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IT executives must ensure businesses have systems in place to gauge effects of rising oil prices and the ability to quickly adapt if new suppliers must be found.
Also See:
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Why Dealing With Environment Is Good For Business
By Mel Duvall
The effects of the dramatic rise in the price of oil are being felt everywhere in the economy, but few feel the impact as much as Bo Andersson, group vice president for global purchasing and supply chain operations at General Motors.
Andersson's every move, every business decision, is being dictated these days by the unrelenting rise in oil as it pushes to new record highs. GM operates some 180 global manufacturing plants, from North America, to China, Europe and South America. His job is to see those plants are constantly fed with parts and to ensure finished vehicles are shipped to their intended markets.
"When you think of all the parts and all the vehicles we ship every day," he says. "I have one primary problem. And that's the miles to ship and the rates. Every day I have to manage those costs."
Andersson's challenge is one that must be shared and supported by chief information officers. Without the right systems and software in place, GM cannot effectively measure and gauge the cost effectiveness of suppliers with each $1 increase or decrease in the price of oil. And if those metrics determine that changes must be made, such as switching from a supplier in China to one in Mexico, GM also needs its IT department to be able to support the changes in workflows and processes so the move can happen quickly and smoothly.
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In fact, every $1 increase in the price of oil costs the automaker an extra $6.5 million in global logistics costs. On it's own that doesn't sound like much for a company the size of GM, but when you consider oil has risen from about $80 per barrel a year ago to recent prices in the range of $143 per barrel—a $63 increase—the added cost is about $410 million a year. GM spends about $7.2 billion a year to transport parts and vehicles.
The direct impact, says Andersson, is that GM is having to measure and make decisions daily on the most cost effective places to source parts and materials. It may have made sense a year ago to source seat belts from China, but with oil now about $140 per barrel, and possibly climbing higher, GM may have to switch to suppliers closer to plants and markets.
"I believe as supply chain leaders, it is critical we have the key metrics at our fingertips," says Andersson.
It is difficult to predict just how high the price of oil will climb. Lately, various analysts have predicted everything from oil holding steady at around $130 per barrel, to those, such as Goldman Sachs, who predict oil could climb to $200 per barrel within two years. The impact prompted analysts at CIBC World Markets to issue a report on May 27, with the almost unthinkable statement that "globalization is reversible."
The report's authors Jeff Rubin and Benjamin Tal concluded that oil prices are now impacting supply chains to such an extent that the benefits of seeking lower cost wages and production in such places as China and India, are being completely offset by higher transportation costs with some products such as steel.
"In a world of triple-digit oil prices, distance costs money. And while trade liberalization and technology may have flattened the world, rising transport prices will once again make it rounder," the authors concluded in their report. (See article: Are Soaring Transportation Costs Reversing Globalization?)
The rising price of oil is already a hot button for CIOs, who must manage spiraling energy costs and look for more effective ways to keep computers running and cool data centers. But the challenges faced by supply chain leaders also demand attention and the support of IT. The underlying question CIOs need to ask themselves are: Do you have systems and software in place that can help your supply chain leaders analyze transportation costs to determine if and when changes must be made? And if those changes need to be made, such as switching suppliers, are you able to make those changes happen quickly and seamlessly for the business?
In the past such changes could be planned out months in advance, but with oil-price spikes companies are being forced to make tough decisions quickly.
Pallab Chatterjee, chief executive of supply chain software specialist i2 Technologies, says the price of oil is driving many of the conversations the company is now having with existing and potential customers. i2's software, including its Total Supply Chain Management offering, allows companies to plug in a wide range of variables beginning with the price of components or sub assemblies, and can calculate the finished product cost by rolling-up inputs such as assembly costs, transportation, and tariffs. With these tools, and similar offerings from such vendors as SAP, Oracle, and Manhattan Associates, companies can examine and compare prices from multiple suppliers to ultimately make the best decision on how to compete.
This capability, says Chatterjee, may very well separate winners from losers in the new oil reality. Chatterjee, for one, is encouraging companies to develop playbooks—ready-made plans of action—that can react to key thresholds such as $140, $150 or even $200 oil.
"Normally, supply chains cannot react that quickly," Chatterjee said. "A CEO or supply chain executive calls a play and three months, six months, perhaps even a year later the play goes into action. We're talking about having plays ready so that when the play gets called, all of the players, the systems and the workflow can change immediately."
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