Multiple economic and geopolitical factors in 2022 so far have pushed up global oil prices and hence fuel costs. In March, US oil prices hit an all-time high of $130 per barrel. Market reaction to Russia’s invasion of Ukraine, lower production from COVID-related cutbacks, a decline in US oil refining capacity to the lowest levels since 2014, and surge in demand for fuel as economies re-open have all played their role.
While prices have receded to just over $100 per barrel, the price is still up 48% year over year. The increased cost of oil has had far-reaching ramifications such as increased gas and diesel prices, which are up about 50% and 75% respectively year over year.
Hampered supply chains
Higher fuel costs have hampered global supply chains, which increases shipping and transportation costs for businesses. For example, Target shares dropped 25% after the latest earnings results, which warned of increased costs from fuel inflation. Target CEO Brian Cornell commented, “We did not anticipate the rapid shifts we’ve seen over the last 60 days. We did not anticipate that transportation and freight costs would soar the way they have as fuel prices have risen to all-time highs”.
These increased costs have combined with other supply chain challenges, such as reduced production and labor shortages, for a perfect storm, which is causing shipping delays, order defects, and lost orders, with knock-on effects into the whole economy, driving up inflation, hitting discretionary consumer spending, and lowering sales growth.
These supply chain issues damage consumer experience and satisfaction. Consumers are unhappy with companies’ inability to deliver complete orders or deliver on time. A Harris poll reported in Forbes found that 71% of people who purchased gifts in the last holiday season were frustrated due to supply chain issues. Further, 82% of those polled viewed the company more negatively as a result, and 74% believe retailers should be held accountable for supply chain issues. This highlights the negative reputational risk associated with your third-party supply chain.
Falling revenue
Businesses struggle to maintain revenue and profit margins in the face of rising fuel costs and supply chain delays. According to the latest annual Council of Supply Chain Management Professionals State of Logistics Report, business logistics costs were up 22% in 2021. Companies are also experiencing parts delays which could slow revenue-generating operations. For example, power companies are warning of short supplies for plant maintenance as the country faces record heat this summer. And Dell’s new Precision laptop series release date has been pushed back several times, delaying revenue and frustrating customers, due to supply chain delays.
How operational resilience can help
While supply chain disruptions pose significant risk to business continuity and a company’s fiscal health, an effective operational resilience program can mitigate the impact. Supply chains tend to be vulnerable to disruptions and few companies have the operational resilience capacity in place to ride out the storm. Supply chain resilience relies on a company’s ability to understand vulnerabilities, predict problems, and respond with agility to unforeseen events.
This capability isn’t yet sufficiently well-developed among the majority of US companies. According to a 2021 McKinsey survey, less than half of executives have visibility into tier one suppliers, and only 2% have visibility into tier 3 suppliers.
Assess the supply chain
To help bolster operational resilience, companies should examine the relationship between the supply chain and critical business services. If fuel costs rise, where are the single points of failure across suppliers, processes, or facilities? What essential supplies are most vulnerable to fuel shortages? And what first, second, and third tier suppliers are most likely to falter under cost pressure? Third party risk management is an important part of your ERM program and of your operational resilience capacity.
Understand your critical business services
To establish an operational resilience program, you first need to understand your critical business services, identify which parts of your supply chain support those with the most significant impact tolerances, and focus your addressing your vulnerabilities there.
Supply chain impact tolerance metrics may include the number of on-time deliveries, the number of customers affected by delays, the value of lost orders because of delays, and the time span of continued delays. When these metrics approach a defined limit, the business will need to act to prevent unacceptable consequences for operations.
Integrating this process with your ERM program will enhance its visibility and benefits to the business.
Prepare for several scenarios
To prepare for supply chain problems, business leaders should identify different disruption scenarios and determine the effects on the company and the industry. For each scenario, senior management should develop response and recovery plans and identify leading indicators, which mean that the business can predict and prepare for supply chain problems. Depending on the business, relevant leading indicators may include oil prices, supplier lead times, or third-party transportation costs and availability.
The specific current problems will gradually fade away, but the business environment is only going to get more uncertain over time. Rather than solely moving to enhance operational resilience in response to the current fuel and supply shocks, the focus should be on long-term planning to support critical business services now and into the future.
Protecht's Complete Guide to Achieving Operational Resilience eBook gives you a detailed look at Operational Resilience, to learn exactly what makes it different from Disaster Recovery and Business Continuity and to get a list of steps to help you develop your own Operational Resilience capability. Find out more and download it now.