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High Fuel Prices Lead Proctor & Gamble to Shift to Local Manufacturers

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Some readers have suggested increasing tariffs as a way to reduce our trade deficit and shield US workers from foreign competition.

High energy prices may be having the same effect. Increased transportation costs are leading companies to rethink how they source their products and shift to local producers where possible. A Financial Times story discusses Proctor & Gamble’s response:

Soaring energy prices are forcing Procter & Gamble to rethink how it distributes its products, with the world’s biggest consumer goods company shifting manufacturing sites closer to consumers to cut its transport bill.

Keith Harrison, head of global supply at P&G, the maker of Tide detergent, Crest toothpaste and Pampers, said the era of high oil prices was forcing P&G to change.

“A lot of our supply chain design work was really developed and implemented in the 1980s and 1990s, when our capital spending was fairly high as a cost of capacity and oil was 10 bucks a barrel,” said Mr Harrison in an interview with the Financial Times.

“I could say that the supply chain design is now upside down. The environment has changed. Transportation cost is going to create an even more distributed sourcing network than we would have had otherwise.”

Earlier this year, P&G launched a comprehensive review of the design of its entire supply operations in response to rising energy costs and its increasingly global expansion.

“We’ve kicked off a study that really asks: what is our business going to look like in 2015?” he said.

The study will include assessing trends such as moves to reduce product size, new sustainable packaging and future consumer demand on a regional basis. It will also try to anticipate changes in the global operating environment.

“What happens if oil is $200 a barrel? What happens if you can’t ship trucks on the weekends or if there are road congestion issues?”

Mr Harrison, responsible for the supply chain behind P&G’s global sales of more than $80bn, said the supply system was currently based on “large, single-category regional production sites with long supply chains”.

“Up to where oil was $70 or so, it was hard to justify building new capacity only on the back of new distribution costs. With oil at $140, the world has changed.”

There has been a trend in recent years for large companies to rely on fewer vendors and try to get the best price from them, partly via bargaining power, partly via greater integration. Those measures may prove disadvantageous, since they will probably make it more costly and difficult to restructure the supply chain.

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4 comments

  1. Anonymous

    Pass costs onto the consumer by raising prices.

    If they deal with Wal-Mart, they already have to make their packaging smaller because Wal-Mart told them to.

    I hear train stocks might be a good bet or maybe short their competitors in their sector hoping they fold first.

  2. Karl

    Consumer product companies, like P&G are typically local or at least onshore, other industries supply chains are more global and all were built based on a hidden assumption — $10 per barrel oil in the 90′s

    This is an assumption that has to be revisited and the supplychains will need to be reshaped to reflect the new realities.

    See interesting analysis by an MIT professor

    http://www.scdigest.com/assets/newsViews/08-04-10-1.php?cid=1605

  3. Lune

    Anon 11:57-

    I was thinking the same thing. They’re touting a study that’s going to peer far far into the future… of 7 years?? Gimme a break. College kids plan their majors for the job market of 4 years down the line. Medical students plan their choice of specialty based on what medicine will look like 10 years forward. And some CEO is getting paid millions to plan 7 years ahead? That must be the most damning admission of the shortsightedness of American management I’ve heard in a long time.

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