Wine shortages – how to mitigate that or similar supply risks

We reported briefly last week on the report from Morgan Stanley that suggests we may be entering a period when wine production won't match demand.

That was followed by other reports saying this was nonsense, that the production figures were dubious and there was no need to panic. Indeed, classic economics would suggest that if there are shortages then of course prices will rise, and that will encourage more marginal production back into the market, until supply / demand and prices are back in balance. There aren't too many barriers to entry in the wine market, although it takes a couple of years for new vines to be productive.

But whatever the prognosis for wine, this got me thinking about supply more generally. What can procurement people do if they are faced with similar issues in terms of potential shortages os something important that they are buying? There are several classic responses to these situations.

Build stock

We appear to have enough first-class postage stamps to keep us going until about 2025. My wife's unassailable logic when she made the purchase some time ago was, "the price is going up a lot so I might as well buy them now". I have a nasty feeling they will announce that the design we have is no longer legitimate at some point. But taking physical delivery to build up stock levels is the most basic way of protecting against future shortages (or indeed price rises). So will we see people filling their spare room with cases of Jacob's Creek? In a business environment, this option does tend to drive costs in terms of storage, financing and danger of obsolescence - but worth considering nonetheless.

 Buy forward

In some cases, we can buy ahead without taking physical delivery of stock – hedging and commodity markets are linked to this strategy of course. This is simple enough in core commodity markets indeed that protection against future shortages is one of the key reasons for the development and n existence of futures markets in cocoa, grains, metals, etc. But is harder to do in the case of wine or indeed much that major organisations buy. However, it may be possible to reserve capacity with a supplier and commit to buying a certain amount of product, or utilising a certain amount of their production capacity, for months or years ahead if necessary.

Find an alternative

If we know the price of wine is going to increase, or a key raw material is going to be in short supply, another option is to find an alternative. So our wine drinker can switch to beer. And in many cases, something similar may be possible in our organisations. But equally, at times there is no feasible alternative, either for functional reasons (you can't make chocolate with coffee instead of cocoa), or customer acceptability. But looking for alternatives to key purchases, for both economic reasons and as risk mitigation, is something procurement should be involved with in most organisations.

 Use less

So cut the wine consumption to just the one bottle an evening? Tough, I know. But whilst it won't avoid the problems around shortages, it will mitigate the cost effect. Again, demand management is something that procurement often doesn't see as a major priority, and yet, as the great truism says, “the best way of saving money is not to spend it".

So, any more steps we can take to manage the risk of shortages - in wine or elsewhere? Anything we've missed?

First Voice

  1. InTheAbsenceOfAHorse:

    There is no wine shortage. I tidied up my garage this weekend and found the small mountain of wine that my wife has accumulated without me knowing. I’m now holding it until the price rises and I can make a killing.

    Similarly, the world shortage of plant pots has been solved.

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