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Supply Chain Analysis: Your Profitability and the Cost of Oil

Paul Vrzal | Oct 27, 2016

Category: Industrial

Fluctuating oil prices are proving to be a substantial challenge among businesses in terms of planning their supply chain strategies. Benchmark oil prices have been experiencing a ...

Oil supply chain analysis

Fluctuating oil prices are proving to be a substantial challenge among businesses in terms of planning their supply chain strategies. Benchmark oil prices have been experiencing a downward trajectory in the last couple of years, thanks to the shale gas revolution in the United States as well as the OPEC-initiated strategy to maintain a certain production level in order to force out high-cost supplies.

Aside from causing unrest in the money markets, this volatility in oil prices is also affecting the entire dynamic of supply chain analysis and execution. Supply chain managers are having difficulty making short- and long-term decisions, which include the planning of physical distribution networks, the sourcing of supplier and transportation, and operational changes with regard to supply chain mode of transport. Overall, the instability of oil prices has an impact on four primary aspects of a company’s supply chain: business, consumers, emerging technology, and the environment.

1. Business

A supply chain analysis on frequent oil price changes shows that this phenomenon is forcing businesses to re-evaluate many of their strategies that have been implemented in the last few decades. Regardless of the nature of the company, emphasis on centralized distribution and extensive manufacturing in low-cost countries will considerably decrease. Due to rising oil prices – which results in higher labor costs in developing countries – a more balanced blend of global and regional manufacturing activities will emerge. With changing markets and increasing costs, the days of static supply chain methods are over. Companies must be able to monitor and re-assess their supply chain and network strategies to make it more flexible.

2. Consumers

With the changing oil prices, companies must also decide whether to absorb the increase internally and accept smaller profit margins or transfer the increased costs to consumers. Oil is such an essential component in the production processes in certain industries such as plastic and rubber, which make them more inclined to transfer costs to the consumers. However, this could be a turnoff for long-term clients that are used to a set price.

3. Emerging Technologies

The volatility of oil prices has raised the demand for technologies that help industries reduce energy consumption and costs as well as technologies that can lower transportation expenditures. Examples of these include on board global positioning systems equipped with centralized data that enables real-time monitoring of vehicle operations, kite-aided ocean freight, aerodynamic tractor-trailers, and automatic tire-inflation systems.

4. Environment

As oil prices go up, eco-friendly supply chain analysis and strategies agree with economically effective business policies. Decreasing deadhead distances, reducing fuel consumption, and boosting cube utilization enhance the transportation bottom line and lessen the carbon footprint. Furthermore, schemes that focus on cutting down carbon emissions typically promotes transportation efficiency. 

Adjustments between inventory and transportation costs also become more important as oil prices go up, so correct inventory positioning can have a significant effect on logistics costs. This also helps businesses deliver satisfactory service to customers despite the pressure to decrease expediting costs caused by rising oil prices. Through tighter supply chain integration – shorter lead times, vendor-managed inventory, and information sharing across supply chain facilities – supply chain variability can be minimized. As consumer-spending ramps up, capacity tightens, and oil costs continue to change into the near future, many companies will need to improve their logistics strategy.

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