Solved: The fluctuating price of oil has a big impact on

The fluctuating price of oil has a big impact on the cost of a supply chain. As oil prices increase,
so does the cost of transportation. Recent fluctuations in the price of oil have taught supply
chain managers that they need to develop a robust supply chain strategy that performs well if
the price of oil is high or low. Also, supply chain managers need to be able to project the
amount they will spend on transportation as the price of oil changes. This is a question that gets
the attention of the senior management within any firm. For businesses that ship mostly by
truck, we can start to answer this question by understanding how the price of oil impacts the
price of diesel fuel. (After we know this, we can approximate how much of our costs are driven
by the price of diesel. For other modes of transportation, we can follow a similar methodology.)
Figure 6.15 shows a scatter plot of the price of diesel versus oil. This data can be found on the
book web site in the file Oil and Diesel Prices.xls. This represents weekly data from December
30, 2005, to March 30, 2012.

A regression analysis can help us determine the relationship.

a. Run a regression in Excel on this data with the price of diesel as the dependent variable.
What is the regression equation that relates the price of diesel to the price of oil? What is the R-
squared value? What is the p-value for the independent variable, the price of oil?

b. How much does this model predict that diesel will increase for every $10 increase in the price
of oil?

c. Build a chart that shows the expected price of diesel for every $10 increment in the price of oil
from $20 a barrel to $200 a barrel.

d. If oil is currently $100 a barrel and you expect it to increase by 40% to $140, what percent
increase would you expect in the price of diesel fuel?

e. If oil is currently $40 a barrel and you expect it to increase by 100% to $80, what percent
increase would you expect in the price of diesel fuel?

f. How would you use this information when running different network modeling scenarios?

ANSWER
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