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The Supply Chain Management Blog covers the latest in SCM strategy, technology, and innovation.

Oil Price Volatility and the Changing Dynamics of Supply Chain Management

A fast-changing oil price is making it harder than ever for businesses to plan for their supply chains

It seems like only yesterday that the price of oil was well over $100 a barrel and experts were telling us to get used to a new normal of expensive fuel. Today, courtesy of the shale gas revolution in the US, OPEC policies and the re-introduction of Iran to the market, the price stands at around $30 per barrel and all indications are that it will fall further over the course of the year.

This news is causing turmoil in the money markets. And it is also causing headaches for supply chain managers at global businesses. Indeed, it’s fair to say that oil price volatility is changing the entire dynamic of supply chain planning and execution.

The reason that oil price volatility is of such concern to businesses is that it hinders their ability to make long- and short-term planning decisions. These decisions include the strategic planning of physical distribution networks (usually long-term, strategic changes that are only reviewed every 5-15 years); transportation and supplier sourcing (usually reviewed every 2-5 years); and operational changes with regards to the mode of transport used in supply chains (these are more operational considerations and can be changed from week to week, or even order to order, based on the market costs at the time).

Since the price of oil is a major component of supply chain costs, its effects are far-reaching. For example, low oil prices result in low transportation costs, which may make off-shoring production to low-cost countries very attractive. But when oil prices are high and transportation costs are high businesses might prefer near-shoring. The key question for supply chain managers revolves around how they make such far-reaching, long-term decisions when the price of oil is changing by 25%, 50% or even 100% in the course of just a few months.

The volatility of oil prices is not new – it has been with us since the financial crisis in 2008, and with hindsight it is easy to see the scale of the challenge facing supply chain managers looking to optimize their supply chains: no doubt many supply chain managers would have been tempted to move manufacturing on-shore when the price of oil looked set to remain around $100 a barrel – a decision which today looks like the wrong one.

For supply chain managers therefore, the average cost of a barrel of oil is in many ways less important than its standard deviation. During periods of extreme volatility, such as we are seeing today, planning horizons therefore need to be shortened and supply chains made much more flexible so that businesses can both flex to take advantage of low oil prices but also be able to hedge against high oil prices. Achieving this is no small task.

One solution to this challenge is to leverage the flexibility of Cloud computing technologies within supply chains. For example, businesses which place core supply chain management processes in the Cloud, such as supply chain planning, will find they can quickly and cost effectively re-engineer their supply chains in the short time frames demanded by a volatile oil price. Cloud-based tools help accelerate the planning process and enable organizations to respond to unexpected events – such as changes in the price of oil – with fast and accurate interactive planning.

Today’s dynamic and rapidly changing supply chain conditions require flexible planning tools that quickly react to unexpected events. The Cloud is built on flexibility and is the best solution yet to meeting these challenges.

Take a look at our eBook: Why Supply Chain Leaders are moving to the Cloud and learn how supply chain management is evolving to grant visibility across global supply chains, offer unmatched scalability and reduce supply chain management costs.

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