Major Components: It’s the basis of your business, but is it part of your supply chain?

Major Components it is the basis of your business

By Howard Roddie, Senior Supply Chain Consultant (@HowardRoddie)

Farmers are famous for complaining about the weather, but when the chairman of the National Farmers Union says “The biggest uncertainty for UK agriculture is extreme weather events”[1] and links it to climate change, any business dependent on agricultural products should sit up and take notice. We move out of a world where it’s about yields, quality and price into a world where it’s about the ability to supply.

So, you would think that the supply of this key material would be linked into any supply chain planning process. Even in a world not increasingly challenged by the climate. The clue to the need for such integration is in the word “supply”. This is not always the case. The procurement of key raw materials is often seen as an arcane world of futures and forward contracts best handled by a team of knowledgeable specialists and rarely integrated into a supply chain solution. Normally, the involvement of supply chain stops at the point where an MRP requirement is created for the buyers.

Commodity buyers often sit outside the supply chain and do not get involved in the decision making process. Whilst packaging buyers may be closely integrated into supply chain teams, the buyers for the major components often work totally independently. Often with spreadsheets.

After all, it’s just one component… isn’t it….? In some cases, this is true. If you make sugar, your main component is sugar cane or beet. It is only the process that differentiates the product. But, even here you have to be careful. If you buy the same variety all the time, then genetic diversity can be put at risk, especially in the short to medium term (Seed banks will help in the long term, but it takes time to build volume from small stocks). I don’t want to list all the factors here, but as well as the obvious wet/dry hot/cold issues, crops are at risk from population and range changes in pests and diseases, so planning by variety is important. Planning by geographical area is also important – many companies now publicise “miles to factory” for their key components.

Many agricultural products are bought on forward contracts. In these situations existing stock and remaining contract information can be quickly set against the latest demand plans to find gaps in current supply (for spot buys) and to allow greater control of the forward buying process. Where quality of the raw material is key, as is the case in the flour industry, the ability to see the issues as soon as possible allows earlier decision making and the potential to save money. This is no different to identifying potential waste in finished products and making decisions to deal with it and avoid the cost of wasted product and disposal.

Given all these factors and the potential impact on the rest of the supply chain, planning the supply of agricultural products (as opposed to procuring) should be seen as key to the continuing success and survival of the business. Contracts for farmers can be drawn up based on contracted varieties, including yield and planting and harvest date information. Contracts with merchants can be drawn up using information from Bills of material and supply. This is the sort of functionality that is already offered by supply chain solutions such as FuturMaster. If we harness this to the information generated by our existing solutions, we can increase the quality and accuracy of our raw material planning, as well as our speed of response. We can also plan for alternative scenarios and test for robustness.

It is also worth noting that other industries are heavily dependent on single commodities. For instance, printing industries require paper and card, in different thicknesses, colours and widths. The supply of these too can be integrated into existing supply chain solutions. Now… If only we could project the climate for the next 50 years and model the demand for paper products, then we could plan the planting of trees!

[1] Peter Kendal, NFU chairman The Guardian 28th July 2013

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