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Article
Sourcing in Times of Uncertainty

Sourcing and procurement professionals are used to dealing with large swings in demand and supply. But the highs and lows created by the recent bubble and recession were difficult for even the most adept sourcing practitioners. There are some best practices and innovations that can help deal with not just uncertainty in demand and supply, but supplier failures, commodity price volatility, and supply chain risk.


Full Article Below

The recent economic crisis only intensified the ever-increasing levels of uncertainty faced by sourcing professionals along many dimensions: extreme commodity and energy price volatility; mounting supplier failures; recurrent capacity and material shortages or oversupply; the credit shortage... the list goes on. There are some concrete actions that sourcing practitioners can take to excel in times of uncertainty.

 

1)    Proactively Monitor and Manage Supplier Risk - with the economic down turn and the credit crunch, it became more important than ever to proactively monitor which suppliers were at risk, and have contingency plans and/or alternate suppliers in place. There are technology solutions available that examine a mix of government trade data, credit data, supplier performance, other public information, and data from a company's internal systems, to provide early warning of suppliers who might be in trouble. Besides these automated approaches, it is also important to manually, yet systematically, monitor potential trouble indicators yourself - e.g., a supplier desperate for shorter payment terms or delivery or quality performance issues. Contingency plans are essential, especially when there are few or no alternate suppliers.

 

2)    Help key suppliers with "financing" for your orders - With the extreme credit crunch still lingering, procurement professionals need to get much more hands-on about helping to alleviate some of the cash flow issues of critical suppliers. Some companies are taking up the role of buying some of the raw materials for selected critical suppliers. Alternatively, you may agree to shorter payment terms in exchange for discounts, to help suppliers' cash flow.  The P.O. can also sometimes be used by the supplier to get a loan if your company has a strong credit rating, though this is getting more difficult.  If one of your critical suppliers has a cash issue and your company has a stronger cash/credit position, you should be able to find a creative solution, at least for the short term, while you work on a more sustainable remedy.

 

3)    Acquire Deeper Commodity Market Knowledge - In the past year or two, we have witnessed unprecedented commodity price swings of 2X, 3X, even 10X or more within a matter of months. With such volatile prices, it requires keen market intelligence capabilities to make intelligent decisions and react quickly as things change. Obtaining really good market intelligence is difficult.  And you can't necessarily get it all from third parties. Sometimes critical pieces of information can only be found "over a beer" with suppliers. Supplier-specific information needs to be combined with relevant macro-economic data, demand, competitive, and political information, analyzed skillfully, in order to draw the right conclusions and make smarter sourcing decisions. Some leading organizations are building dedicated in-house sourcing market intelligence groups and capabilities to meet these needs.   

 

4)    Private "Futures Markets" - Futures markets provide a window into expected future prices of a commodity.  But what about those commodities for which there is not an active futures market?  They can experience as much or more volatility than the traded commodities. One innovative approach was taken by a leading food manufacturer to get a lead on milk prices (although milk is a traded commodity, this approach can be used for non-traded commodities as well). They sent an RFQ with six different contract periods - 3 months, 6 months, 9 months, 12 months, 15 months, and 18 months. By collecting and analyzing the responses, they saw a relative consensus that prices would remain low for 3-6 months, rise dramatically in 9 to12 months, then come back down in 15-18 months. This gave them insight into future prices, as well as flexibility and choice in length of contracts. 

 

5)    The Need for Speed - With markets as volatile as they are, on both the demand and supply sides, speed has become critical.  Anyone moving slowly, with long lead times and long pipelines, will get burned.  Speed allows organizations to be more nimble to react to what goes on in the marketplace.  Speed and knowledge are both needed together, to rapidly detect changes in the supply base, the marketplace, and demand, and know what to do about them. 

 

6)    Collaborate with Suppliers on new cost reduction innovations - Work together with suppliers on how to take cost out. Understand their cost structure, what makes up their price and why the volatility. Look at all the options with suppliers - different ways of payment, different ways of managing the inventory, modifications to product design or delivery. Don't just keep the status quo because that's the way you've always done it. Think outside the box. These times call for innovative approaches.

 

7)    Expand Metrics for Success, beyond cost-reduction only - Financial metrics, in particular cost savings, are still the overriding metrics for procurement. However, there are additional areas, including green/sustainability, quality, safety (e.g. especially in food).  And speed - how responsive is your supply chain: time to respond to market changes, inventory turns, end-to-end transportation times, lead times. For these times, you must pick the right metrics for your organization.

 

8)    Supply-side Differentiation - Preparing for the recovery - It may take time, but as we emerge from the recession, we will eventually get back into a sellers' market, with shortages and allocation once again - sooner in some sectors than others. This means that suppliers select who gets limited supply. It is good practice to remember that, and to build good relationships when the economy is slow and it's a buyers' market. We all know that differentiation of the companies' products and services in the marketplace is a desired goal. Now companies also should try to differentiate themselves on the supply side of their company - become a "preferred customer" for their suppliers. Of course, volumes and price will always be a factor, but you can also work on how easy your company is to do business with, how reliable you are as a customer, payment terms, perhaps (when appropriate) enabling financing of some select suppliers. Suppliers really do remember how various customers treated them during a down turn, and that can influence how they allocate limited supply when the market heats up again.

 

If you can use the recovery to drive improvements to your risk management, speed, knowledge, and especially your supplier relationships, then you will come out way ahead of the pack.

 


To view other articles from this issue of the brief, click here.

 

 

 



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