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Supply Chain News: Largest Procurement Risk is Often in Low Volume Components, MIT's Yossi Sheffi Says



Several Approaches Are Available to Mitigate the Risk


Aug. 29, 2016
SCDigest Editorial Staff

Procurement organizations and broader supply chains often miss key sources of supply risk coming from low volume parts and components.

So writes Dr. Yossi Sheffi, a professor at MIT's Center for Transportation & Logistics, in a recent edition of Inside Supply Management magazine from the Institute for Supply Management.

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Network gear maker Cisco tries to standardize parts where possible, using a "new-product resiliency index" it developed.

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"Critical, low-spend items are often the riskiest because they can lack a high priority for suppliers more focused on larger-volume products," Sheffi says. "Of particular interest are items that are low cost and low volume but essential to the business. "

Sheffi cites the example of a cellphone manufacturer experiencing problems securing camera components after losing its tier-one customer status, and farm equipment manufacturer Deere & Company being considered a secondary customer by some component suppliers that are more focused on customers in the auto industry.

The risk can be especially high for companies that are more conservative in terms of moving to new technology, especially in the electronics area.

"Makers of cars, commercial systems and many industrial systems prefer not to use the latest electronic chip but rather "tried and true" components," Sheffi notes, while the suppliers of these items often have their attention on newer technologies with higher margins. That could lead to an unexpected delay in a supplier's ability to deliver the older parts that are critical to production of some goods.

"Market changes like this mean that suppliers' production priorities are often in a state of flux, and buyers of less commercially attractive, low-volume items must take these demand swings into consideration when assessing procurement risk," Sheffi says.

What can procurement managers do to mitigate this risk on low-volume items?

One obvious answer is to hold more inventory. While every company wants to operate a Lean supply chain, "Inventory carrying costs are, by definition, low for low-spend materials, and the strategy does not require supplier cooperation," Sheffi notes.

Sheffi adds that even if the inventory buffer is insufficient to cover the entire recovery period of a supplier, it allows crisis managers to "catch their breath" and organize a response. The buffer inventory will allow the company to continue operations and shipping customer orders, while developing plans as needed (alternative suppliers, etc.) for when the buffer industry runs out.

Next, Sheffi says Low volume items should generally have engineering specifications such that they are not unique to the buying company. This provides many more alternatives for sourcing in the case of issues with current suppliers

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Sheffi says network gear maker Cisco, for example, tries to standardize parts where possible, using a "new-product resiliency index" it developed. This index includes such factors as the maturity of each part (is it close to its end of life?) and the uniqueness of the supplier (do we have others that can step in?).

Another approach to mitigation risk from low volume items is to consolidate procurement operations. First, companies can consolidate buying of the critical parts by all product divisions across the company to the same supplier, then combine the procurement efforts with other companies to create a buying consortium. This will increasing the spend and thus the attention paid by the supplier to the company.

Second, Sheffi says companies can direct the procurement of other, non-critical parts and materials to the critical supplier, thus making the company a more important customer overall

Another approach, Sheffi says, is to sign long term contract with suppliers of low volume but essential parts or components to increase the status of the relationships at the supplier companies.

"Most companies are a minor customer to some of their suppliers, and that low-spend situation adds to the risk of disruption," Sheffi concludes. "The good news is, certain actions can help prevent many problems before they occur, or make the difference between quickly solving an unexpected issue and facing major shutdowns or delayed deliveries. What is critical to remember is that when creating risk management strategies or adjusting existing ones for supplier networks, low-spend does not necessarily equal low importance. Give these items high priority."

Do many companies not see the procurement risk from key but low volume items? What would you add to Sheffi's take? Let us know your thoughts at the Feedback section below.


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