Reduced crude oil prices in late 2014 have translated into lower prices at the pump, but what exactly do lower oil prices mean for supply chain strategies? There has been much discussion about how the decreasing fuel costs in 2014 are pushing the industry toward Lean supply chain principles, like using cross functional methods to ensure faster transportation and streamlined delivery systems.

The how’s and why’s of Lean in the supply chain will vary according to individual companies and their portfolios. Diesel prices dropped to a 5 year low the first week of February, with the average price of diesel gasoline at $2.831 per gallon. According to data issued by the Department of Energy’s Energy Information Administration (EIA), February’s oil prices are hovering relatively close to the low February 2010 prices, when oil was only $2.756 per gallon. Prices are expected to remain low but unpredictable for some time. However, declining fuel costs for motor carriers and other parties in logistics and supply chain management appears to be a mixed blessing.

The effects of oil price volatility spill into many aspects of the supply chain. In order to manage risk and remain agile in an unpredictable environment, many companies are turning to Lean supply chain strategies. Consider the following effects that lower costs are having, and the reasons companies in 2015 are trending towards Lean.

The Impacts of Low Fuel Prices

Lower oil prices means an increase in disposable consumer income, adding a boost to the economy and ideally increasing consumer demand.

Of course, it also means lower fuel costs for all oil-using transportation providers. As more merchandise flows through the supply chain,carriers become busier and therefore must adopt new strategies to meet increasing competition. As transportation becomes comparatively cheaper relative to inventory, there may be a shift towards faster transportation means like air transport and trucking. While certain industries can expect increasing demand for their services, higher demand may also mean more competition within in demand transportation sectors.

Many transportation strategies like JIT (just-in-time) delivery, frequent shipping, and the use of a dedicated fleet are based around cheap oil prices. Faster and more frequent deliveries may also drive down inventory stock, possibly meaning greater variability in sourcing locations. Rather than relying on slower, more stable sources, companies may opt for speed rather than reliability, reaching out to new and more efficient sources.

Positioning inventory efficiently in relation to changing transportation strategies can have a dramatic impact on logistics costs, which is why many companies are focusing on flexibility and accurate demand forecasting. Shifts in strategy may increase work load and competition as more manufactures take advantage of lower transportation costs. Although fuel prices are expected to remain relatively low well into 2015, prices will likely rise once again, and when they do, those in supply chain management need to be prepared to fulfill orders just as they did when prices were low.

The Benefits of Lean

While companies should take strategic advantage of lower fuel prices, it is important to remember that fuel prices remain volatile, and therefore strategy should be focused around flexibility rather than the current fuel prices. In turn, many companies are moving toward Lean inventory and hybrid Lean inventory/transportation strategies.

The concept of “Lean,” entails a team-based approach to continuous improvement in all aspects of business and the supply chain. Lean is focused on eliminating non-value added activities or “waste” from the viewpoint of the customer. Processes are evaluated for efficiency, flexibility, and control. Although Lean has long been practiced in fields like manufacturing, but only recently have supply chain & logistics management sectors began practicing Lean principles.

Incorporating Lean principles into various aspects of the supply chain can give additional flexibility to supply chain movements. Uncertain times requires greater agility and flexibility, which is part of the Lean mentality. A company’s operations are reliant upon effective logistics processes, and an investment in system flexibility can buffer the supply chain from volatile disruptions. Visibility, control and synchronization of material flows are required so that when confronted with issues, issues can be more easily targeted and remedied, therefore avoiding larger disruptions. However, applying Lean methodologies across a global supply chain requires intensive focus and patience, and it may be some time before companies see the true impact of Lean precepts.

The emphasis on lean inventory and transportation strategies is also heightening the role played by third-party logistics providers (3PLs) and consolidated warehouses.

As companies strive to eliminate waste in all aspects of the supply chain, Lean tactics may include consolidated shipments from common carriers as shipments from multiple vendors fill space in previously under utilized truckloads. Similarly, there may be more large consolidated warehouses aggregates that order quantities in full truckload shipments, reducing total shipping costs. Cheaper transportation costs may allow businesses to reduce their number of warehouses and hold less inventory, creating a more demand driven (pull) supply chain.

Managing a Leaner supply chain strategy is part of 3PL’s emerging role. Not only will they need to transport and store, but also they will serve as a trusted partner in the Lean journey by identifying problems, implementing solutions, and adding value in global and complex supply chains.

As companies embrace Lean precepts in 2015, focus should be placed on improving processes rather than finding immediate cost savings. The transition towards a more reactive and efficient Lean supply chain will likely entail long term cost savings, even if the results are not immediate. Whether fuel prices remain low or not, the benefits of preparing for volatility and flexibility will last long beyond 2015.