Where's My Beef? Sourcing Strategies in Capacity Constrained Markets (Part 2)

There are many ways that procurement can get involved in assuring supply in tight markets, not only in implementing programs and tactics, but helping define overall strategies as well in coming up with the ideas to keep production lines running, shelves stocked, restaurant counters open and customers satisfied. In the first post in this series, we looked at how McDonald's is focused on supply assurance in Australia/New Zealand for its core beef hamburger raw material by expanding into other meats, in this case lamb (bring the lamb burger here, we say)! In fact, tackling raw materials specifications is one of the more advanced tactics that procurement can get involved with, so kudos to McDonalds for leveraging procurement in the ingredients/raw materials area.

Aside from examining and proposing new materials specifications -- be they ingredients, raw materials, tolerances, coatings/finishing, packaging, shelf life, etc. -- there are numerous other areas where procurement can contribute to tackling supply assurance in capacity constrained markets. Among other strategies we've seen used with varying degrees of success include:

  • Demand visibility and demand aggregation programs focused on material requirements, specifications and availability across divisions and for sub-tier suppliers. We just heard an example of this in the castings market, where a manufacturing company bridged the procurement/manufacturing gap by collectively analyzing part specifications and identifying the ideal set of suppliers to produce each part based on capacity constraints and optimal allocations
  • Agreeing to forward contracts or off-take agreements with suppliers. But don't be entirely surprised if global suppliers fail to honor such agreements in steeply rising markets, which is precisely what has happened in the cotton markets in 2012
  • Using financial tools including physical and financial hedges (forwards and options) contracts via exchanges
  • Inventory. There is always the option to increase raw material inventory from hours or days to weeks (or even more). In the past year, we have seen examples where taking a working capital hit was regarded as the cost of doing business (and in fact ended up being the prescient move because of rising raw material prices)

There are many means of tackling supply assurance strategies in supply markets where too many buyers are fighting for too little product (often with speculators now tossed in for good measure). If you'd like us to explore other strategies or flesh these out in more detail, drop a line or post a comment.

- Jason Busch

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