What Tiger?

An airline industry strategist once told us about a unique operational problem he faced in his early years.

Working at San Francisco International Airport one night, he opened the cargo door on a freighter making a run from Seattle to San Francisco to Los Angeles to find, from the loud roar and hot breath coming from the inside, that a live tiger had gotten out of its shipping cage, putting the ground crew in mortal danger.

What do you do in the face of such a life-threatening emergency?

"I slammed the door shut, called our Los Angeles station and I told them they have a problem," he said.

In supply chain management, that is called postponement - the idea of pushing the last logistics and execution decisions as far downstream as possible to minimize the risk. It's an idea that drives many production line decisions at factories and larger distribution for retailers.

It's one driver, for instance, behind the move by home improvement retailer Lowe's to shift its inventory to more regional distribution centers, as described in an article in this week's issue by Managing Editor Bill Cassidy. It pushes final delivery to stores further down the supply chain, where the company hopes to get a better sales bang for its inventory dollar.

It's a strategy many shippers have been using to mitigate fuel costs - more staging of inventory at interim points in the distribution chain and consolidating shipments into truckload or intermodal, pushing some of those costs further upstream.

The trouble is, everything upstream has to come downstream eventually.

Last week's runup in diesel fuel and crude oil prices came along with news on prices in the larger economy that serves as a stark reminder that postponement may be a strategy but it also is really just a delaying tactic.

The government's measure of prices at the wholesale level rose 1 percent in July, including a 4.4 percent increase for "finished" energy goods. The core index, which strips out energy prices, has grown 2.8 percent in the last 12 months, the largest rise in that category since 1995.

Even more sobering was that prices for what the Department of Labor calls crude goods - the unfinished raw materials that go into production - soared 6.7 percent in July.

Anyone who has seen the first signs at gasoline stations for $3 gas, or the news that the average price of diesel fuel in California surpassed $3 a gallon, shouldn't be surprised. Diesel fuel not only hit a record of $2.567 a gallon last week but the 16 cent increase in a single week was a shock to many.

Yet many businesses report that the prices for their materials have been declining of late. The Institute for Supply Management's price index has been in steep decline from since March and only 24 percent of the executives ISM surveys reported paying higher prices in July.

Yet Wal-Mart raised alarm bells this month when it said that the high energy costs were starting to hit the company, not just because of what it pays its transport providers but in the way the costs are cutting into the spending power of the retailer's customers.

As far as fuel costs are concerned, in other words, pushing the problem down the supply chain doesn't put the tiger back in its cage.

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