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 {complink 577|Avnet Inc.}, 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, {complink 6199|Vishay Intertechnology Inc.} 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.

5 comments on “Energy Costs and a Supply Chain in Denial

  1. Jay_Bond
    September 13, 2011

    It appears that the U.S. is the biggest loser in this battle. With the current economic situation and high unemployment coupled by reduced spending, the dollar isn't holding its ground. Even with other countries feeling economic pressure, oil prices are up due to growth in large segments of the globe. With the dollar being a weaker currency right now, crude prices can still increase and the U.S pays the higher price, even with a weak dollar. 

  2. hwong
    September 13, 2011

    The fluctuations of oil prices has always been an issue from the onset of civilization.  It's nothing new. I think the bigger question is, when will new technologies like electric vehicles become more prevalent so that we no longer have to rely on oil and provide more environmental friendly alternatives. 

  3. mfbertozzi
    September 14, 2011

    (@Bolaji): thanks for the article and very interesting live chat held yesterday with Gerry. Basically, I am wondering just a question: are mass-media providing same broadcast or similar sounding board for oil also for alternative energy (bio-mass fuel for example)? Even Gerry stated oil fluctuation is an intrinsic key factor, I am convinced we are not assisting to a fair pounded massive communication; as results there is still no way to face continuous growth of energy costs.

    September 14, 2011

    It will be interesting to see how the USA develops its transportation systems over the next few years with the cost of oil being so high and likely to stay that way. When I lived in the USA in the 80s and 90s I never really considered the cost of gasoline at all.  Living now in Europe I really think about the cost of most journeys. I suppose it might be time for the USA to get more in line with the rest of the developed world in terms of the impact of oil consumption.   Individuals and businesses are similarly affected by transportation costs.

  5. mfbertozzi
    September 15, 2011

    We didn't mention till now weather effect on energy costs. If we consider past Winter, for instance in US or Central Europe, it was a disaster and transportation services have been completely off for several weeks. It was a huge damage for delays in delivery and for demands' peak (not planned) of crude oil. Due to CO2 emissions, it seems expectations on weather forecast are strong winters and hot summers.

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