Reverse Globalization

June 26th, 2008 at 02:55am Sean Delaney - Iasta UK

I have long held the view that if you factor in all the costs associated with Low Cost Country Sourcing (including mistakes driven by long lead times as requirements change) then the benefits are no longer what they initially seemed. As pointed out in a previous blog and also more recently here by Michael Lamoureux, there are many risks associated with LCCS, but I feel these have now been surpassed by the increased cost of distribution driven by the price of Oil.

In a recent paper “Will soaring transport costs reverse Globalization” published by CIBC (Canadian Imperial Bank of Commerce) and written by Jeff Rubin, and his colleague Benjamin Tal, it details the turning point in the global supply chain.

For example, the cost of shipping a 40ft Container from the Far East to the Eastern Seaboard of the US, has almost tripled since 2000 ($3,000 to $8,000). This will double again once the price of a barrel of Oil reaches $200.

Furthermore, at Today’s oil prices, every 10% increase in a trip distance, translates into a 4.5% increase in transport costs.

Not only does this suggest a major slowdown in the growth of world trade, but also a fundamental realignment in trade patterns. The chart below emphasizes the shift in the structural costs of distribution between 2001 and today. The chart also shows how the costs will change when we reach $150 and then $200 a barrel!

In particular, the report points out that those commodities that have a higher ratio of freight cost in relation to the selling price are now possibly more competitively priced locally than sourcing from the Far East. A current example is in the US, where a delivered cost of 1 tonne of hot-rolled steel (manufactured in the US) has now a lower delivered cost than sourcing from the Far East.

The report highlights that non tariff barriers pose the “greatest threat world trade”. Clearly, this is the start of new challenges for supply chain professionals and the answers may now lie closer to home!

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Entry Filed under: Analysts/Research, General, Global Supply Issues/Risk, Sourcing News, Supply Management Best Practices, e-Sourcing Marketplace