My colleagues over on Spend Matters recently penned a pair of articles on 5 Critical Supply Risk Mitigation Principles And Practices for Your Supply Chain Sourcing Process and How to Make Category Management Do Supply Chain Risk Management.
Given today’s metals markets, we thought we’d “make it real” by providing some examples and specific strategies and tactics buying organizations may wish to consider in this quickly evolving commodities market.
By way of background, we refer to the Krajlic Matrix which plots categories against supply impact and supply complexity. So let’s take a look at a couple of metals — specifically stainless steel and steel.
In today’s metals markets, buying organizations would likely all agree that several of these “events” have been triggered, specifically availability/capacity risk, price risk, delivery execution risk and economic risk (a U.S. dollar currency devaluation makes imports more expensive in the U.S.).
Certainly, stainless steel and steel buying organizations find themselves in a market with real supply concerns: lengthy lead times, controlled order entry, and (gulp) no capacity for spot purchases! That, in turn, has knock-on effects across the extended supply chain as critical raw materials might not expeditiously make their way to key suppliers including stampers, machine shops, fabricators, etc.
Specifically we have heard the following:
- Cold-rolled stainless steel lead times are now out 12 weeks (they were 4-6 weeks) — delivery execution risk
- Second half bills of materials quoted to service centers have base price increases equating to approximately $0.04 per pound — price risk
- Hot-rolled coil lead times have extended to six weeks while cold-rolled coil and hot-dipped galvanized lead times have jumped to 10-12 weeks — delivery execution risk
- Like stainless, many steel mills won’t quote product prices to non-contract customers — availability risk
Indeed, the multi-tier stainless steel and steel supply chains, arguably, contain more supply risk today than during the bull run-up of 2010-2011.
Early prevention, “the ability to lower the probability of the risk event through complexity and risk elimination or through early warning,” as alluded to by my colleagues, remains a critical capability. Companies that responded quickly to currency changes and higher metal prices reap the benefits. More important, those that have multi-tier visibility into the parts impacted by supply side volatility can assess the impact on finished goods and profits.
“Costing the risk” — and in the case of many metal buying organizations, metal spend — represents a substantial chunk of the cost of goods sold. A 1% metal price movement could have a significant impact on the bottom line and needs to be operationalized in contracts providing the buying organization with the flexibility to absorb price increases and the ability to use the price risk mitigation strategies previously identified.
Finally, by modeling the broader supply network in greater detail (at least by critical parts/items) procurement can stay in front of both supply and supply chain risk.