Now Cheaper, But not “Cheap Oil”

This is an excerpt of the original article. It was written for the January-February 2015 edition of Supply Chain Management Review. The full article is available to current subscribers.

January-February 2015

As long as there have been boats and beasts of burden, intrepid business professionals, governments, and marauders have sought fame, fortune, wealth, and value by going global. Think the Phoenicians, Marco Polo, and the Vikings in days of old. Or in contemporary times, think of China, BRIC, EMEA, and other emerging markets. One could argue that outsourcing to China a few decades ago gave birth to supply chain management as we think of it today. This month we’re including an online bonus column from APQC. While this issue focuses on global management, we didn’t want to miss out on the column.

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This column represents the annual oil update I’ve been writing since my first column in the January/February 2007 SCMR issue (“Is Your Supply Chain Addicted to Oil?”). Since then, I’ve been steadfast in my advice to supply chain managers to constantly wean their supply chains off oil-based consumption because the price of oil would go up as well as be more volatile over the long-run (defined as at least a decade). However this year’s turmoil in the oil industry (largely driven by the U.S. producing more oil from fracking) gave me some pause before I put pen to paper. I questioned whether the advice I first offered in 2007 is still sound today.

Back in 2007, most supply chains had evolved significantly during the “Era of Cheap Oil” that ran for almost 20 years, from the late 1980s until late in 2004. This period also overlapped with the heyday of the Supply Chain Management (SCM) revolution that began in the mid-1990s. From that time, companies started to alter their networks to embrace the integration and globalization of supply chains, leveraging “Cheap Oil” to minimize costs and inventories. The evolving supply chains included more plastics-based products, wrapped in even more plastics. Supply lines were more fragmented and longer, and this led to the greater use of oil-based energy to transport goods around the world with little abandonment, that is lots of materials, components, and finished goods too-often were transported half-way around the world to their point of consumption.

The end of Cheap Oil was brought about by long-term supply-demand issues. The increasing demand for oil from developing economies around the world (such as China) as well as the use of more costly oil extraction techniques (such as shale fracking, tar sands extraction, and deep-water drilling). This portended a future of increasing oil prices in the long-run as a result of increased global demand and more expensive supply. Thus my advice to managers was to revisit their supply chains over time and evolve them to being cost and oil-efficient, rather than cost and inventory efficient. 

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