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Advice and Impulse

Higher Oil Prices will not lead to Regionalization of Supply Chains

What effect will increasing oil prices have on global supply chains? Will higher transport costs result in the regionalization of supply chains? Answers to these questions are provided in a study by WHU – Otto Beisheim School of Management and by DB Schenker.

Lesser production costs, lower oil prices and efficient transport paths have led, up until recently, to increased globalization of supply chains. For reasons of costs, many companies increasingly moved their production abroad. Up until the explosive increases in oil prices in the year 2007, at least. Within six months, the price of crude oil per barrel rallied from 55 USD to almost three times this value. The result: the return of cheap production in Europe was once again en vogue.

Increasing oil prices have almost no effect on total costs

The results of the WHU study seem odd at first sight: According to the study, even rapidly increasing oil prices have negligible effect on total production costs. The reason for the regionalization of supply chains is more likely to be the lack of flexibility, reliability and quality of production abroad than the increases in oil price.

The study assumes a variety of situations. It takes into account increasing wages in the emerging markets as well as high oil prices and necessary environmental protection levies.

Savings of a third abroad – despite higher oil prices

Example Toys: Production costs in Germany are one third higher than in China – even with oil prices of 150 USD per barrel and wage increases of 6 percent per year. Even larger are the cost differentials in standard clothing and electronics. Production in Germany would only make sense if oil prices hit four digits!

The reason for this is the small proportion of entire costs taken up by transport. Even for quality products which can only be transported by air, transport costs account for only 1-2 percent of total production costs. The only exceptions are products which are heavy and voluminous such as sand, cement or refrigerators.

Another reason is the efficiency of transport: Transport of a 40-foot container on a fully loaded freight ship from Shanghai to Hamburg is not more expensive than transport by lorry from Hamburg to Stuttgart.

Decisive factor for supply chains: wage costs

The study also shows: The most important factor in global supply chains is personnel costs. These are only a fraction in China – despite increases – of those in Germany. Wages in China must increase by 12 percent each year for 20 years to reach German levels.

The increase in oil price is nevertheless felt in supply chains. Not the long but the short distances become more expensive. In order to meet this problem, loads must be better organised, the number of distribution centres increased and the speeds of lorries and ships reduced.

As a result of the global economic downturn and the crisis of the financial markets, the regionalization discussion has lost lots its heat. Meanwhile, oil prices have fallen below 50 USD. At the very latest with the expected rebounding of oil prices though, the discussion on global supply chains will return.

You can download the complete article published in "Logistik inside" besides (in German).

Last modified: 21.08.2014

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