Oil price fluctuations can have a substantial impact on operational costs and overall profitability for manufacturers. Every spike or dip in oil production can impact the entire supply chain, as can external geopolitical or economic factors.
For manufacturing facilities that rely heavily on oil, these fluctuations can lead to unpredictable costs, budgeting difficulties, and potential production disruptions. However, by implementing a combination of strategic approaches, facility managers can navigate these challenges more effectively.
Strategies for Better Purchasing Control
The goal for most manufacturers is to insulate themselves from the negative effects of oil price volatility. Here are some steps they can take:
- Establish long-term contracts with wholesale oil distributors. Long-term contracts allow facility managers to lock in prices for an extended period, typically 6-12 months or longer. This gives them more predictable costs and helps guard against sudden price spikes.
Long-term contracts also offer volume discounts, allowing facilities to reduce costs over time by purchasing larger quantities.
- Streamline inventory management. Facility managers should work to maintain a strategic reserve of oil, to serve as a buffer against short-term price spikes. However, this approach requires careful consideration of storage capacity and carrying costs.
Alternatively, they could try implementing a “just-in-time” (JIT) system to help minimize inventory costs by reducing the amount of oil stored on-site. However, this approach requires robust supply chain management and contingency planning to avoid potential disruptions.
- Implement real-time monitoring. As the market fluctuates, so should a manager’s pricing and purchasing strategies. With a real-time price tracking tool, facility managers can follow market fluctuations and make informed purchasing decisions.
Managers should also analyze historical price data to help identify patterns and trends, enabling more accurate forecasting and strategic planning.
- Plan for contingencies. Implementing robust risk management strategies can help protect against unforeseen circumstances. Managers can consider purchasing insurance to protect against extreme price spikes or supply disruptions. They could also develop comprehensive contingency plans that outline specific actions in the event of unexpected price increases or shortages.
A Comprehensive Approach Works Best
While each of these strategies can be effective on its own, the best approach to managing volatile oil prices involves implementing several of these tactics.
For example, a facility might negotiate long-term contracts with a supplier, while simultaneously investing in energy efficiency measures and alternative energy sources. This approach could be complemented by real-time price monitoring and advanced inventory management techniques, all underpinned by comprehensive risk management strategies.
Success lies in developing a flexible approach that can respond to changing market conditions while still focusing on cost control and efficiency. Manufacturing facilities can adapt to oil price volatility and position themselves for greater competitiveness and sustainability.
At Keller-Heartt, our B2B Account Program offers many of these benefits for manufacturing facilities. If you’re interested in learning more, contact your Keller-Heart procurement specialist.