Optimus reckon that companies can hedge themselves against a depressed economy and can even come out of it stronger and better equipped to face the future.

What’s more, they’re saying, the time to start is now, and that plans put in hand today are the best bet for success tomorrow.

“Downsizing and running away may be the natural responses to the seismic events of the past few months, but companies that substitute the knee-jerk reaction for a cooler-headed and longer-term view not only stand the best chance of surviving, but will also come to reap the rewards once the corner has been turned”.

That’s the view of Barloworld Optimus’ Global Business Development Director Fraser Ironside who said today that even against a background of wildly fluctuating oil costs that saw ppb (price per barrel) at an all-time peak of $147 in July, inventory costs are rising faster than transport costs – underlining, he says, the fact that survival hinges on closer examination of supply chains from top to bottom rather than focusing on transportation costs alone.

“Trends in the United States are traditionally reflected here in the UK, so it’s significant to note that US logistics costs have risen 52% in 5 years, driven by higher inventories, interest rates and fuel costs.

“Their logistics costs are now $1.4 trillion – 10.1% of GDP – and inventory carrying costs have risen faster than transport costs for the fourth consecutive year, giving a clear indication of what’s headed our way.

“If being forewarned means being forearmed, then it all points to the likelihood that companies now taking the necessary steps to address these issues via a close examination of their network design are those most likely to be revealing the kind of economies that will make all the difference later”.

He also adds that the longer the downturn persists, the greater the impact on companies’ supply chains...

“Falling retail sales drives lower manufactured and shipped volumes – and this results in rising inventory levels as demand falters, redundant capacity in the manufacturing base, falling throughputs in warehouses eroding economies of scale, and reduced order volumes driving smaller shipment sizes, in turn resulting in higher cost per unit transportation”.

Describing accurate network modeling as ‘the means to finding the lowest point at which change needs to be made’ – in short, he says, effectively presenting a trade-off between warehousing and transport – he added that improving inventory visibility, close review of current network design and warehouse configuration, detailed transportation analysis and tighter forecasting all hold the key to survival.

But, he adds: “....though market forces are keeping down the price of oil after July’s devastating $147/barrel peak, companies should also be preparing for the possibility of oil soaring to $225/barrel by 2012” – a comment made in response to a recent forecast by full service investment bank CIBC World Markets and which he describes as ‘very scary stuff’.

Earlier this year, the highly respected Toronto-based bank voted Canada’s #1 private equity adviser predicted that oil prices will reach $130 next year, $150 in 2010 and $225 by 2012 –though the firm has slightly revised its forecasts downwards in the wake the past few weeks’ financial markets turmoil

According to Fraser Ironside, low fuel prices in the 1990s and early 2000s sparked widescale development of centralised warehouse networks across Europe, but the soaring price of oil earlier this year, driven by growing industrialisation in China and India, has prompted some observers to forecast that current European warehouse configurations could revert back to more traditional ‘country’ models.

“Given that at present levels, demand is outstripping supply, and that fuel represents up to 40% of operating costs of a heavy truck, the question that supply chain managers need to be seriously asking themselves is ‘at what point does fuel cost trigger a network change?’”

The conclusion, he says, is that costs become significantly higher when companies fail to consider the possibility of change.

With oil ppb currently settled back to a similar level as July 2006 – effectively translating to 98p per litre on the forecourt – typical cost per mile for a full truck load is calculated at 56p.
With oil at the July peak of $147 ppb, £1.32 on the forecourt, £ cost per mile rose to 75p. At $200 pbb forecourt costs will rise to £1.51 and £cost per mile 86p.

Fraser Ironside adds that though July’s level of $147 ppb is an all-time high, the situation runs a close parallel to December 1979 when oil reached the then unheard-of level of $104.91.

“The situation we have now is very similar – volatility in oil prices, stagflation, ‘misery’ indices – so one would have though we should have anticipated at least some of it.
“Today, with the technology to forecast and plan for any eventuality, the conclusion is inescapable: ‘look at what’s going on in the world, learn from it and plan today to survive for tomorrow” he said.