This is a contributed op-ed by Praveen Kumar Soni, procurement manager at Colgate-Palmolive. Opinions are the author's own.
Supply chain has long been considered a cost center in most companies. But during the pandemic, when systems came to a standstill for months, organizations realized the importance of supply chain as a value creator.
Procurement departments can create even more value if they take a closer look at market intelligence and use it to make informed buying decisions. Disruptions, price hikes and shortages have roiled so many commodities, from paperboard, to semiconductors, to lumber. Now is the right time for procurement to focus on market dynamics.
Instead of a cost center, supply chains can become a center of cost savings, if they follow a few steps to gain a better understanding of the market.
Have a relationship with the supplier's supplier
Understanding a supplier's supplier and their linkage to other industries can help to get early signals and be better prepared to take necessary actions as per market dynamics.
Take paperboard, for example. At the start of the pandemic, the market slumped due to a drop in the demand for apparel, electronics, and office and stationery items. CPG demand also went down due to production restrictions.
After a few months, there was a huge surge in demand for paperboard as consumer goods companies wanted to build up stock due to uncertainty of the future.
Additionally, there was an increase in the demand for paperboard from the e-commerce industry, which registered the highest ever year-on-year growth during the pandemic. Moreover, due to high pressure to reduce the use of plastic, paper-based products demand went up.
Paperboard prices rise
All these factors led to market demand being much higher than capacities in the market. The increase in demand had a cascading effect on the upstream material "waste paper," which is primarily generated from schools, offices and newsprint. Since the educational institutes and offices were shut and people switched to digital platforms from newspapers, the supplies of waste paper went down dramatically.
The net effect of an increase in demand for board and a decrease in the supply of waste paper led to a surge in the price of paperboard and short supply in the market. The situation worsened in Asia due to container availability as most of the waste paper is imported from the US, Europe and the Middle East. The ripple effect of the price surge pushed consumer goods companies to raise prices.
CPG companies have direct contact with box manufacturers. If they move up a step in the supply chain and have contact with a paperboard manufacturer, they can get early information on market trends and may be able to mitigate some of the price hikes and supply shortages. Accordingly, they can advise box manufacturers to have safety stock or increase on-hand inventory.
Identify alternate supply sources
A thorough analysis must be carried out for all the spend segments to ensure there are no bottlenecks.
Even in unfavorable market conditions, it helps to have strong bargaining power. For instance, if a company has multiple paperboard mills qualified for their requirement, they could use the volume commitment as a strong negotiation point to get the best market rate. This is what many CPGs did during the pandemic.
Identify alternate material
Be ready with the qualification of alternate material, which can act as a backup in crisis time.
In the case of paperboard, most of the organizations use virgin boards for boxes due to superior quality. However, there is also an option to use recycled boards, which have lower stiffness and are cheaper.
For instance, if there are supply issues in virgin boards, organizations must be willing to switch to recycled boards for the interim period to ensure production is not hampered. The aesthetics and decoration can still be managed with advanced printing technology and higher thickness to ensure the finished package looks the same.
Reassess inventory norms
Over the last few decades, there has been a high focus on lean and just-in-time concepts, which has led to a drop in the inventory levels by corporations.
The automotive industry is particularly wedded to JIT, which created trouble for many OEMs in need of semiconductors.
After an initial slump, the demand for semiconductors bounced back as people started buying gadgets for home offices and household activities. This caused a huge surge in demand for chips, and prices started shooting up.
Make corrections to provide a cushion against external or internal situations.
As the supplies were constrained, the corporations started giving advance orders to build up buffer stock for chips. This worsened the situation, and currently, there is an acute shortage of chips against the requirements. It is putting price pressure on other industries, like mobile phones, as the chip manufacturers are common for all the industries.
Now is the time to relook at the norm and make corrections to provide a cushion against external or internal situations.
The post-pandemic world will be much different with changes in the market and consumption patterns. Procurement should reassess the organizational priorities, business plans and carry out risk management to be better prepared to tackle the situation in the future.
This story was first published in our weekly newsletter, Supply Chain Dive: Procurement. Sign up here.