Global Supply Chain Strategy For Supply Of Lubricants

Global Supply Chain Strategy for Supply of Lubricants

The supply of lubricants is an interesting concept to deal with. Working for large MNCs gave me the opportunity to see how mid-size brands, as well as family/group-owned companies, were succeeding in their lubricants supply business models. As a result, I was intrigued as to what the secret to success is.


Let us discuss:

To begin, lubricants are a mixture of raw ingredients, primarily base oils and specialist compounds known as additives. Now, before we go on to the supply point strategy, let's get the following facts straight.

  1. Base oils and additives account for 95% of lubricant costs, and this is true for all lubricant manufacturers who create products that fulfil API criteria.
  2. Balance 5% cost problem is one where cost reductions will drive profitability. The following are the details:
  • Blending cost.
  • Distribution and supply cost which includes :-
  1. Transportation.
  2. Freight
  3. Insurance.
  4. Destination country charges


Blending costs

Because total added cost is a crucial component for decision makers, selecting a blending plant for production is critical in conjunction with distribution costs.
The Africa, Middle East & Asia Pacific regions do blend at 30 to 40 % lower cost than Europe & America.


Distribution cost

This is an important consideration while making decisions on the following topics:
  1. Transportation.
  2. Port charges.
  3. Freight.
  4. Import & other associate duties levied.
For example, European areas protect themselves by exempting European manufactured goods from duty, whilst all other destinations are subject to a 5 to 10% import tax. East and west Africa are particularly bad, with tariff increases of up to 45% compared to 5 to 10% on raw materials and manufacturing the finished product within those nations.


Model

I advocate creating a template to measure the landed cost at the distribution point, which will aid in making an informed decision to keep or raise margins. Please take a look at the very simple template (All the components of the costing in the template are US cents per liter)

Here are the components of the following factors:-

  1. Product Cost- Cost of RM + PM
  2. Blending Cost- Cost of converting the product into a sale-able pack.
  3. FOB Cost- Local transportation to the part and part charges are included in the free on board cost.
  4. Transport- Incase of Land transport it is the cost of reaching to the destination.
  5. CFR/ Border Cost- Cost at the destination port or crossing the border in case of land transport.



Other important factors

While the model appears to be relatively straightforward mathematically, it may be beneficial for the decision maker to consider the following factors that may influence the cost;
  1. Cost of packaging- Packaging costs are variables of MOQ (Minimum Order Quantities) & prices are driven by the same.
  2. Capital investments- The source must invest capital in making molds for the packaging.
  3. Demand forecasting must be deployed rationally to avoid the stock outs & over stocking.



* Many firms have used this method to create a win-win situation, which has aided them in the following areas:

  1. Closing high-cost plant operations.
  2. To obtain lower packaging prices by pooling demand.
  3. Using automation to reduce the cost of blending.

This concept is applicable to any industry and is widely used as part of a cost-cutting strategy.


Thank-You for reading this blog, hope it helped you out!


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