Crisis procurement within a disrupted supply chain

On risk management, jumping the price curve & getting orders filled

Learnings from experiences acquiring PPE during the covid crisis.

  • Accessing Supply: Finding suppliers aren’t that hard (Alibaba.com!) but accessing secure, good quality suppliers in a crisis is well, very hard

  • Supply Stability: Single sourcing is a recipe for failure. ref: $1 billion state of CA PPE purchase that got delayed until it wasn’t as much needed anymore.

  • Pricing Realities: If prices are going up every week (or day!) what can & should you do?

Accessing Supply

  • have pre-existing relationships.

    • New customers will not be treated well as they are considered ‘flighty’. eg. Only around during the crisis. Long term customer > short term. Which is completely logical as the suppliers business will continue on after the crisis ends and they will continue needing buyers.

    • So, generally, if a supplier has to cut someone out, they will start with new customers + lower priced contracts before going to the higher prices + old customers.

  • No pre-existing relationship? Get a side-channel. This can be a broker/agent or an entity in-region (government or business) to help mediate the relationship.

    Naturally, if your broker/agent is also new to the supplier. Well, that’s just the same as being a new customer but worse. Check your pathway to the supplier!

    Why such a strong emphasis on relationship? See Pricing Realities below

Enabling Supply Stability. Diversification of suppliers, country source, logistics, and process

  • Even with strong relationships, other things may fail. Diversify. How?

    • Multi-pathing (smartly). eg. Half your per-order size and increase the number of suppliers. In fact, if you can afford it, double your total order size, but split it across 4 suppliers assuming only 2 will actually fill your order.

  • A crisis by default means some suppliers are going to fail your order. Countries might bar exports (or imports) and having multiple suppliers maximizes you getting your order.

  • It isn’t just suppliers failing. For masks, China changed export regulations almost weekly. For good reason (quality was too variable) but the effect were delays across the entire chain and massive lines to get goods out through customs.

    • Even now (Jul 15th), with nitrile gloves, Top Glove was just banned by the US from being imported

    • side note: for China & masks, enforcement of new regulations were patchy. So while cargo going through Shanghai airport was strictly checked, it wasn’t the same elsewhere (or if you shipped by sea). Splitting logistics helps as well.

  • Stability of supply is critical with safety products as the no-supply scenario means someone will die while over-ordering has minimal impact since you can always re-sell or use the extra supply later on.

  • Separately, it isn’t a-priori known that your own filters/biases for what is a good supplier is the right one during a crisis. Thus, not only should you split your order, you need to split your processes as well.

    • this was evident in the mask availability crisis when the only way to get any supply was to pre-pay. 100%. upfront. No sane procurement process does that for large million $ orders with all of 1-2 days to make a decision. But that needed to happen.

Pricing Realities in a Deepening Supply Shortage. Jump the price curve.

  • contracts are nice but that does not mean you would get your order in a crisis

  • this is especially important when prices are increasing rapidly

  • For example. You strike a contract for gloves at $6/box for delivery in 3 weeks, but by then, the same box can be sold for $7. On a million box order, that’s $1 million in net margin. Don’t be surprised if your $6/box order does not get filled.

  • A contract, even with penalty provisions is still a simple economic calculation in such a situation. Hence, ensuring you have a strong relationship is critical. That makes the equation more than just numbers especially for Asia where relationships are critical in business.

  • There is another path, of course, guesstimate pricing at the time of delivery. eg. just pay the future price.

So, in short. If you are clearly in a crisis, expect to order more, pay more and do more work. You might just get the supplies you need to live more. All the best!