Purchasing in the supply chain crisis
The supply chain in the United States is struggling. Some deliveries arrive on time, but many companies are struggling to get the materials they ordered. Cheap and easy solutions can solve some problems, but the bigger challenges force companies to consider a variety of possible solutions, middle-of-the-road solutions, and frustrating trade-offs. Considering the options will help managers make the choices that are right for their business.
Manufacturers will find these ideas in their back alley. Entrepreneurs, wholesalers, and other types of businesses should consider whether they can use them as well.
The cheap and easy solution applies to materials which represent a relatively small share of the cost of the final product. Imagine a machine that sold for $ 10,000 and had a 35-cent on-off switch from Asia. The company could buy switches for a year long before they run out. This “buy big” strategy was used by a pallet maker who sourced the wood locally but the nails from a South Korean company. He bought nine months of nails. Not only did this purchase reduce the risk of having to shut down production, it relieved the management team of a big worry.
Considerations before implementing this strategy include whether the component is likely to go out of fashion, including not only the fashions but the design functionality. Businesses should also consider storage space and the risk of shrinkage. This strategy works well in some cases but does not solve the bigger problems.
Most materials cannot use the big buy strategy, as this would require too much money or too much storage space or too much risk of obsolescence or shrinkage. Buying local is often suggested to reduce supply chain risks, but materials that have a substantial impact on the cost of finished products should be purchased as cheaply as possible. Checking out local suppliers makes sense. Do not be surprised, however, if the imported price is significantly lower and the difference significantly increases the cost of the company’s product.
Conversations with critical suppliers should begin the risk reduction process. They can have ideas to reduce the risk, or at least assess how risky current practices are. Suppliers certainly have the incentive to paint a rosy picture, but the conversation is worth it, if only to stress the importance of reliable delivery.
Alternative suppliers who are in more reliable locations can be contacted. Reliability can describe distance or actual routes. Sometimes the shorter distance results in an unreliable road or port; in these cases, a more reliable location may mean a longer map distance.
Having more stocks of raw materials is one way to reduce the supply risk. It is simply a scaled-down version of the big buying strategy that has been suggested for small parts. More inventory will definitely require more working capital and storage space, but consider the three usual criticisms of high inventory: loss of interest income when money is tied up in inventory, obsolescence and shrinking. Interest rates are so low that lost interest income can be counted in cents rather than dollars. The risk of obsolescence and shrinkage depends on the activity and the product, so this strategy works for some materials but not for others.
When more reliable suppliers are more expensive, it may make sense to split a company’s order between two suppliers. When the cheap supplier doesn’t deliver, the reliable supplier keeps the business going. The failure of the cheap supplier can be symptomatic of a global problem, in which case the reliable supplier will likely be so overwhelmed with orders that they will not be able to increase production. Yet having some of the business’s needs met is much better than nothing. And in some cases, the cheap producer’s problems will be localized, and the more reliable seller will be able to ship more products. This strategy may be too costly for smaller buyers, but again, it’s a good approach to consider.
Redesigning a product can solve part of the reliability of supply problem. Let the engineers think about how to modify the design to use an easy-to-find component. If the on-off switch in the previous example is custom made, it’s time to determine if a standard product would perform as well.
Businesses struggling to evaluate these ideas may want to look into better inventory management software. Considering different vendors makes sense in times of turbulence, but it should also happen periodically, even in stable times. Good software makes this effort easier, which means it’s less likely to be postponed.
Finally, companies should consider more inventory of finished products. If production stops for a week due to a supply chain issue, having products ready to ship to customers keeps cash flow in the business. Recall the previous discussion of the downsides of stocks: interest, obsolescence, and shrinkage. If this is a minor issue and there is adequate storage space, then carrying more inventory is an easy fix.
No single strategy works for all businesses, so any given business will benefit from listing possible strategies, as well as brainstorming their own creative ideas.