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From the Desk of Jack Healy

How Oil is Shaping Your Manufacturing Organization

By Jack Healy, Director, MassMEP

That uneasy feeling we all get these days as we refuel our cars, the feeling that something in our lives has changed, has certainly become more acute as gas goes over the four dollar a gallon mark. While this is not a feeling of change for the good, it should be viewed in perspective — today’s fuel prices are the result of our country’s success in its goal to globalize the world’s economy. Today’s prices at the pump are a result of increased global demand for diesel fuel, not only in the US but from China, India, and Europe. And this is a direct reflection of our government’s policies for growing world trade.  

And now we’ve gotten what we wished for. Newly developed demand for US goods from these rising economies, coupled with a low dollar, has provided US manufacturing with the biggest emerging market opportunity of the past 50 years. US manufactured products are now a ‘sale item’ to the rest of the world.

This change is becoming a reality as increasing exports of goods to other nations has increased an average of 8.3% a year from 2004 through 2007. The US Department of Commerce announced that January 2008 exports increased 16.8% from the prior year, and there are now Wall Street Journal articles stating that we are facing a "longer term Manufacturing renaissance" that is "a godsend for the country’s depleted manufacturing base." 

If this growing in exports continues into the future, it has the potential to reverse many years of trade deficits in manufactured goods and could save the country from a deep recession, or even worse, a multi-year economic decline. But all of this can be lost unless we can employ the needed innovation and management changes necessary to compensate for the high costs of fuel, not only here, but throughout the world.

Container Shipping Capacity Innovation – Super Ships are
now adding shipping capacity at a rate in excess of

Overseas Sourcing
One of the primary of areas responsible for the growth of US manufacturing is overseas sourcing. Approximately 16 million (20 ft. equiv.) containers now arrive in US ports each year and are a vital part of today’s complex, "Just in Time" supply chain infrastructure. The continued, cost-effective management of the delivery of materials, components, and finished products, without increasing inventories, is the most significant challenge facing the US manufacturing economy.

This challenge has developed into a whole new entity described as "Logistics Management," the management of goods and information between the point of origin and the point of consumption in order to meet customer requirements.

The problem in meeting this challenge within the manufacturing community is that there is no complete, fully integrated, interoperable, and transnational manufacturing software available to manage all of the associated logistics costs.

This means that US manufacturers need to continue to develop their own business solutions by piecing together existing platforms from various software vendors in order to meet specific needs. We are fortunate that US software firms still dominate the market, providing a vast array of the products and support services that are required to customize the individual supply chain needs of the manufacturers.

Taking Advantage of Container Capacity
Yet there are immediate opportunities for improvement in the existing supply chain  systems, that the accelerating cost of fuel will be forced to be realized. Logistics Management magazine’s outlook on ocean freight, in their "2008 State of Logistics Report," indicates that "overall slot capacity – the biggest, crudest measure of overall container shipping capacity — is being added at a greater rate than the growth that is being projected in this trade year. What this really means is that the fundamentals are there for the steamship lines to continue to face this pricing pressure situation, much to the benefit of the shippers." 

This is especially true for US exporters, who can take advantage of surplus incoming container capacity to mitigate fuel cost increases and negotiate attractive export rates. This is usually best achieved by companies who centralize the management of all of their shipments into one department. Purchasing managers seek to keep control on all aspects of pricing and use of freight as part of their negotiation process. This is all well and good, but there are significant savings to be had when all shipments are centrally managed in a single department, internally, or through an outside professional logistics organization. 

Redefining Shipping
All manufacturing enterprises need to realize that the management, planning, and control of the flow and storage of goods and related information between the point of production and the point of consumption require continued organizational changes well into the future. What used to pass as the "shipping department," that was originally organized to manage the LTL outbound shipments, will no longer suffice.  Increasing demands from customers, supply chain interactions, information systems, and more, requires a re-evaluation of this function by all manufactures

Trucking has been a mainstay of US transportation, transporting the vast majority of today’s goods. This will undoubtedly continue into the future. However, there are opportunities for change here, as the high cost of fuel reshapes reality.

As reported by the American Trucking Society, "a one-penny increase in the price of diesel cost the industry an additional $391 million dollars a year." The industry’s 2007 diesel expenditures were equal to the size of the Kuwaiti economy, the 6th largest oil exporter in the world. The industry’s diesel costs are now on track to rise to $154.1 billion dollars or another $32 billion dollars of costs that must be absorbed.

The Switch to Rail
The trucking industry is facing similar overcapacity as ocean freight will undoubtedly employ many tactics to minimize their costs. However, such rising costs are driving manufacturers to move away from a one-size-fits-all approach for transportation management and toward a multi-modal strategy. Bear Stearns’ 2007 shippers survey indicated that respondents have switched an average of 6.7% of their truckloads to rail in the fourth quarter 2007. This marks the highest level of freight diversion to rail since the second quarter of 2003.

There are opportunities in this continuing energy crisis that can only be realized if addressed head on. The continued escalation of energy costs are have evolved through economic forces that are beyond our individual control, but we compound the issue if few manufacturers reorganize their production processes in order to maximize their energy  utilization.

Individual firms have done some outstanding work in limiting their own energy costs, but there has been little reduction of energy costs in their respective supply chains.  With Massachusetts already having the highest energy costs in the nation, it would seem that there would be a concerted and widespread effort to control not only direct energy consumption, but the indirect consumption that is contained in supply chains and is being subsidized by purchasers. While there has been a widespread adoption of various energy conservation programs that are offered by the power companies, there has been no corresponding effort applied to the reduction of energy utilization.

Anyone interested in finding out more about the opportunities for managing the energy utilization in their supply chain, contact Mike Prior at 508-831-7020.

Additional Resources
For a copy of the "2008 International Trade Report," see

For a discussion of the opportunities for managing trucking and rail costs, see  "Regional Effort Required to Upgrade Transportation Infrastructure."


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