Excerpt from: China Supply Chain and Logistics Strategy
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| January 18, 2007 | | Affect of Fuel Prices Changes on China Logistics Networks: Impact of Human Behavior | In a previous post I commented on the effect of energy cost increases on logistics costs and China logistics strategy. As a follow-up, below are some insights obtained from William Drumm, President of Establish Inc. North America.
Bill has extensively looked into the effect of energy cost increases on logistics costs in North America and has commented on it in the annual review of logistics costs presented at the 2006 CSCMP Conference. Based on the data examined in North America, while energy increases make for great news shock value in the media, changes and fluctuations in the energy costs and their impact on total logistics costs are muted by the relatively small percentage that energy represents in total logistics costs – at least in the US where they have data to examine.
While energy costs have risen, and will continue to rise, based on the US cost components of logistics Bill Drumm does not agree with the conclusion that the magnitude of the increases that are being experienced will necessarily lead to changes in logistics networks in the US.
Establish Inc. in New Jersey has demonstrated that the amount of logistics costs which are actually energy are still relatively small as a percentage of total costs. A 20% increase in the cost of energy being used in transport would result in less than a 5% change in total logistics costs.
Of course this may change in the US due to a number of logical reasons.
In addition, logistics managers may react more to the media and its stories about energy than they do to logical math. Thus, we may see a stronger reaction than is dictated by the math alone.
Comparative Impact on China Logistics Costs
The relative weightings of the cost components in China will most likely be different. If oil and energy make up a larger component of the total costs (due in part to the lower wage rates, and the higher amount of transport being accomplished for instance) then the changes in energy costs will drive a larger change in overall costs and a correspondingly larger reaction in logistics strategy.
It is important to obtain accurate logistics cost data in China in order to verify this assumption.
People Drive Supply Chains (Buyer Behavior Important)
Logistics managers are not the only individuals who may react illogically. The complexities of developing and maintaining the best logistics and supply chain strategy in China are intimately tied to customer behavior. Therefore, it is also advised to closely watch for changes in
the buying behaviors of your customer segments and adjust your logistics strategy accordingly. Your customers may also react in response to media hype, rather than facts based on true logistics costs increases. Customer relationships should improve if your company can effectly obtain and use objective facts on actual impacts of energy cost increases on the logistics network - and ultimately prove that the product prices and service levels to customers will not be affected by energy cost increases.
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