Written by Nick Driver
Posted on 25/01/2016

Oil, plunging markets, and what it means for supply chain risk

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The New Year is supposed to bring renewed optimism with it, but one look at the FTSE 100’s movements over the past 30 days will tell you that not everyone has such a sunny outlook. A sharp drop in the price of oil and resulting hit to stock prices here and outside of Europe are putting the financial squeeze on businesses. The damage will cause many to sharpen their focus on the supply chain and consider if it’s robust enough to take a hit.   

Supply chain risk predictably unstable

This most recent drop in investor confidence is worrying but nothing unusual. Uncertainty in the markets is reflected by FM Global’s Resilience Index which shows only a slight drop in global supply chain risk for 2015 when compared to 2014. However, those areas posing a higher risk remain the same - parts of Eastern Europe, Africa and Asia – and risk managers can at least take comfort in the fact that the hazards they face aren’t completely unfamiliar. But what this continued uncertainty does do is make it increasingly difficult to make supply chain predictions for the future.

A hard task gets harder

Predictions about the supply chain and logistics are notoriously hard to make, and with recent market movements affecting so many, it now seems even more difficult to plan and reduce risk in the short term. The tumbling price of oil has been a driving force behind a move into bear territory for many global markets. Risk managers would therefore be wise to monitor where it goes from here and what it means for their suppliers as they begin to make plans.

What oil prices mean for supply

Supply may be outstripping demand now, but dwindling oil reserves will see this trend reverse at some point in the future. Prices will rise again as a result, pushing transportation and manufacturing costs up and some suppliers out of business. For the businesses that rely on them, the knock on effects could be dire. So what can be done?

Safeguarding your supply chain from uncertainty

If uncertainty is the challenge, then flexibility is the key to mitigating supply chain risk. Here’s how your business can become more agile and better equipped to overcome the challenges ahead. 

  1. Build small, focused teams

Smaller teams that are focused on each link of the supply chain can communicate efficiently and react quickly to overcome issues, which keeps supply moving. Bureaucracy and the many layers of decision making it brings will only slow these important decisions down.

  1. Help suppliers to help yourself

Maintaining a strong relationship with suppliers is especially important when uncertainty is high. When you need them the most, a poor relationship can put the brakes on supply, whereas a healthy relationship may see them go above and beyond to help. Here are some simple ways you can strengthen supplier relations:

  • Pay them on time
  • Update them on strategic changes regularly and in good time so they can plan ahead
  • Implement a straightforward purchase order system to control the supply of goods and prevent costly misunderstandings
  • Coordinate your production schedules to improve efficiency
  1. Monitor constantly

As we’ve already highlighted, planning ahead is a difficult task. Being completely certain of an outcome is impossible, but by being fully informed and learning from past outcomes, you can at least make decisions based on knowledge and evidence. By monitoring factors like the markets, political unrest, and environmental issues, you can build a picture of the risks, what might happen next, and take the right action.

  1. Have a plan B

When plan A fails, such as your primary suppliers being unable to meet demand, having a plan B can keep your operations moving. Build and maintain relationships with backup suppliers who you can turn to when you need support. This could mean onshoring supply to use a local supplier, which gives you access to materials quickly if transportation issues disrupt your offshore partnerships.

A risk manager’s working life is never certain, as they can only minimise but not eliminate the unexpected events their firm faces. 2016’s testing start is another challenge, but one that can teach a lot.