Practical Tips in an Uncontrollable Environment

If the news that oil prices are at an all-time high seems like the same old story, you’re right. And market factors suggest that fuel prices – as well as various other commodity prices – will remain high for years to come.

Oil supplies to the West will continue to be strained by:

• An unstable work force, as seen in the current strike by Nigerian oil unions.
  
• Artificial supply constraints created by OPEC.
  
• Efforts by foreign governments either to privatize – as in Venezuela – or to hoard oil supplies in emerging markets, such as China’s controversial investments in African oil fields.
  

But the most immediate and long-lasting impact on fuel supplies is closer to home and is due to an unlikely culprit: the lack of skilled labor and construction services to build new refineries. Oil refineries report that costs for steel have jumped 74 percent in the past two years, while the cost of skilled labor in the hurricane-battered Gulf Coast has risen 60 percent. And little relief is in sight, as much of the materials, construction services and labor are moving offshore, where projects are booming and where pressures from environmental and social groups are relatively subdued (or, in some cases, forced into submission).

I’m not going to debate whether such dynamics are the result of self-inflicted wounds due to decades of underinvestment by U.S. oil refineries. I am merely warning supply managers to build rising fuel costs into their energy and category plans for at least the next five years.

With that said, there are simple tactics you can employ in your everyday supply management process that can yield an immediate impact. You’ll likely not see a nationwide drop in oil prices, but you’ll reduce risk, lower cost and ensure supply in your own processes.

Ensure Currency

Have suppliers bid in your currency to reduce exposure to currency fluctuations. Or share currency risk with suppliers by negotiating tiered pricing in the seller’s currency based on a mean price set at an agreed exchange rate. Make adjustments to agreed price as currency rates fluctuate.

Use Your Own Paper

Using (and reusing) your own standard form contracts whenever possible not only will limit risks but also help to maintain consistency, improve negotiation leverage with suppliers and streamline contracting cycles.

Put Risk Management on Autopilot

Reduce your exposure to supply risk by setting automatic alerts when key supplier milestones, such as insurance renewals or critical certifications, are coming to term.

Issue reminders to suppliers well in advance of the term date and track their compliance. Some supplier portal and performance management systems offer this capability. If not, set the alerts in your desktop calendar.

Combine risk management with the next few tips to lower cost and ensure supply within your organization:

• Get a green thumb. Incorporate environmentally responsible practices – such as using recycled materials, sustainable energy and eco-friendly materials – into your supply strategies. It can help to ensure supply and lower costs.
  
• Don’t be afraid of commitment. Assess future pricing and supply-market implications to determine when to engage in long-term supplier or hedging agreements. This will ensure supply and lock in preferred pricing.
  
• Be responsible. Employ responsible supply strategies that foster fair labor practices, supplier development and diversity. Such practices ensure supply, often with unique competitive advantages. They also provide a highly marketable status as a socially responsible company.
  

If you have found these tips helpful, download the complete collection, titled “The 100 Greatest Supply Tips of All Time,” at http://www.topsupplytips.com. The tips found in the book were gathered from real-world approaches as part of Procuri’s ongoing effort to foster the exchange of best practices by elevating the supply management discipline.

About the Author

Tim Minahan is senior vice president of marketing at Procuri Inc., a provider of on-demand supply management solutions. Previously, he developed and managed Aberdeen Group’s global supply management research practice.