Suppliers are one of the biggest factors affecting inventory management
Managing supply chains can be difficult business , particularly if you cannot rely on suppliers to meet your commercial deadlines and deliver quality products first time. A poorly managed supply chain is one of the biggest factors affecting inventory management; in the food manufacturing space a key supplier failing to meet their commitments could mean shutting down production or failing to meet your own customer orders. Partnering with the right suppliers is crucial, so let’s look at four of the main questions food and beverage manufacturers should be asking when selecting suppliers.
Supply Chain Risk
Supply chains are at risk of failure in any business, but this risk is much more acute in the processed food sector where key inputs are typically agricultural and horticultural commodities. For example, producers of processed nut products (such as nut butters, granolas and satay sauces) have been concerned in recent years by potential shortage risks posed by climate change and unseasonably low yields. Unpredictable weather events, temperature spikes, long term drought events and even frosts risk disrupting supply in the global nut and legume market.
If your business is a small or medium sized producer, you have only a limited ability to mitigate the risk of global supply disruptions. This means that reliability should be a key consideration when partnering with a supplier. Major suppliers may have more resources at their disposal to manage commodity shortage risks, such as large reserves of safety stock or options to purchase extra inventory. When negotiating with suppliers, consider asking further information about their ability to manage supply chain risk.
Import or Buy Local?
The decision whether to import raw materials or procure locally is not an easy choice, particularly in the food sector where cost pressures and customer sentiments about overseas ingredients collide. Importing peanuts from China (the world’s largest peanut exporter by volume) may be cheaper than sourcing peanuts from a local grower in Queensland. As a small scale producer, sourcing cheaper ingredients may make it easier to compete with major brands. On the other hand, if your business has adopted a lean or just in time inventory model, higher lead times associated with overseas producers are also factors affecting inventory management.
Despite the cost savings, customers frequently take a dim view of ingredients sourced in other countries. In particular, Australian customers often express a desire to buy Australian Made. This may be particularly important where your product is trying to carve out a niche market segment or compete on quality and innovation, rather than simply beating other producers’ prices. Catering to consumer demand is one of the important factors affecting inventory management.
Should You Partner with Multiple Suppliers?
Using one supplier to procure all of your raw ingredients essentially leaves your business’ success in that supplier’s hands. One strategy to manage supply chain and inventory risks involves partnering with multiple suppliers.
On the other hand, obtaining the freshest ingredients often depends on developing a strong relationship with one (or several) key suppliers. While it may be attractive to spread the risk across multiple suppliers, this should not be at the expense of developing a strong relationship with a reliable partner.
Should You Focus On Price?
Although price is not a major factor affecting inventory management, it is a key consideration for most SMEs. As a growing business, lower procurement costs allow you to invest more money elsewhere within your business. Identifying a supplier who is able to offer a special price is therefore of significant benefit to many businesses.
However, it is important to remember that the cheapest suppliers will not always be the most economical. For example, a peanut butter producer might face a choice between two packaging suppliers. One is able to supply an inexpensive jar that would marginally reduce per unit cost, while the incumbent supplier might produce the jar using a slightly thicker plastic and is therefore less able to move on price. After factoring in some level of damage, both in the warehouse and by distributors, the thicker jar may reduce losses, potentially compensating for the higher initial expense. While managing procurement costs is important, artisan and niche market food producers are likely to require high quality ingredients and materials.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.