Chain Reaction

This week’s commentary examines the rising price of fuel and the supply chain.  Here’s some of what we talked about:

Our top questions these days are all about how to respond to high oil prices. Even the most respected and well-heeled global supply chain leaders are wondering how quickly everyone else can flex their supply network designs to offset the risks and challenges posed by $150-a-barrel oil. The answer: not quickly enough, unfortunately.

Oil has been ridiculously cheap for almost 20 years, coinciding nicely with the development of supply chain management as a widely recognized discipline in business. Not until 2005 did our current steep climb begin. Certain sensible principles like leaning inventory, outsourcing low value-added work, and rationalizing suppliers have gotten out of hand as we have chased cheap labor and just-in-time deliveries around the world.

We have thoughts on a fix: Railroads. Rail is dramatically cheaper per mile than truck transport, and yet, according to the American Association of Railroads freight traffic is down from last year. Carload traffic, which handles bulk shipments of stuff like coal, was down 3.6% in June 2008 compared to June 2007. More telling is that intermodal traffic (containers that fit onto trucks for their “last mile”) was down 4% in the same period. So, containers full of toys and furniture shipped from China are still rumbling eastward on Interstate 80 despite $5.00 per gallon diesel. Why?

You can subscribe to the Chain Reaction companion newsletter here. What do you think? What other fixes might there be for high oil prices (which aren’t likely to go away)? Let us know here.