Time for a process overhaul?

Global - Corporations probably only started to think seriously about bottom lines when oil prices reached US$120 a barrel, said Dan Kuzdzal of KPMG Advisory, when companies worked out the this equated to an extra four cents per mile of fuel related costs being passed on to them by their distributors.

"If your company was operating on paper thin margins already, this was the sort of price hike which you could no longer afford to ignore. With oil more like $140 per barrel at the time of writing, you can only imagine the effect this is having on corporate balance sheets around the world," he says.

Kuzdzal believes one of the ways of mitigating the high prices of oil is by being prepared to use new technologies, but much of it also requires businesses to challenge procedures which have been in place for years.

"For example, how many businesses are using the available approved fuel additives which can improve both fuel and engine efficiency? How many businesses are now starting to reassess their distribution networks? And by that I don't just mean where distribution hubs are located. I mean - who's actually considering whether direct-to-customer distribution is more efficient in fuel terms than sending goods to a distribution centre and then sending it on from there?"

The analyst believes only the more flexible and forward-thinking companies are considering these options, but that more companies will be forced to reconsider long-standing strategies as they fight to keep their margins.

One of the strategies worth revisiting is low cost country sourcing, he says. "These may have looked like a no-brainer several years ago but now the extra fuel costs may have wiped out any benefit which the location brought."

Companies who have realised this are now using routing software to reduce mileage and avoid congestion and accident hotspots, including selecting routes which eliminate as many left turns as possible (in countries which drive on the right). "If this sounds an extreme measure, consider how much time is spent - and fuel burnt - in large trucks waiting to cut across the oncoming traffic," he says.

Another long-standing tradition companies can afford to rethink is the "cost to serve" theory, he says. Companies in the past have been generous to offer premium delivery options, even if this was highly inefficient. "I believe it may not be much longer before companies revert to offering standard delivery only because fuel costs have turned such premium delivery options into a millstone around their neck," he says.

The fact of the matter is that oil may not revert to its lower prices in the short-term. "However, far from being a cost which they simply have to swallow, this is something which can be actively managed," he says. "It's a question of whether companies have the creativity to do so or the nerve to challenge some well-established conventions within their business models."