Energy Costs and a Supply Chain in Denial

In 2008, a trader bent on making history made the first $100 bid for a barrel of crude oil. It was a headline-grabbing move, since oil was trading at a substantially lower level, and everyone knew the trader wanted to make a loud statement. He rammed into our collective consciousness the idea that wild gyrations in energy prices could force significant changes in global economic and business decisions.

Three years later, crude oil prices stormed above $100 per barrel again, driven this time by economic upheaval, trouble in the Middle East (especially Libya), and a sharp decline in the dollar against other major currencies. Since oil producers trade in dollars, it made sense that any weakness in the value of that currency would require prices to rise. Today, nobody would bat an eyelash if crude oil prices surged even as high as $120 per barrel.

Except, perhaps, for businesses that are beginning to wake up to the corrosive effects of rising energy costs on their profits and margins. Companies have used hedging mechanisms to offset fluctuations in energy costs. But it is becoming clear that the added uncertainty is putting pressure on managements across the electronics industry, one of the segments heavily impacted by rising logistics prices and fuel surcharges. Gerry Fay, chief global logistics and operations officer for Avnet Inc. (NYSE: AVT), pointed that out in a recent blog on EBN. (See: Death, Taxes & Fuel Surcharges.)

Transportation costs can be both a hidden cost and a minimally understood utility for manufacturers across all economic sectors. Everyone realizes that products must get from the factory floor to customers, so everyone values the critical service that logistics companies provide. But very few top-level executives appreciate the nuances of the industry and the extra charges layered on to their operations by continued fluctuations in energy costs.

This issue has become even more important in the current economic climate. Any additional margin squeeze, no matter the source, should be of concern to industry executives. Skittish consumers in Western economies are dodging all but the most essential purchases. We're already seeing signs that end-of-year sales might not be as robust as they were in previous years. Several companies have cut revenue and profit forecasts. On Monday, for instance, Vishay Intertechnology Inc. (NYSE: VSH) lowered its sales guidance for the current quarter to a range of $625 million to $655 million, compared with the prior estimate of $675 million to $715 million.

"The anticipated seasonal pickup during the current quarter did not materialize," Gerald Paul, Vishay's president and CEO, said in a statement. "The expected inventory reduction of our products in the distribution channel is occurring while the slowdown in the consumer and computing end markets did not reverse."

How much more pressure can Western energy consumers take on top of high unemployment, softening purchasing power, and stomach-churning uncertainties about the future? One would have expected energy costs to weaken in the face of declining demand, except that the global economic weakness everyone keeps talking about is not truly global. The West is weak, but many Asian, South American, and even some African countries are trying to curb steamy growth that's driving up inflation. As a result of the strong growth in Brazil, China, India, and Russia, demand for crude oil is swinging higher, pushing up pricing.

If you cannot control what the energy market does, you certainly should try to get assistance from supply chain service providers, including distributors and logistics vendors, to improve transportation productivity.

Today, EBN will advance the discussion of transportation costs with a Live Chat hosted by Gerry at 2:00 p.m. EDT. The subject is "Managing Supply Chain Transportation Spend & Fuel Cost Volatility," and you can participate by clicking here.