The Procurement Pendulum & What To Do About It

Managing your supply chain has never been more important – or more difficult. Pendulum swings throughout the supply chain as a result of new changes in consumer demand can wreak havoc on production and business operations for manufacturers, wholesalers, and retailers alike. Even worse? This pendulum swinging creates product inventory unaligned with actual consumer demand, particularly when it comes to electronic components.  

While pendulum swings may feel inevitable, and is created by instability, it’s clear that the modern procurement teams need tactics to prepare for and ultimately dampen the its negative effects. 

The Beer Game: Insights Into Supply Chain Communication Challenges 

Before we jump into tactics for dampening the procurement pendulum, let’s explore the issues created by it by taking a closer look at “The Beer Game,” a scenario which simulates the effect of unequal supply and demand…

The Players: The brewery, the warehouse, the retailer, and the consumer.

The Rules: No player can communicate with another player.

The Scenario: There is a steady state demand for 4 cases of beer per day, and each player always purchases this amount. Then, one week the consumer now wants to purchase 8 cases of beer.  

To meet this new, changed demand, the retailer puts in an order to the wholesaler for 8 cases of beer, and the wholesaler adjusts their order schedule accordingly with the brewery. This larger, 8-case order becomes the new standard. The issue? The following week, the consumer is back to ordering their usual 4 cases of beer – while the warehouse, retailer, and brewery are now set at an 8 case delivery cadence. This inconsistency and potential miscommunication in demand sends the entire supply chain out of whack, with each participant needing to decide what to do with surplus inventory and how to forecast future demand. Depending on the answer to these questions, pricing in the supply chain could increase or decrease. 

So, what’s the solution to avoid such a scenario? Communication. In The Beer Game, if the players were allowed to speak to each other, the consumer could have told the retailer that his 8 case order was for a party, and only for this week. Post-party, his demand would fall back to 4 cases. This would enable a less volatile supply chain where pricing and availability are less susceptible to giant pendulum swings.

Applying The Beer Game’s Lessons to the Electronic Component Supply Chain 

The Beer Game demonstrates how orders submitted to suppliers from retails and other players within the supply chain are often less reliable in reflecting true market demand than customer-driven orders. This estimation leads to supply chain participants potentially demanding or producing volume of product that is not in line with market realities – creating major negative financial consequences.  

While cases of beer and electronic components supply chains might appear quite different, The Beer Game is highly useful in demonstrating how lack of insight into true demand and lack of coordination within a supply chain can negatively impact the key players. 
 

How Buyers Can Prepare for Pendulum Swings in Supply Chains 

There are three key ways that buyers can prepare for pendulum swings in electronic component supply chains:  

1. Monitor component price and availability 
2. Strengthen communication with suppliers 
3. Review and expand sourcing strategy and supply coverage options 

Monitor component price and availability 

To start, in order to help dampen the oscillation cycle in electronics supply chains, it’s critical to continually monitor fluctuations in availability and price for components. By watching for changes in pricing, buyers can avoid the all-too-common problem of overpaying for parts (from lack of insight into market data that allows for better negotiation) or scrambling to manage component scarcity when larger-than-expected orders come in. 

Price monitoring may sound time-consuming and tedious (or even impossible, since many component prices are hidden), but solutions like Lytica, which include monthly alerting capabilities, can automate and streamline the process.  

Communicate with suppliers  

A second tactic to help prepare for oscillation in electronics supply chains is to bolster communication with your suppliers about your unique needs and their unique inventory situation.  

To best meet your needs, it’s crucial to provide your suppliers with consistent updates on your current inventory, anticipated times for your next order, and any upcoming additions or changes expected down the pipeline.  

Additionally, it’s helpful for your suppliers to understand the larger picture of your company. What are the big goals? What key metrics will be the focus? What’s the vision for the next year or three or five?  

By presenting key suppliers with overall company strategy and the desired path to future success, suppliers can best gauge how to support you. (Of course, in order to present this information to suppliers, it requires a thorough understanding of your own inventory and current demands.) 

By communicating your inventory and customer demand, to your suppliers, you can create a communication system where suppliers can best serve your needs, calibrate their own business, and everyone can work to fight oscillation. 

Review and expand sourcing strategy and supply coverage options 

Finally, in order to prepare for oscillation in electronics supply chains, it’s important to periodically review and expand your sourcing strategy and supply coverage options.  

This begins by ensuring a diversity of your suppliers and avoiding reliance on a single company or geographic location. By working with multiple suppliers, preferably from different companies and geographical areas, companies can eliminate the vulnerability of a single point of failure in their supply chain. This spells happier customers – and internal operations. 

It’s recommended to have at least three suppliers, as this provides a greater level of resilience and flexibility in executing supply chain operations. With three suppliers, it’s less likely that certain components will be discontinued, a problem many companies run into during mergers and acquisitions.  

Finally, if you’re serious about avoiding oscillation in your supply chain, make it a point to build merit with your suppliers. By investing in a supplier base and making it clear that they are your preferred source of goods, you let your suppliers know your seriousness and intent of working as partners to weather fluctuations and avoid the highs and lows of oscillation. This may aid in helping buyers gain access to a strategic inventory reserve when they need it most. 

Preparing for the future 

Mitigating pendulum swings in electronics procurement is a necessity to profitably compete. Fueled by new technologies, those organizations who digitally transform stand to gain the most from a market that will rapidly grow in both size and complexity for decades to come. For help on this journey, Lytica provides customers with the insight and analysis they need to improve their electronic procurement teams and build better, stronger, more resilient supply chains. Learn more today by reaching out to us!