Wednesday, April 6, 2011

Continuity of Supply

To ensure continuity of Supply many companies standard contract templates may have:
·       Requirements for disaster recovery plans,
·       Periods of guaranteed availability for products, spare parts, repairs or services, 
·       End of life notice requirements and last time buy rights.

There are other ways to manage continuity of supply.
·       Dual source items and make sure both Suppliers get volumes as it may be difficult to get a Supplier to respond to a problem with another Supplier if they were not getting business.
·       Have inventory held either by the Supplier or third party to minimize the impact of force majeure events.
·       Require Software Escrow & Licensing requirements and Hardware Escrow and licensing requirements, with rights to make or have the material made in the event of a material breach.
·       Require suppliers to set up a dual source (either requiring they produce the product at multiple locations of theirs) or the license a third party to build it.

The biggest challenge in managing continuity of supply is cost.
·       It costs money to develop and qualify a second source and it would cost to have the Supplier set up a dual source.
·       Having dual sources may affect the average price you pay as the volumes are split, potentially reducing volume based savings.
·       Having dual sources may affect the average price you pay, as the supplier prices may not be the same because their products or cost structure are not the same.
·       Inventory whether the Buyer holds it, Supplier or a third party adds to cost.
·       Escrow and licensing requirements cost money and there will always be cost to establish a new source even with getting the escrow materials and rights.

Most supply chains focus on pushing as much inventory as possible back into the supply chain to reduce inventory levels the Buyers carry and reduce their cost associated with excess or obsolete material.  When you do that your ordering and forecasting need to be well managed. If you forecast and order too little, you have the cost of expediting and any premiums required. If you forecast too much, but pull too little, the Supplier then has excess inventory that they are paying for. If they don’t get recovery for their costs of that excess inventory, they won’t trust forecasts and will only order consistent with actual demand, which can cause supply shortages and interruption to the continuity of supply.

To ensure continuity of supply there has to be a balance struck between what’s needed for continuity of supply versus what’s desired for cost reduction. If cost always wins out, you will have continuity of supply problems on an on-going basis. 

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