A pair of articles came out over the weekend discussing whether or not industrial buyers may wish to consider forming either national stockpiles or in the case of ThyssenKrupp, a new company held in part by ThyssenKrupp as well as the German government to purchase and stockpile key raw materials. The articles identified several key raw materials including copper, iron ore, nickel and rare earths. When one considers the severe allocation issues of 2008, particularly for steel products, one may become tempted to jump onto the stockpiling bandwagon. But does national stockpiling and in turn, industrial manufacturing company-specific stockpiling represent sound sourcing strategy?
The arguments against stockpiling may outweigh the arguments for it.
According to the Reuters articles, the primary argument against stockpiling involves the potential effect on prices, “Stockpiling is competing for scarce resources, and initially at least it will exacerbate what they are worried about high prices, according to Daniel Brebner, an analyst at Deutsche Bank.
But we believe many additional arguments exist against stockpiling that we have discussed previously in a post about rare earth metal stockpiling in particular. The general case against stockpiling centers on three if not four arguments:
- In cases where the government owns the stockpile (vs. those in the private sector), stockpiling can create conflicts between buyers and suppliers. For example, do the stockpiles get released when prices become “too high in which case the government would upset the supply base to the benefit of buyers or only when production could get shut down for want of materials?
- Sometimes materials degrade their chemical and mechanical properties don’t hold up over long periods of time. Should the government stockpile anyways?
- Many often “get it wrong from a timing perspective. In our post on rare earth stockpiling we reference the stockpiling of over 9000 tons of tin prior to 1922 by a group of British and Indonesian traders. What happened? The market for tin crashed and the traders couldn’t offload the stockpile
Perhaps the biggest argument against stockpiling for individual manufacturing organizations relates to weighing the costs of holding the inventory (and tying up working capital) and adding to that, the risk of potentially holding high priced inventory should the market drop. Our short-term memories should remind us that not that long ago, many buying organizations (including producers) had stockpiled high cost inventory (that took months if not quarters to reduce).
Can stockpiling ever work? Referencing our earlier article, yes, they can and here we can take a cue from the Russians. They created two types of stockpiles one called “immobile, the other “mobile. Immobile stockpiles release only in the event of a natural disaster whereas mobile stockpiles could hit the market based upon industry-specific metal shortages. Pricing does not appear to represent a factor for release of materials.
In answer to our headline question, we’d posit the risks of stockpiling probably outweigh the rewards. But if buying organizations want to better understand strategies for securing raw materials, take a look at some of the Japanese companies such as Toyota as a case study.