From an average customer’s viewpoint, increase in oil prices mean more expensive fuel costs and expected inflation concerning consumer products. However, volatility in oil prices affects different segments of the industry, especially sectors that rely on oil, based on interdependencies, such as logistics, the F&B industry and consumer goods, among others. However, oil prices have far-reaching consequences especially on supply chain expenses, since substantial components of the supply chain are dependent on factors closely linked with oil prices.
The global benchmark for oil – Brent Crude – rose as high as $130 per barrel in March, hitting decade-highs, further causing uncertainty in the supply chain industry, which is recovering from the pandemic’s impact. Collaterally, plastics, labour, and even semiconductor chips faced supply chain issues due to higher oil prices and pandemic disruptions.
Here are five ways the supply chain will be impacted due to volatility in oil prices:
Companies can’t grow without a steady supply chain
According to a McKinsey Global Survey on economic conditions, geo-political instability is now cited as the top risk to growth in respondents’ countries. Supply-chain disruptions now outweigh COVID-19 concerns as the biggest risks executives see to domestic and corporate growth.
According to the study, in a change from the first three quarters in 2021, uncertainty over COVID-19 is no longer a foremost economic concern to executives. Instead, executives now cite mounting fallout on the supply chain—which is also the most common risk to company growth—and inflation as the foremost concern, more often than the pandemic.
Moreover, having endured as the most-cited risk to domestic growth since March 2020, the pandemic is now cited by just one-quarter of respondents: half the share who did so in September 2021.
Offshoring becomes unsustainable
Additionally, oil price volatility also hinders businesses’ long and short-term decision-making abilities. Companies usually plan for the long-term with respect to physical distribution networks.
Meanwhile, short-term plans include suppliers and transportation sourcing and the more prevalent decisions on the mode of transport used in the supply chain based on several factors such as markets, prices, order touchpoints, etc.
Low oil prices, for example, lead to lower transportation costs, making offshoring production to low-cost countries highly appealing. However, firms may be forced to choose near-shoring due to high oil prices, consequently increasing warehousing costs.
Digitalisation gets a boost as efficiency becomes key
Organisations use technology in three broad areas: transaction processing, supply chain planning and collaboration, and order tracking and delivery coordination.
Technology aids in supply chain planning and collaboration by increasing the process’s overall effectiveness when firms are not at liberty to order more or less than required due to the economic situation of different markets.
Technology is used in this case to share planning-related information such as customer feedback, demand forecasting, inventory level, production capacity, and other data. This aids in the management of waste and inconsistency caused by volatile and logistically demanding markets.
Closing the gap on delivery
Indeed, with the increase in crude prices, transportation costs have become more important than inventory, production, and facility fixed costs. As a result, companies look for flexibilities.
Regional distribution centres become more appealing. As oil prices rise, so do outbound transportation costs, making it increasingly important to shorten the distance between distribution centres and retail outlets. This is accomplished by establishing additional warehouses, each of which can be responsible for a specific region.
Building up resilience and agility
During the pandemic, suppliers and manufacturers discovered that supplies are frequently too far away, in too few places, and with insufficient inventory to meet unexpected and varying demands. Combined with geo-political uncertainty, firms have realised the need for resilient models in supply chain management in a networked economy.
Hence, within the last three years, organisations have understood the benefit of augmenting the number and size of distribution centres, as well as the importance of optimal location.
Companies have also benefitted from 3PL logistics firms such as Aramex that have enhanced this experience by understanding the challenges of logistics and supply chain management and, in turn, suggesting new strategies, conceptualising customer needs, and frequently innovating new services to address the concerns of their partners and their partner’s customers.
During times of extreme volatility, planning perspectives must be lowered and supply chains must be made much more engaging so that firms can benefit from low oil prices while also protecting against high oil prices.
