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Effects of fluctuating oil prices on global supply chain management may be countered by segmenting supply chains and embracing green initiatives.

How Fluctuating Oil Prices Affect Global Supply Chain ManagementARTICLE

By Christine Parizo

Oil prices are relatively low right now. But as we’ve seen so often in previous years, they have the propensity to fluctuate widely, sometimes in very short periods of time – and that can have a significant effect on global supply chain management. Because oil is a major component of supply chain costs, its fluctuating price can alternately make offshoring or on-shoring production highly attractive.1 Therefore, sustaining profitability during times of fluctuating oil prices requires a balancing act between static and flexible global supply chain management strategies.

The Double-Edged Sword of Declining Oil Prices in Global Supply Chain Management

While paying less is usually considered good, declining oil prices present positives and negatives for global supply chain management. On one hand, current transportation cost benefits rooted in the continuing low price of oil have made it possible to facilitate just-in-time delivery and quick and frequent shipments.2 But on the other hand, domestic manufacturers may face stiffer competition from overseas companies when the price of transportation drops.3

Additionally, lower oil prices – and therefore, lower fuel costs, means lower prices at the pump and more disposable income for consumers. That creates demand for products, which can add strain to supply chain management systems. However, there is always the possibility that, as oil prices drop, domestic shale operations will become uneconomical. In that case, it’s likely that current wells will continue to operate, but new wells won’t be drilled. That could create a backlog that drives up oil costs in the future. 4

Thus, when oil prices are volatile – and even when declining – supply chain managers look for flexibility in their supply chains. They may want to serve product demand from the closest possible manufacturing plant. This can become tricky if the rush to near-shoring production is considered purely due to oil prices; often, regional plants will specialize in just a few products to keep costs down.5 Should oil prices skyrocket as they have in the past, the dedicated manufacturing trend might hurt more than help.

For example, the financial crisis of 2008 drove up the cost of oil to $100 a barrel – and it looked like it might stay that way for the foreseeable future. Companies that rushed to bring manufacturing on-shore may regret that decision when the cost of oil hovers around $30 a barrel.6

Segmenting Supply Chains to Preserve Profitability

Fluctuating oil can effect global supply chain management. Such effects are typically beyond supply chain managers’ control: an act of God, a price spike in a critical material. Reconfiguring supply chains to better handle these disruptions is one way of doing business, as long as the company is willing to accept any additional costs. There are different ways to do this – it’s not a one size fits all approach.7

One of the strategies advocated by experts is to portion the supply chain into sections, so that disruptions can be contained in that one portion. Segmenting the supply chain may mean sourcing products from multiple suppliers, some of which could be located closer to the destination of the goods. Additionally, facilities need to be able to produce multiple items so that, if needed, they can continue production and distribution while executives work out how to handle global supply chain management when oil prices rise. Another strategy used by companies to segment the supply chain is to keep faster-moving products at distribution centers and retail locations. Slower-moving items are housed at a central location.8

Another global supply chain management strategy employed by some companies is postponement. Instead of having products fully assembled and packaged at remote manufacturing locations, they send unfinished or unpacked items to a location closer to the final destination for assembly. That helps maintain a flexible inventory and reduce transportation costs. They may also change shipping practices to consolidate multiple shipments, changing the delivery dates to reduce costs.9

Embracing green initiatives may also help global supply chain management keep costs down. For example, choosing alternative fuels for vehicles may reduce costs while also positioning the company well in the public eye. Another initiative that can cut costs is to choose less bulky packaging using recycled materials. This increases pallet density and reduces shipping costs since companies can pack more items into their vehicles for transport.10

The Takeaway

While oil prices may be low right now, political and environmental factors can quickly drive prices back up, leading to global supply chain management headaches. Supply chain managers may wish to prepare now by developing flexibility to weather any potential price hikes, including segmenting their supply chains and even embracing green initiatives.

Christine Parazio - The Author

The Author

Christine Parizo

Christine Parizo is a professional writer specializing in business and technology. She's written for a variety of TechTarget sites, including searchSAP.com, searchSOA.com, and searchCloudApplications.com, as well as HPE's Infrastructure Insights and The Pulse of IT.

Sources

1. "Oil Price Volatility and the Changing Dynamics of Supply Chain Management" ,Oracle Supply Chain Management;https://blogs.oracle.com/scm/oil-price-volatility-and-the-changing-dynamics-of-supply-chain-management.
2. "How volatile oil prices will rock the supply chain,” Supply Chain Quarterly;http://www.supplychainquarterly.com/topics/Strategy/201201reading/.
3. “Winners and Losers in the Supply Chain as Oil Prices Tumble,” Logistics Executive;http://www.logisticsexecutive.com/winners-and-losers-in-the-supply-chain-as-oil-prices-tumble/
4.“How Will Falling Oil Prices Impact Transportation & Logistics Companies?,” Supply Chain 24/7;http://www.supplychain247.com/paper/how_will_falling_oil_prices_impact_transportation_logistics_companies
5. “How volatile oil prices will rock the supply chain,” Supply Chain Quarterly;http://www.supplychainquarterly.com/topics/Strategy/201201reading/
6. “Oil Price Volatility and the Changing Dynamics of Supply Chain Management,” Oracle Supply Chain Management;https://blogs.oracle.com/scm/oil-price-volatility-and-the-changing-dynamics-of-supply-chain-management
7. “Reducing the Risk of Supply Chain Disruptions,” MIT Sloan Management Review;http://sloanreview.mit.edu/article/reducing-the-risk-of-supply-chain-disruptions/ 8. “Reducing the Risk of Supply Chain Disruptions,” MIT Sloan Management Review;http://sloanreview.mit.edu/article/reducing-the-risk-of-supply-chain-disruptions/
9. “Safeguarding Your Supply Chain Against Rising Fuel Prices,” Inbound Logistics;http://www.inboundlogistics.com/cms/article/safeguarding-your-supply-chain-against-rising-fuel-prices/ 10. “Safeguarding Your Supply Chain Against Rising Fuel Prices,” Inbound Logistics;http://www.inboundlogistics.com/cms/article/safeguarding-your-supply-chain-against-rising-fuel-prices/

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