Procurement In The Supply Chain Crisis

The supply chain into the United States is in trouble. Some deliveries arrive on time, but many companies face challenges getting the materials they have ordered. Cheap and easy solutions can solve some problems, but the bigger challenges require businesses to consider a variety of possible solutions, half-way solutions and frustrating tradeoffs. Considering the options will help managers make the choices that work for their particular businesses.

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Manufacturers will find these ideas right up their alley. Contractors, wholesalers and other types of businesses should consider whether they can use them also.

The cheap and easy solution applies to materials that are a relatively small portion of the final product’s cost. Imagine a piece of machinery that sells for $10,000 and has a 35-cent on-off switch sourced from Asia. The company might buy a year’s worth of switches well in advance of running out. This “buy big” strategy was used by a pallet manufacturer who sourced wood locally but nails from a South Korean company. He bought a nine-months supply of nails. Not only did that purchase reduce the risk of having to shut down production, but it relieved the management team of a big worry.

Considerations before implementing this strategy include whether the component is likely to go out of style, including not only fashions but design functionality. Companies must also consider storage space and the risk of shrinkage. This strategy works well in some cases but does not solve the biggest problems.

Most materials cannot use the buy-big strategy, because it would require too much cash or too much storage space or too great a risk of obsolescence or shrinkage. Buying local is often suggested to reduce supply chain risk, but materials that have a substantial impact on the cost of the finished products have to be purchased as inexpensively as possible. Checking local suppliers makes sense. Don’t be surprised, however, if the imported price is significantly less and the difference materially increases the cost of the company’s product.

Conversations with critical suppliers should begin the risk reduction process. They may have ideas for reducing risk, or at least assessing how risky current practices are. Suppliers certainly have an incentive to paint a rosy picture, but the conversation is worthwhile if for no other reason than to emphasize the importance of reliable delivery.

Alternative suppliers that are in more reliable locations can be contacted. Reliability can describe actual distance or routes. Sometimes the shortest distance entails an unreliable road or port; in these cases, a more reliable location may mean a longer map distance.

Carrying more raw materials inventory is one way to reduce supply risk. It’s simply a smaller version of the buy-big strategy that was suggested for small parts. More inventory will certainly 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 shrinkage. Interest rates are so low that lost interest income may be counted in pennies rather than dollars. The risk of obsolescence and shrinkage depends on the business and product, so this strategy works for some materials but not for others.

When more reliable vendors are more expensive, it may make sense to split a company’s order between two suppliers. When the cheap supplier fails to deliver, the reliable supplier keeps the company in business. The cheap supplier’s failure may be symptomatic of a global problem, in which case the reliable supplier will probably be so inundated with orders that it won’t be able to increase production. Still, having a portion of the company’s needs met is far better than nothing. And in some cases, the cheap producer’s problems will be localized, and the more reliable vendor will be able to ship more product. This strategy may be too costly for small purchasers, but again it’s a good approach to consider.


Redesigning a product may solve some of the supply reliability problem. Let the engineers brainstorm on how to change the design so that an easily sourced component is used. If the on-off switch in the prior example is custom made, it’s time to consider whether an off-the-shelf product would work just as well.

Companies that have trouble evaluating these ideas may want to look into better inventory management software. Considering different suppliers makes sense in turbulent times, but it should also occur periodically even in stable times. Good software makes this effort easier, which means less likely to be postponed.

Finally, companies should consider more finished goods inventory. If production stops for a week because of a supply chain problem, having products ready to ship to customers keeps cash flowing into the company. Recall the earlier discussion of inventory drawbacks: interest, obsolescence and shrinkage. If these are of small concern, and there’s adequate storage space, then carrying more inventory is an easy solution.

No one strategy works for every business, so any given company will benefit from rolling down the list of possible strategies, as well as brainstorming their own creative ideas.

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