The world's supply chain managers should brace themselves for government intervention as high oil prices and shortages become permanent, with no viable alternatives to cheap fossil fuel in sight. So, as more companies move production out of the UK on the grounds of capital and labour efficiency, can we really condone the long term transportation of basic manufactured foodstuffs from Spain and elsewhere to the UK in high volumes?
The trade-off between minimised capital investment with high levels of automation on one hand and intensively used, low cost transport on the other is in desperate need of a strategic re-think. But considerations such as discounted cash-flow (DCF) or an internal rate of return (IRR) - the two algorithms that drive most business investment decisions - also need to be taken into account.
Assuming that fuel prices eventually hit £2/l, would that change DCF-based decisions made by big food manufacturers? Take Spain, for example: the journey to and from Spain consumes (say) 270l of fuel, times 15 journeys a week - around 200,000l a year. If you double the price of diesel from £1 to £2, you add an extra £200,000 a year to the costs of transportation.
Compare that with the avoidance of around £25M in capital spend. I do not need to run a DCF to tell you that the original investment decision would still be ratified - even at £2.50/l.
Can it be the right decision, knowing what is going to happen to fossil fuels? I think not. I can see very clearly, however, that, without government intervention, the chances of change are remote. But is any government brave enough to grasp this 'big brother' nettle?
How about a specific tax on food miles for manufacturers and retailers, reported clearly to shareholders in the annual report? You might set the tax just above the level that will change the DCF break-even? You might even accompany such taxes with additional, compensatory rules on capital allowances? Just a thought ...
Tim Knowles is partner at supply chain consultancy TKA.