“There’s no harm in hoping for the best as long as you’re prepared for the worst.” Stephen King, Different Seasons
Although Mr. King is not known for his supply chain expertise, he could have written a thriller based on a situation that took place in our supply chain a number of years ago.
About a month after our company had launched a new product line using water chestnuts, we immediately saw signs of sales exceeding the forecast. After confirming this with Sales, I performed analysis on the raw material inventory to determine if we were at risk. It had already been a long day when my spreadsheet revealed that we would run out of water chestnuts in less than 6 weeks. I gave Procurement a quick call to let them know we would need to move up a shipment or two.
After a few minutes of discussion with Procurement, what I learned was a little shocking: the supplier was in China and they didn’t have any ‘safety stock’ in the US. This meant that there wasn’t any extra material readily available and we were likely to run out of material before the next shipment.
Unfortunately, it got worse. Digging further, we determined that the amount ordered and in-transit was not going to be enough to cover the rapidly rising requirements. We needed to ship incremental material quickly or we would jeopardize the product launch. This situation emphasized one of the unwritten rules of planning: If you are about to run out of a material, demand for the product will invariably increase.
My next question for Procurement was about an alternative supplier that could cover the potential shortage. After an uncomfortable pause on the phone, my contact said, “Water chestnuts are only sourced out of China, and because of our unique specifications, the supplier is the sole source of supply for the material we need for our product.” Really?
Rosemary Coates’ ‘The Risk of Failure.’ addresses rising supply chain risk due to materials being routinely sourced from far-reaching geographies. Speaking from experience, the risk is very real.
If we had to do it over again, we would certainly do things differently. It is the business team’s prerogative to ‘assemble’ the best product they can with the materials at their disposal. It can always be debated whether a unique material is ‘necessary’ to make a desirable product, but this discussion will focus on a proactive approach to managing long lead-time materials.
“Prepare for the unknown by studying how others in the past have coped with the unforeseeable and the unpredictable.” Gen. George S. Patton
There were a few days that felt like we were in the Battle of Bulge along with General Patton. In other circumstances it would be good news that sales of the product line were exceeding the forecast, but in this case, the supply chain was raising flags saying we may experience a shortage of water chestnuts (among other ingredients) making it difficult to produce some of the items. Putting it mildly, this is not what the business team wanted to hear.
Based on the trials and tribulations we experienced as we worked out the situation, here are three broad areas to consider when sourcing unique materials from distant geographies:
- Carefully estimate the transit time and the time it takes to move items through Customs. What is the typical shipping time? Does it take 3 weeks or more to get across the ocean? How long does it take to get through Customs. Does your company have experience clearing materials through Customs. How long does it take to transport the material from the entry port to your location? Hiring an experienced import resource to manage the paperwork at the port and subsequent transactions can be very helpful. For this particular item, we allowed 6 weeks from the time the boat left the port in China until the material was in our facility ready for use.
- Understand the vendor’s options if their primary source is depleted or the demand outpaces the rate of supply. Does the vendor have an alternative supplier or additional production capacity? If the demand for the material unexpectedly doubles or triples, can the vendor keep up? If not, what are the alternatives? Will a slightly different material work for short periods of time? Knowing the answers to these questions prior to being in a panic situation can be very helpful.
- Develop a conservative inventory policy for high-risk materials. A conservative policy in this context means ‘extra’ inventory. Obviously it is necessary to be fiscally responsible, however the risk of suffering customer service issues (no product available) must be weighed against making sure 3-4 months of inventory is always available in a local warehouse. A key to making this plan work is requiring the vendor to have ‘safety stock’ readily available at all times. It is extremely important to ensure this agreement is being upheld and the inventory confirmed on a frequent basis. Having this stock locally available (in country) on short notice can greatly improve the chances for success of a product launch.
Perhaps you are wondering how our ‘thrilling’ situation worked out. We had to air-freight some of the material from China to the US. Suffice it to say this was very costly. From the beginning of the product launch, our customers were extremely excited to have the product on their shelves. The initial success of the product line led the business team to justify the expense.
After this incident, one of the activities that proved to be helpful was setting aside a day to conduct what we called ‘War Games’. The idea behind this activity was to get all of the key players (Sales, Marketing, Procurement, Planning, Quality, etc.) in one room for a day to go through all of the possible issues that could jeopardize the launch of a product. This brainstorming session would take place soon after Management decided to launch a new product and everyone had a chance to discuss possible upcoming challenges to the new business. All aspects are discussed, including competitive market challenges, distribution problems, supply chain concerns (such as the one discussed here) and any other concerns the team may uncover.
Planning conservative raw material inventories can make a significant difference in ensuring product is available during the critical stages of a product launch. Turning Mr. King’s quote around, “Preparing for the worst will let us hope for the best.”
Photo credit: Depositphotos.com 53476899 thinglass