Companies are tightening their planning horizons and prioritising an agile supply chain.
From an average customer’s viewpoint, higher oil prices mean more expensive fuel and inflated prices for consumer products. In reality, oil price volatility affects all sectors that rely on oil, including logistics, the F&B industry, and consumer goods, among others.
Brent crude, the global benchmark for oil, rose as high as $130 per barrel in March, hitting decade-highs.
Here are five top ways oil prices affect supply chain logistics now.
1 – Companies can’t grow without a steady supply chain
According to a McKinsey Global Survey on economic conditions, supply chain disruptions now outweigh COVID-19 concerns as the biggest risk 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 more frequently cite mounting fallout on the supply chain—which is also the most common risk to company growth—and inflation as their top concern.
2 – Offshoring becomes unsustainable
Oil price volatility limits businesses’ long and short-term decision-making abilities. Companies usually plan for the long-term with respect to physical distribution networks.
Short-term plans include suppliers and transportation sourcing and decisions on the mode of transport used in the supply chain based on factors including markets, prices, order touchpoints, and other considerations.
Because low oil prices lead to lower transportation costs, offshoring production to low-cost countries is an appealing option that helps the bottom line. When oil prices are high, companies are sometimes forced to move their operations onshore to avoid the unsustainable cost of transportation with higher fuel prices or turn to logistics companies that use electric vehicles.
3 – Digitalisation gets a boost as efficiency becomes key
Digital technology allows for advanced supply chain planning and collaboration, making operations more effective in a difficult market. While it can be applied across the value chain, this particular use case manages waste and inconsistency caused by volatile and logistically demanding markets.
Sharing planning-related information like customer feedback, demand forecasting, inventory level, production capacity, and other data builds clarity and promotes quick and simple cooperation.
4 – Closing the gap on delivery
Increasing crude prices have made transportation costs more important than inventory, production, and facility fixed costs, leaving companies searching for flexibilities.
Regional distribution centres become more appealing when oil prices rise. High oil prices mean high outbound transportation costs, making it increasingly important to shorten the distance between distribution centres and retail outlets. This can be accomplished by establishing additional warehouses, each of which can be responsible for a specific region.
5 – Building up resilience and agility
During the pandemic, suppliers and manufacturers discovered that supplies were frequently too far away, in too few places, and with insufficient inventory to meet unexpected and varying demands. This, in addition to geo-political uncertainty, has helped firms realise the need for resilient models in supply chain management in a networked economy.
Within the last three years, organisations have increasingly paid attention to the benefit of augmenting the number and size of distribution centres, as well as the importance of optimal location.
Companies have also benefitted from 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 partners’ customers.
During times of extreme volatility, planning perspectives must be shortened and supply chains must be made much more agile so that firms can enjoy the benefits of low oil prices and, when necessary, guard against the effects of high oil prices.