Toyota has cut production by 40% due to the semiconductor shortage © xPACIFICA via Getty Images
Toyota has cut production by 40% due to the semiconductor shortage © xPACIFICA via Getty Images

7 strategies for buyers in a world of shortages

Will Green is news editor of Supply Management
20 August 2021

Sectors from automotive to foodservice are struggling with crippling shortages of supplies due to a perfect storm of factors.

The pandemic caused a see-saw in demand for goods and shipping services – leading to a global shortage of containers – while outbreaks continue to close down supplier factories. In the UK a shortage of HGV drivers and Brexit have exacerbated these problems.

Meanwhile, with organisations reporting higher prices for goods and services the prospect of rising inflation is on the horizon.

For many procurement professionals this is likely to be the first time they have operated in an environment where the balance of power lies so strongly with suppliers. So how should they be responding?

1. Develop deeper supplier relationships

Being proactive not reactive, sharing future plans and offering more security are critical.

Dawn Tiura, president of Sourcing Industry Group, a membership organisation for sourcing executives, said: “When your relationships are tactical, it’s easy for the supplier to move you to the bottom of the list when capacity is extremely tight. When it’s strategic and concrete, the dynamics shift. Work with your suppliers to understand what’s most important to them. Often, there’s an area where you can give that will result in a better outcome elsewhere.”

Gareth Thomas, senior manager at IT services and software firm Delaware UK, said: “Keep your selected suppliers onside and let them know the importance of the relationship, what your organisations plans for the future are, and what that means for the supplier. Make your supplier part of an interdependent team.

“Once they've been awarded a supply agreement, don't just react to them when something goes wrong. Maintain a constant dialogue between both organisations so that the supplier’s representative will not find it uncomfortable to broach possible difficulties, and will therefore raise them at an early stage.”

He added: “Can you provide security for the supplier? A good tool to negotiate better terms and prices is if your supplier knows that you are able to stabilise their sales demand by guaranteeing supply requirements via long-term agreements.”

2. Get better supply chain visibility

Unsurprisingly, the pandemic revealed weakness in supply chains, including situations where third-tier suppliers shared the same fourth-tier supplier.

Tiura said: “It’s important procurement leaders understand who their fourth-tier suppliers are in their supply chain. So often we see professionals diversify their third parties without understanding where their supply sources are originating. During the pandemic, we found that some of the best diversified supply chains (on the surface) had the same fourth parties – deeper supply chain visibility is a must.”

3. Prepare for the long haul

The semiconductor shortage and shipping issues are expected to last until 2023.

Tiura said: “It depends on the type of product affected. For example, we’re expecting that the global chip shortage could last until 2023. The impact on shipping capacity will be similar. On the whole, supply shortages will continue well into 2022 with a likely peak during this year’s holiday season.”

4. Manage expectations

Don’t keep your internal stakeholders in the dark.

Thomas said: “Open dialogue with all levels of management. In an inflationary environment price fluctuations are inevitable, and whilst a well-informed manager or C-level executive should be aware of the current and impending economic conditions, no one likes surprises.

“Therefore, ensure that there is a constant open dialogue to discuss your plans. Allow management to be expectant of mitigating costs (e.g. to bolster your team), or the forecasts of how prices are to be effected.”

Tiura said: “Skill-wise, it’s important to be able to proactively manage the expectations of company leadership so they are conscious of price, supply movements and outcomes. Within your team, establish a process for responding to price changes that includes a proactive strategy for mitigating changes, handling negotiation and determining financial impact.”

5. Be more agile

Bear in mind suppliers may be able to recognise desperation, and be prepared to move fast.

Alan Holland, CEO of sourcing software firm Keelvar, said: “With cancelled contracts on the rise, many procurement teams are scrambling to find new suppliers and forced to spot bid. If they don’t act fast, business continuity is threatened. Suppliers recognise the demand (and sometimes desperation).

“Speed is key in these instances. Professionals faced with supply shortages should automate and optimise the sourcing function to streamline the search for and awarding to new suppliers.”

He added: “When suppliers raise prices, sourcing optimisation tech helps procurement teams assess their options. By analysing the supplier and its competitors on a wide variety of criteria, procurement teams can move beyond lowest-cost sourcing models and assess the big picture.

“Sometimes, supply price increases simply can’t be avoided. In these cases, we recommend procurement look at other areas within the business to see where costs can be reduced – or to see what other value can be unlocked through creative and competitive bidding from the suppliers.”

Tiura said: “If suppliers are raising prices, is there another area you can get more return – like sustainability – to even out the value?  If there are no opportunities to create more value or maximise total value, the next best option is to change your demand pattern.

“Incorporating a demand management programme to analyse product demand will also help you understand your demand pattern and make long-term decisions that eliminate unnecessary costs and help you stay ahead of inflation.”

6. Review your capacity

Do you have enough inputs to make the products you’re selling, or is it time sacrifice certain lines?

Thomas said: “Consider that while you may have honed your operational planning to effectively turn received materials into sellable products, have you also suitably utilised your sales planning to ensure that you have the initial capacity to produce based on forecasted sales?

“If your buyers are fully and constantly appraised of market conditions and see shortages on the horizon, then they will be able to know where to focus their efforts to secure supply in the areas that are going to produce the most profitable return during tough times. This may in turn allow the least profitable product lines to be sacrificed.”

7. Spread risk

The use of quota-style agreements with suppliers is an under-used approach.

Thomas said: “My first introduction to strategic procurement in the mid 90s was for an organisation who knew the importance of spreading risk. Every core material they required would be sourced from at least two suppliers with a quota agreement in place, including clauses for emergency ramp-up of supply should one supplier not be able to fulfil their obligations. This approach is heavily underused today.”

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