Rising Energy Prices and Global Sourcing Don't Mix Well
It won't surprise many readers of this blog to learn that rising energy and oil costs are reducing the benefits of global sourcing, but it's worth asking the question, as Bob Ferrari recently did, if we've reached an inflection point in the energy/sourcing equation. In a post from earlier in the month, Bob states his belief "that this is just the beginning of fundamental structural changes that will occur in the interrelationships and flow of goods across global supply chains ... with increased speculation in world energy markets, an obvious imbalance in the global supply vs. demand for oil, and more predictions for increased global energy prices, it seems to me that we are quickly reaching a fundamental inflection point where supply chain business and global sourcing strategies are going to become structurally altered." While I don't think that we'll ever go back to a Spend Management environment focused just on local sourcing, I do believe we're about to enter a new era where global price equations don't necessarily make sense -- that is, unless the impact of rising global prices is simply inflated away (a scary, but not outlandish thought).
- Jason Busch
TweetBacks
First, strategic sourcing still has to at least look globally to see what representative prices are and what landed costs will be.
Second, they need to compare the landed cost saving to the difference in transportation costs between the local and remote suppliers.
Third, they need to calculate what percent of total landed costs both transportation costs are.
If for example, total landed costs differ by 20% but transportation is 2% of the local supplier's landed cost and 5% of the remote supplier's costs, the remote suppliers' transportation cost would have to more than quadruple in order to eat up the 20% cost differential. (Remember the local supplier's transportation costs would inflate at approximately the same rate...that's why I say "more than" quadruple.)
OK, I picked a set of numbers that lead to a preordained conclusion but my point is that the analysis is necessary in every particular set of circumstances and there is no set answer.
There will likely be secondary effects of course. I expect ships will slow down to save fuel. I expect green marketing strategies will lead many companies toward lower cost transportation alternatives.
This doesn't mean global sourcing will go away.