Fuel Costs and Supply Chain Decisions

By Welborn, Cliff | Journal of Transportation Management, Spring 2010 | Go to article overview

Fuel Costs and Supply Chain Decisions


Welborn, Cliff, Journal of Transportation Management


INTRODUCTION

Individual consumers are well aware of the effects of rising fuel prices on their personal shopping experiences. Numerous news reports, magazine articles, and personal stories recount the sticker shock of seeing consumer goods escalate in price. Consumers, who were once oblivious to fuel surcharges, logistics, and transportation strategies, have discovered how this aspect of supply chain management affects their ability to purchase goods. Families are even struggling to purchase fuel to keep their personal automobiles operational. Gas prices, and even gas availability, has become a significant issue for many citizens.

In the mid to late 1990's, the cost for a barrel of crude oil hovered around the $20 mark. However, in 2007 crude climbed to $150/barrel, and currently is priced in the $70-80 range. These crude oil prices translate to higher refined fuel prices. Not only do personal transportation vehicles rely on fuel, but also cargo jets, container ships, rail cars, and tractor trailers. These vehicles carry goods from manufacturers to the ultimate end customer. As crude oil prices escalate, fuel prices follow. As fuel costs increase, the cost to transport merchandise through the supply chain increases. Fuel surcharges, additional fees added to a standard freight charge, have become a matter of fact for many companies. Industrial buyers and consumers, who did not know or care where their products originated when transportation costs were low, are now becoming more aware of how the supply chain operates and how fuel costs affect the price of consumer goods.

Supply Chain strategies that were once optimum are being challenged as transportation costs rise and become a larger percentage of a product's total delivered cost (Tirschwell, 2008). Supply Chain decisions related to outsourcing, transportation modes, and product design and packaging are dramatically influenced by the cost to move a product from one location to another. Manufacturers are trying to become more efficient in their business decisions when dealing with options that affect transportation costs. Consequently, there is a positive side effect of the rising cost of fuel. Businesses are becoming more energy conscious and energy efficient when dealing with decisions that affect transportation costs.

Manufacturers are actively seeking strategies to become more efficient in terms of transportation costs. Three key areas being targeted for improvements are outsourcing decisions, modes of transportation, and product design and packaging techniques. Manufacturers are taking a close look at their outsourcing decisions. They

are comparing the savings associated with low cost labor in foreign countries with the transportation cost required to bring products back to the U.S. for sale. When moving products from one point to another, manufacturers consider different transportation modes, such as marine, rail, truck, and air freight. Each option has its own advantages and disadvantages in terms of speed of travel and cost of travel. Firms are also working to become more efficient with the design and packaging of products. The packaging of a product can have a significant impact on the cost to distribute it. The amount of cubic space the product and packaging consumes, and the added weight of the product and packaging materials, are two key considerations that are being addressed in hopes of reducing transportation costs.

OUTSOURCING

In recent years, the media has publicized the trend of manufacturing companies in the United States moving their production operations off shore. U.S. companies found the lure of low cost labor in foreign countries hard to resist. Moving the manufacturing operations offshore could result in major cost reductions, even when the completed products had to be shipped back to the U.S. for delivery to the final customers. Decisions were made to save on labor cost at the expense of transportation costs. …

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