Ch 11 - Please read - Managerial Insights Box

What will be a major negative impact of commodity swapping and why?

"Who says competitors can't be good to one another? One nonobvious way to lower the overall cost of supply chain operations is for competing companies to make a deal with each other to rationalize commodity sourcing. Swapping with a competitor may lead to mutual cost savings where everyone wins. Raw materials are traditionally shipped from the point of extraction to the point of processing. This takes place across vast oceans or continents. The innovation of commodity swapping allows some companies in iron, steel, chemicals, paper, oil, electricity, and textile industries to virtually eliminate the cost of transporting commodities. When a shipment of metal bolts makes its way across the ocean and passes another shipment of nearly identical bolts heading in the opposite direction, the managers receiving these shipments should consider swapping commodities with one another. Consider the case of the Dow Chemical Company, which makes 100% of its polymers in the United States. Dow Chemical used to ship these polymers to be consumed by its own plants around the world, less than half of which were located in the United States. A competitor company, Arkema, with manufacturing based in France and Italy, made the same polymers and shipped them around the world to be consumed internally, some by plants in North America. Both the European Union and the United States imposed import duties, and the Atlantic Ocean freight cost per metric ton was $40 to $60. The competitors saw an opportunity to engage in a costsaving collaboration. After each company tested the competitor's product, Dow Chemical and Arkema negotiated a commodity swap to supply one another's polymer plants. This collaborative negotiation between competitors resulted in annual cost savings of tens of millions of dollars. Swapping allows both parties to eliminate inefficient transport procedures. Commodity swapping is particularly useful when dealing with import taxes, large distances, and bulk quantities. The concept of swapping commodities can be extended to products as well as to manufacturing capacities. Benefits of swapping include reduced transport costs including import and export levies, reduced logistics costs including storage, reduced uncertainty in supply, reduced price volatility, reduced inventory, and reduced environmental impact."