What Does the End of Cheap Oil Mean For Procurement?

Those who have seen or heard my recent Spend Management stump speech might recall a new slide that talks about the cascading cost impact of $100/barrel oil across the supply chain. But I barely pay the subject justice, compared with a recent dissertation-like analysis in DC Velocity about what "The End of Cheap Oil" will mean for the world -- and procurement and operations organizations in particular. The detailed article -- which is worth printing out for your next long flight -- is a synopsis of a number of stories from The Supply Chain Quarterly on the subject. Above all, I was struck by a few bullet points at the start of the piece, one of which suggests that the "cheap petroleum energy has been a main driver of supply chain productivity" is "now gone". While "this is not the end of civilization ... we are in an uncharted bridging period and without prompt and decisive action, human suffering will be high." Above all, "Winners will start implementing their supply chain plans NOW!"

What will winners look like in this new era of high-priced oil? The author cites Toyota who managed to emerge after the last oil crisis as a leader of the pack in a country whose economy was one of the hardest hit during the energy crisis in the 1970s. According to the story, Toyota recovered within one year -- 1974 -- from the oil crisis, sustaining higher earnings in 1975, 1976, and 1977 than its competitors. Beyond the scenes, "what was going on was the development and refinement of the Toyota Production System, or 'lean' as it is now known" and as a result, "Toyota may be the only large company in the world that understood and learned from the 1973 oil embargo. It is now the biggest and most profitable automobile company in the world, with market capitalization larger than that of GM, Ford, Daimler/Chrysler, Honda, and Nissan combined." Now that's food for thought next time you pay a fuel surcharge or receive a price increase for any commodity directly or indirectly impacted by the lasting impact of rising oil prices.

- Jason Busch

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