Parts Shortages Impact Bottom Line

Oct. 7, 2006
Identifying and coping with shortages will ensure sustainability.

Saying and doing are two different things. Just ask Sony Corp., maker of video game players. In May, the Japanese company said it would have 2 million PlayStation3 consoles available for the 2006 holiday-buying season. Unbeknownst to Sony, a parts shortage would foil that plan.

Instead of 2 million consoles, Sony will have only 400,000 game players ready for the North American market in November. According to the company, it hopes to increase supplies to 1 million by the end of the year. The culprit: production problems due to a parts shortage for the console's Blu-ray DVD player included in the package.

The news caused Sony stock to fall, and spurred competitors to ramp up their efforts to steal Sony's market share.

According to data from the Institute for Supply Management (ISM), Sony probably isn't the only manufacturer to suffer from shortages.

Supplier deliveries for September 2006 note that delivery performance was slower for the 39th consecutive month. ISM's Supplier Deliveries Index for September was 54.1%. A reading above 50% indicates slower deliveries. Among the 10 industries reporting slower supplier deliveries: electrical equipment, appliances and components; computer and electronic products; printing and related support activities; primary metals and furniture and related products.

Aside from stuffing your network with parts and spending a lot of money in the process, there are ways to cope with parts shortages.

Omer Bakkalbasi, vice president of inventory practice at Atlanta-based Chainalytics LLC, a supply chain performance consultancy, offers these tips:

Enhance Visibility And Collaboration

Provide your suppliers with a view of your own forecast. And as your forecast changes, communicate those changes to your suppliers. Also ask your parts suppliers for a view of their inventory position.

See Also...

Parts Forecasting

As for collaboration, vendor-managed inventory is one example. "If you put the burden of supplying the part to the supplier, not only do you have to provide visibility, but the supplier will be responsible for replenishing your parts inventory with their choice of modes and their choice of frequency," says Bakkalbasi.

Execution Support

You can facilitate the process by taking on some of the responsibility. For instance, have your third-party logistics providers pick up the goods.

Also, you can build a multilevel inventory replenishment plan where you consider your parts supplier as a part of your supply chain. Consider their capabilities, their inventory and their suppliers. It goes one level beyond vendor-managed replenishment. You essentially build multilevel replenishment plans.

However, being able to apply some of these guidelines is difficult.

"For example, a large manufacturer I worked for could dictate terms to some of their parts suppliers in terms of the delivery frequency and penalties for being short or late," says Bakkalbasi. "But there were some parts suppliers, one of which was Motorola, that had a particular part that the whole industry used. In this case they could not dictate the terms."

Strategic Sourcing

Having multiple suppliers is an option. However, too many suppliers may not be good from a supply chain efficiency perspective. The tradeoff: inventory penalties as opposed to shortage penalties.

"There has to be a balance," says Bakkalbasi. "If you have many suppliers, it supposedly gives you maximum flexibility but it decreases your supply chain efficiency. If you only have one supplier, your supply chain efficiency increases but that decreases the flexibility that you have. You need to find the happy medium."

An example: What is the risk of having a supplier in Asia/Pacific versus in California if you are actually putting those things together in Denver? One may be more expensive, but the other would have longer lead times. For predictable parts, you might want to use the Asia/Pacific supplier. For unpredictable parts, you may want to use the supplier in California. These things call for quantitatively-based studies to optimize your strategic sourcing decisions, according to Bakkalbasi.

Supplier Deliveries Index

Month % Slower % Same % Faster Index
September 2006 13 82 5 54.1
August 2006 16 80 4 55.0
July 2006 16 80 4 55.4
June 2006 15 82 3 55.0
May 2006 20 77 3 57.5
Source: Institute for Supply Management

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