The destruction caused by Irma, Maria and the earthquake in Mexico is a stark reminder that strategic sourcing and planning can help protect your company’s profits.
Natural disasters cause service and supply disruptions that can cripple your ability to meet demand. The impact on profits may be felt for years if your customers move their business to backup suppliers.
It is not unusual for prices to increase significantly when supplier’s plants are forced to shut down or operate on a limited basis. For example: petrochemical based products that are particularly susceptible to supply interruptions if their suppliers are on the gulf coast.
The impact of changing supply and demand factors can be felt by organizations of all sizes.
I was a member of the board of a homeowner’s association and our costs for natural gas skyrocketed several years ago. That increase caused us to look at that purchase strategically. Steps were put in place to ensure that we could limit the budgetary impact of significant price fluctuations going forward.
Unfortunately, those steps didn’t fix the budgetary hole for the year impacted.
When clients seem to be overly motivated by cost savings offered by a new supplier, I like to ask them to consider some of the following questions:
- What steps have you taken to work with your current supplier on a more competitive agreement?
- How critical is this product or service for your company?
- What percent of your business do you plan to move?
- Will they become the primary supplier?
- If they will become the primary supplier, how long will it take them to ramp up?
- Are there any geographic regions that they may not be able to fully service?
- What is the expected cost to change?
- Do they have any of your key competitors as clients?
- How will they ensure that the service or product they are supplying won’t be impacted by natural disasters?
- Do they have alternative suppliers in place in case they face shortages?
- What proof of their on-time record have they provided?
- Does their warranty or guaranty meet your needs?
- If your company continues to grow, will they be able to meet the additional demand?
- What is your plan if this doesn’t work out?
A review of your onboarding process could be a good place to start the evaluation.
If you ask better questions up front, then you should be in a much stronger position to evaluate the benefits of changing suppliers or if an unplanned event occurs.
There will always be factors that are more difficult to evaluate. If any key supplier also supplies a competitor this will not help you gain a competitive advantage and this is a nonstarter for me.
I understand that you can’t eliminate all potential disruptions but understanding what products or services are critical to your company is essential.
If your organization is in an area that is prone to disruptions like weather, it is natural to make this type of assessment. This is much harder to plan for when you or your supplier are in an area that is rarely impacted. The impact of Super Storm Sandy in the northeast is still being felt five years after it hit. Few organizations were prepared for a storm like that.
Evaluating all the factors before considering an attractive price is smart sourcing.
Action Step: Every organization wants to protect profits. If you believe that your procurement process could benefit from an independent review, a professional like myself can provide guidance and expertise to help your organization achieve the results you want. If you would like to explore this topic in greater detail, please contact me.
If you want to explore a purchasing or procurement topic in greater detail, I invite you to request 30-minute discovery conversation. In my experience the next step will be apparent at the end of the call. I never assume that my recommendations will be right for everyone, so don’t expect a sales pitch. You can reach me at (973) 718-7071 x875. The call will be forwarded to my mobile phone if I am not in my office, which is pretty likely.
Organizations of all sizes are reducing costs and increasing efficiency, without changing the way they conduct business. If you would like to know how, simply give me a call or send me an email with your contact information and the best time to reach you.
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Until Next Time, I Wish You Great Success in Your Business and in Your Life