Rising Oil Could Transform the Supply Chain

As we look ahead this Friday, our thoughts may be primarily focused on the week ahead. However, some of the biggest gains can be made by identifying long-term trends ahead of the crowd.

One thing to watch will be business inventories. As Tony Crescenzi noted, inventories added eight-tenths of a percentage point to the 0.6% GDP gain, which means that final sales (GDP minus the change in inventories) fell 0.2%. The easy read on this would be that sales were slower than expected, leading to the inventory build.

I'm not so sure about that. This month's CFO magazine says that rising oil prices may be changing the way companies do business. "The supply-chain management strategies spawned during the last 20 years -- quick transport, lean inventories, and a growing reliance on low-cost, offshore labor -- may not make good business sense anymore."

It makes sense, and it is worth thinking about how these changing practices can affect a broad swath of the investment universe. The most obvious casualties are probably companies like FedEx (FDX - commentary - Cramer's Take) and UPS (UPS - commentary - Cramer's Take) that have built businesses around just-in-time models.

But what about Dell (DELL - commentary - Cramer's Take)? Its success back in the day was built around a business model that included low inventories and shipment direct to consumers, and it was simply more efficient than those of its competitors. That strategy made sense when computers averaged $2,000 to buy and $30 to ship, but it seems questionable when computers are under $1,000 to buy and $100 to ship. Perhaps this explains the persistent rumors of Dell's interest in RadioShack (RSH - commentary - Cramer's Take). What quicker way to revamp the supply chain?

Mileage in Mind

The CFO magazine article also notes that companies like Kimberly-Clark (KMB - commentary - Cramer's Take) are moving their distribution centers closer to consumers to save on fuel, or leasing distribution centers from third parties and using more intermodal (rail and road) transport such as "trailer on a flatcar," in which the long-haul portion of a shipment is by rail.

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At the time of publication, Trent had a covered call position in Landstar and had written put options against shares of RadioShack, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.