Unstable markets can cause a lot of problems, but they can also help expose the weak points or gaps in your supply chain. When companies map their supply chain, typically step one includes identifying direct raw material suppliers, and then the suppliers to those suppliers. Step two is identifying where each of those suppliers production facilities are located, and examining their capacity, output, ISO status, etc. Step three, which is often overlooked, is understanding how each of those production facilities manages their inventory.
Suppliers, in the face of cash shortages and increased pressure to see quarterly increases in profitability, are making their facilities more and more efficient, and that move includes keeping little or no on hand inventories, normally as part of a JIT manufacturing process. But take a look at where a majority of domestic feed stocks, particularly oil and chemicals, come from – The Gulf Coast. Year after year, the gulf coast has made headlines for the number and severity of natural disasters, yet suppliers continue to manage inventories as if facilities will continue to run 24/7 with no problems, essentially treating plant closures as a non-factor.
A perfect example of the problem with this approach is the current allocation issue happening with Base Oils. As Steve Tatum referenced in his recent blog on lubricant prices, supplies were already tight before storm season this year. To cap it off, most producers make product to order, and hold little or no inventory, in order to keep costs down and margins up. The storms came through, production stopped, and month later many customers are having difficulty getting product. This perfect storm caused prices to sky rocket, and left customers scrambling to find product elsewhere.
Base Oil producers felt the JIT approach was the right one, as they couldn’t justify additional expenses to make lubricants, even though the margins per metric ton are at an all time high. Regard for the customer went out the window.
Suppliers need to recognize if they build plants in unstable areas (war, weather, etc), then their risk of outages becomes greater. If they don’t consider warehousing inventory, then they are putting their customers at risk.
The way to get suppliers to shift the focus is to ask the right questions and show the supplier you are paying attention. When examining your supply chain and choosing suppliers, understand and review these issues. Supply Chain needs to challenge their suppliers on how they manage inventory, and make sure their disaster recovery plans include warehousing inventories to counterbalance the effects of unscheduled plant shutdowns. Without pressure from their customers, suppliers will continue to focus on short term profits rather than long term risk aversion. Ultimately, if a supplier has facilities in high risk areas and is unwilling to make an inventory investment, they shouldn’t be in the business.
Suppliers, in the face of cash shortages and increased pressure to see quarterly increases in profitability, are making their facilities more and more efficient, and that move includes keeping little or no on hand inventories, normally as part of a JIT manufacturing process. But take a look at where a majority of domestic feed stocks, particularly oil and chemicals, come from – The Gulf Coast. Year after year, the gulf coast has made headlines for the number and severity of natural disasters, yet suppliers continue to manage inventories as if facilities will continue to run 24/7 with no problems, essentially treating plant closures as a non-factor.
A perfect example of the problem with this approach is the current allocation issue happening with Base Oils. As Steve Tatum referenced in his recent blog on lubricant prices, supplies were already tight before storm season this year. To cap it off, most producers make product to order, and hold little or no inventory, in order to keep costs down and margins up. The storms came through, production stopped, and month later many customers are having difficulty getting product. This perfect storm caused prices to sky rocket, and left customers scrambling to find product elsewhere.
Base Oil producers felt the JIT approach was the right one, as they couldn’t justify additional expenses to make lubricants, even though the margins per metric ton are at an all time high. Regard for the customer went out the window.
Suppliers need to recognize if they build plants in unstable areas (war, weather, etc), then their risk of outages becomes greater. If they don’t consider warehousing inventory, then they are putting their customers at risk.
The way to get suppliers to shift the focus is to ask the right questions and show the supplier you are paying attention. When examining your supply chain and choosing suppliers, understand and review these issues. Supply Chain needs to challenge their suppliers on how they manage inventory, and make sure their disaster recovery plans include warehousing inventories to counterbalance the effects of unscheduled plant shutdowns. Without pressure from their customers, suppliers will continue to focus on short term profits rather than long term risk aversion. Ultimately, if a supplier has facilities in high risk areas and is unwilling to make an inventory investment, they shouldn’t be in the business.
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