Daily Archives: November 14, 2016

The Nature of Supply Dynamics Part I: Unknown When Unmanaged

Despite the constant pressure from the CFO to squeeze every peso out of the supply chain (not penny, that’s not good enough any more, they want to squeeze tenths of a penny now), the primary purpose of Sourcing is not cost reduction — it’s assurance of supply. (And that’s why Sourcing Innovation prefers Supply Management terminology over Procurement and Purchasing, but that’s another post.)

Assurance of supply is no easy feat. Just because you do a sourcing event, identify a supplier, cut a contract, send a purchase order, and arrange a delivery date, it doesn’t mean the product is going to show up. The product might not be manufactured on time due to a a raw material shipment delay on behalf of a tier 2 supplier or a production line breakdown. The shipment might be lost, stolen, or under 3 km of water. Or, the supplier might go bankrupt. Either way, no supply.

But this is a risk that can be fairly well managed through proper supplier qualification, production tracking, shipment tracking, and dual-supply. However, a bigger risk, and one that keeps the CFO (vs. the COO) up at night is the cost control measures you put in place during negotiations to keep supply affordable so the company (knowing that there is always a ceiling to what customers will pay) can maintain profitability.

If you are in an advanced Supply Management organization, one measure you are probably taking is aggregating raw material supply needs across products and categories and buying the raw materials on behalf of the supply base as your volume can often net a better deal than individual suppliers that supply products purchased in lower volume or that use lesser amounts of expensive raw materials (like steel and rare earth metals). This measure can save an organization a lot of money in markets where prices can fluctuate 50% or more in a few months, but only if the suppliers buy off of the contracts you tell them to when they are supposed to.

But how do you insure this? And more importantly, how do you even know what they are doing? Your organization can put in the contract that they have to buy off of any raw material contracts your organization mandates and your organization can ask them to report regularly, but how does your organization really know? The account rep might report 95% compliance and claim only a few “off-contract” purchases due to the need to buy emergency supply as a result of a late shipment, but the reality could be the exact opposite. And you can ask for records, but will you get the right ones?

If you don’t have anyway of keeping tabs on the situation, and managing it to whatever extent it can be managed, it’s completely unknown. It’s the nature of supply dynamics, and why visibility is needed both into, and across the supply chain. So how do you get it? More on that later in a later post. But first, how do you know the analytics is right and the master contracts are appropriate in the first place?