Managing the Impact of Oil Price Fluctuations on Supply Chain Costs
In this day and age, with increased volatility in oil prices, nothing is certain. With oil prices directly impacting transportation costs, manufacturers, wholesalers and retailers cannot avoid the constant changes in supply-chain costs caused by oil price fluctuations.
Retailers especially face a greater burden when sourcing products internationally. Being the final stage in the supply chain, these buyers typically have to bear cost changes incurred by both the manufacturer and the distributor. Therefore, they have no other choice but to adapt their global sourcing strategies to minimize cost impacts brought on by rising or falling oil prices.
How can buyers deal effectively with oil price hikes?
One of the primary ways businesses can keep operational costs down during oil price hikes is by lowering transportation costs. Some retailers branch out to low-cost manufacturers in an attempt to curb operational costs, but this can backfire because those manufacturers are typically located offshore, and this will result in higher transportation costs that are likely to cancel out any cost reduction provided by that manufacturer.
Employ one of the following sourcing strategies to combat oil price hikes:
1. Source early
Monitor your inventory closely to map the timeframe required to place an order. Planning ahead will give you time to review sourcing options and shipping routes to select the cheapest alternative, as well as some buffer time to wait-and-see if oil prices drop, whilst ensuring that you still receive your shipment on time.
2. Reduce product packaging weight
This strategy depends heavily on the type of goods being procured. If you are able to reduce the weight of packaging materials even by a small amount, you could enjoy greater savings on your overall transportation fees as shipping and transport providers charge by weight.
3. Reduce supplier diversification
Just as manufacturers give greater discounts with orders of greater quantities, so do transport providers with bulk orders. Reducing your supplier diversification and increasing order volumes with a smaller number of suppliers will help you reap significant transportation cost savings.
4. Try near-shoring
Since offshore manufacturers are associated with higher transportation costs, retailers have increasingly been moving manufacturing facilities from low-cost countries to locations closer to market demand. Buyers who are also under pressure to reduce time to market should also consider this sourcing strategy.
5. Decentralize distribution centers
Minimizing distance from distribution centers to retail outlets is key to reducing your overall transportation costs. Instead of having products shipped to a central warehouse and then transported multiple times before reaching their destination, buyers should rent more warehouses near their retail outlets to help them eliminate unnecessary transportation costs.
How can retailers capitalize on oil price drops?
With falling oil prices, retailers get to enjoy cost savings from time to time. However, it is best that they truly take advantage of the situation by using the following sourcing strategies:
1. Diversify suppliers
Lower oil prices allow you to diversify your sourcing list and try out other low-cost manufacturers. Despite the large distance between most low-cost manufacturing plants and the destination warehouse, the fall in oil prices means that transportation costs will also reduce, generating additional savings overall.
2. Increase product diversification
With oil prices decreasing, retailers can worry less about transportation costs, and focus on the product. Businesses can have the opportunity to explore manufacturers for different products to capitalize on the potential product-and-service benefits delivered by newer and more advanced manufacturers.
3. Negotiate lower prices
With a larger supplier portfolio, companies have more sources to choose from, giving them a bigger negotiating power. Harness this negotiating power when discussing orders with new and existing manufacturers to enable you to obtain bugger discounts from these manufacturers.
Ultimately, there are two things buyers and retailers need to keep in mind when managing the supply chain in the midst of oil price fluctuations. Firstly, oil prices are out of your control. And secondly, they will continue to fluctuate. Therefore, it is best that buyers keep a watchful eye on oil prices, so that they can gauge trends and take prompt action to manage any changes that come their way.