Sunday, October 12, 2008
Effects of Lower Oil Prices
As we have seen over the past several weeks, the price of oil has considerably dropped to levels that we have not seen in the past several years. Many say that the lower prices are a result of lower demand levels caused by the economic condition that our economy is going through. With the lower prices for oil, comes benefits for companies that have to distribute their products. These lower oil prices help lower transportation costs. The possible savings from lower transportation costs could be used in other areas of the company in an attempt to find better ways for their supply chain to lower the amounts of inventory on hand while at the same time increasing the level of service offered to the customer. This could be done through investing in new technology or through more extensive R&D. By lowering inventory levels, a company can gain even further cost savings that will help them in a time when prices of products is one of the main factors that goes into the buying process for customers. With lower amounts of spendable income, customers are more than ever price conscious. I hope that this provided you with an insight on how lower transportation costs could ultimately help with finding new ways of lowering inventory levels throughout the entire value chain.
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4 comments:
This observation is interesting.
What about the following counter-argument?
"With lower oil prices, we can continue to outsource at higher levels, which will contribute to higher levels of inventory."
It is also possible that lower gas prices will result in another situation where demand exceeds supply, thus causing a drastic increase in gas prices.
I do agree that lower transportation prices could lead to lower inventory. However, operations managers should be careful not to make any drastic changes to their operations strategy until thy are reasonably sure that prices will remain low.
I don't really know how much of an impact that lower oil prices will have on inventory. I do agree that it will clearly help companies that are currently struggling and hopefully that extra money can stabilize companies and help them through this period. I agree with G3 though that companies should not just assume that the prices will stay low and make drastic changes. I think alot of companies tend to assume that things will always be good when they are good. So even if the economy is struggling right now, thinking that oil prices will stay as low as they are could be a major mistake for a large company. -Mark
There is no doubt that the lower oil prices will have various effects on companies' inventory policies. However, if the prices continue to stay low, a company following the EOQ strategy could see lower levels of inventory. If they are following the strategy closely, their fixed cost associated with ordering inventory (K or A) would be decreased, thus resulting in smaller order sizes and a lower level of inventory. Of course these effects could be offset by a variety of other factors, some of which are mentioned in the previous comments.
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