The Sourcing Challenge – next two years
The economy has stabilized over the last few months in many countries and in India, it appears to be firmly on the growth path. Capacity utilization has improved significantly in many industries. Management are increasingly optimistic, expecting steady to good growth over the next few years. Companies are going in for significant capital expenditure, after almost 5 years, to be better prepared for the anticipated increase in demand.
With growth being witnessed across industries you can feel the heightened activity levels at corporate offices as executives change gears to try and grab market share in a growing market. Or to defend their turf, which in itself would give them a healthy improvement in sales and profits. With all this euphoria beginning to spread across businesses let us not get carried away and try to understand the execution challenge. Without which even the best-laid plans come undone.
When demand picks up significantly in many sectors and continues at the higher level or increases further, the supply chain takes some time to catch up. This time frame can vary from a few months to a few quarters or years.
In the first few weeks and months, the Tier 1 suppliers try to meet the demand from their OEM / Brand Owner customers by working to a full shift or on overtime, where feasible. Then they start encountering a few problems. Supplies from their own suppliers start becoming a cause of worry on two fronts – quantity and price.
The Tier 2 suppliers, who are generally smaller, find it harder to sustain supplies beyond a few weeks without making significant changes. The commodity suppliers, who supply to both Tier1 and Tier 2 suppliers, need time and visibility (of higher demand in the foreseeable future) to action increase in their capacity utilization. But being larger they are able to demand and get higher prices as more customers chase the same output.
On the other hand, working on overtime is more expensive and only a short-term solution to a sustained growth in demand. Either more working shifts need to be added if the capacity utilization allows enough headroom. Or capacity will need to be added to increase output. To add more shifts, more manpower is required. But then a lot of manufacturers across tiers are trying to do the same thing.
How and where to get the additional manpower? Believe me, it is not easy in such a situation and more so, skilled manpower for your type of industry may just not be there. So you need to get un/semi-skilled people and then train them in your trade. This takes both time and money. Till the time they are ready, you try to make the best use of what you have, with direct impact on both quantity and quality.
These constraints on supply and increase in cost of commodities and components cause a lot of strain at the OEMs. If they do not agree to price increases, then they may not get sufficient material. Even after agreeing to increases, the supplies are not guaranteed as the manpower and capacity factors take time to get addressed all along the chain. If they do agree to price increases they do not know whether they will be able to pass it on to the end customer in a competitive market.
Not being able to supply when the demand is there, is obviously unacceptable. Losing market share is every CEO’s nightmare. The luxury of the customer waiting for your product is accorded to only a few products in a few industries. You can also not bank on it for a long time as the customer is not likely to wait for very long before choosing an alternative.
On one side are the prospects of growing sales, profits and market share with the confident sales team piling up orders. On the other are supply constraints, increase in material costs, quality issues and the sourcing team struggling to keep up. To add to the heady mix are the questions about the OEMs own capacity and manpower today, tomorrow and beyond. Whether to add capacity now or later? Whether to make or to buy? Enough to keep the top management busy seven days a week. No doubt it is a good problem to have rather than worry about getting enough sales.
In the short to medium term, this competition for sales and market share effectively becomes a competition between the companies’ supply chains with the sourcing teams playing the lead roles. Yes, the company with the stronger, better-managed sourcing team will get more material at better prices allowing it to provide supplies seamlessly to the market and take advantage of its growth. No, the stronger sourcing team is not necessarily the one with highest value or volume of procurement. Sure, the high value of buying does give you strength, but it does not always work this way.
So, as we discuss this challenge, scores of sourcing managers are camping at suppliers’ factories trying to get the maximum output of their companies from a total output which is not sufficient for all. They are there to prioritize and expedite and ensure that their requirement is produced before anyone else’s. Even some CEOs have had to visit key suppliers urgently for the same purpose.
From the suppliers’ point of view, after quite some time they are in a position, where instead of chasing the buyers to get more orders, it is the other way round, with the buyers trying to get more and more material from them. From, waiting to get an audience with the sourcing manager and then the price correction request being returned without a glance, to now, when they are ready to discuss price increases and willing to settle at the earliest.
As the business grows further in the next few months powered by a good monsoon (forecast) followed by a vibrant festival season this battle for supplies, will only intensify. It will be upto the sourcing teams to rise to the challenge and “procure” victory for their respective organizations.
There are no easy solutions, no quick remedies to overcome this challenge. There is no way around it either. It will have to be taken on. Some will win. Many will not. There will also be costs in the immediate term. No one can escape this.
Can one be prepared for this? Yes. Can one use it as an opportunity? Yes. How? Is the subject of another discussion. But the first thing to do is to understand and accept it for what it is – a Challenge. Only then can one be prepared, surmount it and use it to one's advantage.