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ASCM Insights

A New Perspective on Sourcing Raw Materials

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As organizations work to reset their supply chains in anticipation of what they foresee post-pandemic, I’m starting to see more articles and commentary on the subject of reshoring. Black swan events tend to trigger supply chain overreaction and frustration, and COVID is no different. Sourcing has captured the spotlight for good reason: The combination of increased reliance on imports flowing out of China, plus the endless stockouts of basic and essential consumer products, have heightened the awareness of fragility in our networks and made reshoring the catchword of the day.

COVID-19 gave us all a live, up-close example of the proverbial butterfly effect. A small ripple in China exploded into a global nightmare. Every aspect of the supply chain has been bullwhipped, with container and vessel capacity being particularly exposed, as evidenced by recent global port delays. And many consumer goods companies still can’t get their necessary raw and pack component products out of China, or through U.S. ports, exacerbating the perception of shortage and setting us all up for the hoarding effects that inevitably follow. The supply chain is so lean that a week-long delay caused by one grounded container ship in the Suez Canal created a whole series of Armageddon-like scenarios.

Supply chain leaders are concerned, and many are choosing to reshore some or most of their operations as a result. But I have to question whether that decision should be so binary. There are far more options available — especially because so much of the discussion around reshoring feels both reactionary and overly simplistic, often infused with political rhetoric and rarely reflecting the exceptional complexity involved in changing sourcing models or building out capacity.

Frankly, we can’t always walk the edge of Occam’s razor, seeking the simplest solution to a complex problem. One cannot, for example, just add incremental manufacturing capacity with the snap of a finger. It takes years to build out production capabilities, with many hurdles between the date of initial concept and the first product to roll off the production line. Even then, there would remain a tremendous dependency on globally sourced raw materials.

As a real, everyday example, consider a fragrance used in a body wash. It may require 15-20 ingredients or chemicals, each potentially sourced from a different region of the globe, and each subject to its own isolated risk profile. Add to that the preservative chemicals, buffers, surfactants, colorants or homogenizing chemistry needed to complete the body wash — and this just concerns its fragrance. While reshoring may read like a great idea on paper, the execution is fraught with issues. And when we distill all the potential options for mitigating total supply chain and sourcing risk, the best solution in the short-to-midterm view is most likely a composite of multiple sourcing and inventory practices, including — but not exclusively — reshoring.

In the wake of COVID, the challenges are painfully obvious, very real and undoubtedly ongoing. Domestic manufacturers and intermediate processers continue to feel the squeeze. Each week, I hear from colleagues expressing their frustration about shortages. The failure to deliver critical ingredients or packaging idles production lines and creates order-fill issues. In discussions with these colleagues, I ask one recurring question: Are you sole sourced? In each case the answer is yes. Therein lies the real root cause.

The exceptional emphasis on reducing inventory and leaning operations works against the supply chain during black swan events. By making ourselves tremendously efficient, we take most of the slack inventory and capacity out of our networks. We have done the same thing with sourcing, spending too much time working cost models and not enough fully assessing the risk associated with single-country sourcing, an extended supply chain, congested ports and delayed inbounds.

So, how can we mitigate such oversight in the future? It must be a deliberate effort to multisource mission-critical items, married to varied inventory models to create a combinatory approach that balances the risk of different sourcing approaches with a solitary sourcing model. These strategies are best used in combination, so the following approaches are no particular order:

Store more inventory. Consider this a short-term “solution” that may make some intuitive sense and might work for assorted raw and pack products that are not particularly hazardous or dangerous to store. Similarly, one can build a reservoir of finished goods inventory as a buffer against expected demand-side supply chain uncertainty. But building up finished goods has risks, especially if consumer mix shifts. Well-executed planning models might enable smarter material and finished goods requirements planning. I include this option because it is the most obvious and reflexive. But note that relying on this approach reactively is a blunt instrument with risk unto itself. It also may not be particularly feasible in the short-term based on network constraints. When it comes to inventory, the long view is the most essential.

Use consignment approaches for raw materials. Leveraging consignment inventory allows for a more secure supply of critical raw and pack components without incurring the capital cost of inventory. The best consignment agreements are relationship- and commitment-based, with both storage minimums and annual volumes clearly defined, creating a win-win for both trading partners. Of course, if you forecast incorrectly this approach may increase your obsolete risk, and warehouse costs may increase a bit. But such costs may be acceptable for securing supply while minimizing the potential cost of outages. Plus, longer-term commitments for raw materials help secure supply and container and vessel capacity, both of which are currently in short supply.

Diversify your sourcing. This, too, is a logical approach. And while it may present cost implications when compared to sole sourcing, it makes common sense to spread your sourcing risk across a range of suppliers; distributors; and, ideally, source countries. This is the best approach to limit supply chain risk. Of course, items outsourced to global suppliers could still face threats arising from the port and container vessel constraints that are so common right now. Also, this approach works best for large companies or those buying substantial quantities of a given item. It’s not really for C-level customers who need to buy a C-level raw material from a supplier’s portfolio. My simple rule of thumb is that no single supplier of a critical raw material should constitute more than 80% of a company’s total requirement.

Source locally. Start to increase the percentage of raw materials that you purchase via domestic providers to help nurture the expansion of available resources. By committing to gradually larger, and consistent, supply contracts, you begin to develop and ensure a more flexible source of supply. This may not be the cheapest option, but it’s one of the best lead-time options, enabling you to increase throughput quickly and avoid the sort of logistical delays that are headline news these days. In terms of our fragrance example, a key consideration should be whether the local source itself purchases base chemicals or components internationally, which could therefore pose a risk unto itself. In general, this recommendation represents longer-term risk remediation best suited for large-scale consumers of chemicals and ingredients and is a more sophisticated approach when we continue to see frailty throughout the global supply chain. This is step one in reshoring, but it’s only a baby step.

Use distributors. It’s common for organizations to use distributors as a secondary or flex supply source. One of the distinct advantages is that distributors typically have extensive knowledge of international supply sources, as well as international shipping and commerce. And because buying and selling globally is their stock-in-trade, they have a depth of knowledge that enables them to provide expertise and resources far greater than most in-house procurement groups. Much like sourcing locally or using consignment approaches, the best distributor relationships involve strategic partnerships and minimum volumes. This way your distributor partners can develop a pre-built supply chain (and inventory) for essential items. Establishing a strong relationship with distributors helps diversify your raw and pack source diversity almost immediately.

The truth is, there is no perfect risk-averse solution to sourcing raw materials. But COVID has cast a harsh light on the flaws in our sole-sourced and offshored approach. As a supply chain community, we should evolve the next best practice that embeds a supply chain risk management framework for sourcing. In my world, this involves identifying the risk in your supply chain, then partnering with multiple, globally diverse providers of essential raw and pack materials while examining local manufacturing and inventory storage opportunities.

About the Author

Patrick Bower

Patrick Bower is the author of SCM Now magazine’s “Sales and Operations Planning Department.” He may be contacted at plbowerone@yahoo.com.

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