World Trade - February 2009 - (Page 37)

SUPPLY CHAIN Freight costs from China were on average 20% of landed costs of goods, and fuel was on average 20% of freight costs. Consequently, a rise in fuel costs by 400%, from $30 to $150 a barrel, would translate to a 16% increase in the landed cost of goods (assuming the shipper passes on the entire cost increase). This rise will wipe out almost all the savings from LCCS in some categories. The recent lifting of some fuel subsidies by countries like China, India and Indonesia will make raw material and production costs in these countries go up, putting further pressure on the savings from sourcing. Furthermore, hedging against exchange rate risks has to be integrated into the sourcing strategy. The burden of importing with rising fuel prices has been exacerbated by a decrease in the value of the U.S. dollar. Historically, an increase in oil prices is accompanied by an increase in the value of the USD. That makes imports cheaper—creating a natural hedge against rising transportation costs. Instead, oil prices increased almost six fold since 2002, while the dollar has slid against most major currencies in the same time period. To deal with this double whammy of rising fuel costs and a falling dollar, the sourcing executive must effectively answer the following questions: • Do I understand my total cost of ownership (TCO), including my detailed landed costs? • What is the inﬂection point in the price of crude and the USD exchange rate at which one sourcing location will become unviable compared to another? • For which categories of sourced goods is transportation a large component? • Can the cost increases in these categories be passed on to customers? • Can a premium be obtained for shorter lead times or on goods made in the US? • Are the savings on these categories sufficient to justify continued LCCS, or should they be nearshored? • Should the prices with suppliers be contracted in USD or in local currency? • Should length of contracts be re-evaluated to protect from further increases in fuel costs and currency depreciation? • Which suppliers are more fuel efﬁcient or improving fuel efﬁciency levels? • Is one country a better long-term choice because of proximity to oil, government subsidies on fuel, availability of alternative energy sources, etc.? Transportation mode Another lever that the supply chain practitioner can use to control supply chain costs is choice and mix of transport mode. With rising fuel costs, fuel efﬁcient modes of transport will replace quicker and more fuel intensive forms. The rise in fuel prices has widened the cost gap between air freight and ocean freight, as the corresponding fuel surcharges have been much higher in air freight. Today, sending a container from Shanghai to WWW.WORLDTRADEMAG.COM 37 http://WWW.WORLDTRADEMAG.COM

Table of Contents Feed for the Digital Edition of World Trade - February 2009

World Trade - February 2009 Contents Taking Stock in America Confronting Corruption in Latin America Supply Chain Watch Tradewinds Where's the Goods? Where's the Money? Hope on the Horizon Managing Fleets in Turbulent Times The Impact of China's Economic Slowdown on U.S. Supply Chains The Fuel Volatile Supply Chain Getting the Most from On-the-Fly Transactions Managing Supply Chain Risk by Managing China Sourcing Capacity OECD Global Economic Outlook for 2009 'Natural' Agricultural Monopolies No More

World Trade - February 2009

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