Safeguarding Your Supply Chain Against Rising Oil Prices

Dec. 22, 2011
In an economic climate where the cost of fuel continues to rise uncontrollably, network optimization can help you strike a balance between inventory costs, labor costs and distribution center location.

Have you considered what the fluctuating cost of oil could be doing to your supply chain? Maybe you are dealing with a fuel surcharge on your logistics invoice or are experiencing increased component and operating costs? In any instance, as the price per barrel changes on a daily basis, you need to be concerned with more than just the prices at the pump.

The challenges that ensue can negatively impact your supply chain if your infrastructure is not equipped to handle quick adaptations. However, by planning ahead and reevaluating where your supply chain activities are performed, as well as your current processes, you can face these challenges head-on and lessen the impact on your operations and your bottom line.

The record peak for oil occurred in July 2008 when prices reached $147 per barrel. This year's prices are topping $100 per barrel. While prices at this moment are lower than that, it is unclear where prices will go in 2012. Whether it's up or down, you can prepare your supply chain for rapid fluctuations by following some key best practices:

Flexible Infrastructure
Supply chains have undergone dramatic changes in recent years in response to shifting product needs, labor costs, taxes and environmental considerations. Having the flexibility to employ multiple routes to market is an important risk mitigation strategy, but it also provides the capability needed to rebalance product flows in response to changing input costs.

Network Optimization
If oil prices increase, you may be forced to look at where distribution centers are located in relation to areas of key demand. For many companies, the combination of higher logistics costs and additional inventory requirements have already triggered the movement of supply chain activities closer to key markets. In an economic climate where the cost of fuel continues to rise uncontrollably, network optimization can help you strike a balance between inventory costs, labor costs and distribution center location(s). A network optimization analysis may result in the addition or closing down of distribution centers or even the movement of centers to more optimal locations. It is important to remember that frequent evaluations are necessary to ensure your supply chain model matches current conditions.

Postponement Strategies
A postponement strategy based on your network optimization analysis can help increase the density of product coming from remote manufacturing locations. By sending unfinished or unpackaged goods into regions that are closer to the end consumer for final assembly, you can maintain inventory at a flexible level and reduce fuel costs.

Shipping Practices
Making changes to your shipping practices can dramatically impact your bottom line, but can also benefit the environment. And there are several creative approaches to shipping available today. This can be as simple as establishing specific delivery dates with key customers which will enable you to consolidate shipping. You can also partner with a company that is not a competitor and that ships product to the same retail locations. Consolidating shipments between multiple brand owners can lead to a reduction in cost and an increase in shipment density. Organizations such as the European Logistics Users Providers and Enablers Group (ELUPEG) practice and promote collaborative shipping and encourage manufacturers across all industries to partake in an effort to improve asset utilization, carbon reduction, customer service, and more.

Environmental Responsibility
Adopting sustainable supply chain practices can help you reduce costs and stay in line with social and corporate environmental responsibilities. One thing to consider is using alternative sources of fuel in your trucks and other vehicles. By using sources other than oil, you can potentially avoid fluctuating prices and the complexities that follow. The Environmental Protection Agency's (EPA) SmartWay Program aims to reduce environmental pollutants caused by traditional fuel sources by providing companies with cleaner alternatives, including ethanol, E85, Biodiesel, and natural gas and propane. Another area to evaluate is product packaging. Bulky product packaging made from synthetic materials and plastics is not friendly to your operations, shipping costs, or the environment. By redesigning packaging to be more compact and made from recyclable materials with little or no plastic, you can increase pallet density which reduces shipping costs, and also decrease your carbon footprint.

In order to overcome unforeseen obstacles like the inconsistent cost of oil, you must have a firm understanding of how your supply chain functions, and what you want it to accomplish. Know your key markets -- do you want to reach consumers domestically or in other regions of the world -- and decide whether or not your current processes and distribution center locations are equipped to handle this demand. Determine whether or not your current shipping practices are in need of an upgrade to more efficient, cost-effective and eco-friendly methods. Once you have this information, you can work internally or with an outsource partner to implement strategies and best practices that can add flexibility to your infrastructure. The choices you make can benefit your supply chain, but may also benefit the environment.

Lorcan Sheehan is senior vice president, Marketing & Strategy for ModusLink, a provider of supply chain solutions.

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