Higher prices for resins, additives and just about everything else that can be bought have led to sleepless nights for plastics purchasing managers so far in 2021.
With this challenge in mind, Plastics News recently did an email Q&A with purchasing veteran Lydia DiLiello. She has more than 25 years of purchasing experience and now owns and operates her own Cleveland-based consulting firm, Capital Pricing Consultants LLC.
Prior to starting her own firm, DiLiello's experience included nine years with Automated Packaging Systems, a major plastics packaging firm that was acquired by Sealed Air Corp. in 2019.
Q: Since early 2020, the pandemic, hurricanes and the ice storm have had a huge impact on supplies of plastic resin and other raw materials. What should purchasing executives be focusing on as we approach the middle of 2021?
DiLiello: According to Reuters [May 3], "The survey from the Institute for Supply Management on Monday showed record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products across industries." My clients are all reporting the same issues.
With extended labor shortages and lockdowns across the country and globe, hopefully purchasing executives came into 2021 with a plan anticipating the rise in most raw materials costs as a result of the pandemic. With such dour news surrounding all manufacturers, the critical focus for midpoint of the year is supply relationships and communication.
While this may seem soft, it is the bedrock for future business of any kind. Weekly or daily communications with key suppliers is paramount to success in this market. Knowing what comes next, good or bad, provides an opportunity to choose from options rather than Tums or Rolaids.
The ability to address circumstances like short supply, late delivery or partial shipments is less caustic when it isn't a total surprise and discussions are continuous rather than sporadic and highly emotional. Purchasing executives want to be at the top of a supplier's contact list and want them to take the call.
Be prepared with specific questions and be gracious for any concessions the supplier can provide. Perhaps there is a little additional inventory available that could be swung your way? Being in constant, open, positive communication is the best way to manage through 2021.
Q: How have inventory levels been affected by these recent events? Is it still possible to have just-in-time inventory?
DiLiello: Many manufacturers are stating that their raw materials are on back order and maintaining standard inventory levels is simply not possible. Just-in-time inventory is hugely risky at this point in time and in my view should not be attempted — it's Russian roulette at its best.
High cost adds for overnight shipping and expedited charges are just a few of the challenges awaiting companies trying to manage JIT inventory. And the big "if" is whether they can procure the supply at all at any price.
Additionally, disrupted manufacturing schedules will cause a domino effect on production, leading to angry end customers and waning profits for the manufacturer. Simply trying to have inventory is a challenge currently; JIT is a thing of the past at least for the next 12-18 months.
Q: Are manufacturers taking more steps to have backup suppliers or even backups to those backups?
DiLiello: I preach this to all of my clients and in any workshop that I present. Manufacturers need backup suppliers. The old adage "Don't put all your eggs in one basket" is more germane today than it was a decade ago. And expect to pay higher prices to the suppliers who are receiving a small percentage of the total business.
Splitting supply needs across several vendors helps mitigate risk and generally ensures some level of supply. According to a recent Windward panel — Windward is a compliance, safety and security software company for managing maritime intelligence — due to the Suez Canal blockage, freight could be delayed as much as three months. JIT inventory cannot function nor can production with a three-month delay.
Procurement must now delve into their suppliers' details. Raw material shipping routes must now be known and understood by procurement to ensure adequate coverage and risk mitigation. It doesn't do any good to have three suppliers if they all utilize the same shipping routes.
Q: Is the current supply situation being looked at as temporary? Or do you think it will bring lasting change to purchasing strategies?
DiLiello: I believe it must bring lasting and transformational change. Both supply chain professionals as well as maritime intelligence experts like Windward are all in agreement that we have entered into a new realm. Assumptions of the past no longer exist nor can they be counted on.
We cannot do business the way we have done previously. Procurement must now maintain redundant suppliers, be educated about the shipping routes and notified when those routes change in order to fully manage the risk to their supply chain.
Additionally, my expectation is inventory management will grow dramatically. Knowing that raw material supplies are staged and waiting for production provides a sense of security for a business, though at a cost to be sure.
Q: Will the impact of these recent events on global supply chains lead companies to do more purchasing in their home regions?
DiLiello: Where possible, it will certainly encourage companies to review options closer to home. However, until all manufacturers return to full production schedules, close may not solve the core issue.
If the supplier 100 miles from your manufacturing site is working half shifts or one of three daily shifts, ability to procure requested volumes will be difficult at best. That still doesn't solve a company's issue of requiring supply. And no matter what supply option is chosen close to home or far afield, procurement will be wrestling with increased costs — an unpleasant reality in current conditions.
These increased costs will carry implications far beyond 2021. For now, multiple suppliers from various regions with different supply routes is the best protection for supply chain, in addition to strong positive relationships with each supplier.