As oil prices rise, many of today's supply chain practices may become unsustainable.

Just-in-time manufacturing, offshoring, speeding products to market—even the use of plastic packaging—all rely on "cheap oil," says Larry Lapide, research director for the Supply Chain 2020 Project at the Massachusetts Institute of Technology (617-258-7267). But the world may not be able to count on cheap oil going forward.

Charles Taylor of Awake Consulting told members of the Council of Supply Chain Management Professionals (CSCMP) at their October conference that world production of petroleum will peak sometime before 2015. "The wolf is at the door," Taylor said. Oil is about to become more scarce and more expensive, "and it will change everything in your world."

Not all experts agree with Taylor's alarming predictions of looming oil shortages. Lapide says he is more optimistic about oil availability, but he is concerned about the cost of oil getting higher and more volatile (see chart below).

Several future oil scenarios are possible, says Lapide, but returning to reliably cheap oil is the least likely scenario, which means supply chain practices may have to change in the long term.

Manufacturing and distribution on a just-in-time basis, for example, is an oil-intensive practice developed during the 1980s (when oil cost less than $20 a barrel) that trades transportation costs for inventory costs.

"Once you start getting energy that's two or three times more expensive, the tradeoff picture will change," says Lapide. "We'll have to improve inventory management or carry more inventory."

Likewise, outsourcing manufacturing to Asia is an oil-intensive practice that trades transportation costs for labor costs. This tradeoff has worked well during the past 20 years while oil prices have been low, says Lapide, "but now we've created a supply chain that's vulnerable to the availability and price of oil."

"We advise clients to take a pessimistic view of fuel costs and freight costs," says Paul Huppertz, a logistics consultant for IBM Global Business Services (800-426-7080 ext. BCS).

And while the high cost of fuel has prompted some of Huppertz's clients to take on more inventory or to add more DCs to their distribution networks, he says, "it's not causing any wholesale strategy changes."

Brice Russell, senior vice president for supply chain at Masterfoods USA (908-852-1000), maker of Snickers bars and M&Ms, says volatility in fuel prices may not be forcing companies to change their supply chain strategies just yet, but companies are examining their strategies more closely than they have for many years.

Sourcing from China, for example, may still be the best practice, he says, but with fuel prices higher and less predictable, supply chain managers are envisioning a time when the practice ceases to be profitable.

"It may not be the time now," says Russell, "but it makes you ask, 'When is the time?'"

Rising fuel prices have already prompted Masterfoods to make changes to its domestic logistics network. The company implemented new software to assist in restructuring its driving routes and has made an effort to bring up the weights in its trucks, primarily by double-stacking pallets.

In the last year, Masterfoods has reduced its total mileage by 5%, saving 1.2 million gallons of fuel, Russell says, adding that rising fuel costs were the catalyst that forced the company to get smarter in its logistics planning.

Oil prices primarily impact the transportation-related components of the supply chain, but materials handling components are also affected.

Double-stacking pallets in over-the-road trucks meant Masterfoods needed more uniform pallet configurations, says Russell. The change affected the way products were palletized at the end of the production line and the way pallets were stored in the warehouse.

Since its introduction in the 1970s, stretchwrapping has become a popular unitizing practice. However, stretch film is a petroleum product with an ever-increasing price tag and Lapide suggests companies may have to use less of it in the future.

As companies place more emphasis on full truckloads, orders will have to be consolidated. Customers may have to offer more flexible delivery windows at warehouses and adapt receiving practices accordingly.

During the last two decades, warehouses have adapted to sending and receiving smaller, more frequent shipments. If fuel prices affect the supply chain in the way Lapide predicts, warehouses may have to adjust back to larger, less frequent deliveries.

Managing a supply chain always involves balancing the costs of transportation, materials handling and inventory, says Huppertz. As the price of transportation rises, supply chain managers will be forced to adjust the scales. How much adjustment they'll make, he says, depends on how expensive oil actually becomes and on how sensitive their particular products are to rising fuel costs.