3 Things Supply Shock Can Teach Us About Procurement

3 Things Supply Shock Can Teach Us About Procurement

Supply shock is the stuff of nightmares for any procurement professional. Your perfectly-oiled procurement department is suddenly caught short by sweeping supply changes outside of your control.

Supply shock encompasses a wide range of events which result in the sudden increase or decrease of supplies of a particular good or service. In global terms, perhaps the most visible impact of supply shocks comes from the international oil industry, where significant surges or declines in production have led to everything from a glut of cheap energy to a rapidly increasing price of sugar.

The threat of supply shock is one that is often unpredictable. But what can previous examples of supply shock teach us about best-practice for the procurement industry?

2011: Floods in Thailand

In 2011, Thailand was hit by an unseasonably late and destructive monsoon season that led to widespread flooding throughout the country. It’s estimated as many as 7 million people were impacted by the rising waters. This flooding also crippled the global supply of computer hard-drives.

At the time, Thailand was the source of roughly 40% of the world’s computer hard disks. The flooding closed down thousands of factories, resulting in an estimated 10% rise in hard-drive costs globally, and significantly limiting the international supply for years to come.

Aside from highlighting the growing vulnerability of our world to climate change, this devastating event illustrated just how intrinsically global our supply chains are today. Hard-disks form the foundation of everything from email to e-procurement, meaning a global supply shock here has a knock-on effect around the world. As procurement professionals we need to be increasingly aware of the complexity of our supply chains, and the increasingly interlinked global nature of our industry.

1973: The OPEC Oil Embargo

Perhaps the most famous supply shock in modern history is the story of the 1973 oil embargo by members of the OPEC oil-producing nations. The embargo was the result of tense international relations due to a geopolitical crisis focussing on the state of Israel. It led to a refusal to supply oil to a list of western nations, including the USA, and ultimately a 400% rise in the price of a barrel of oil globally. The shock saw huge queues at petrol stations across the world, alongside a steep recession and rising inflation.

While the complex nature of geopolitical intrigue was at the heart of this negative supply shock, the ultimate cause of the embargo was a complete breakdown of relations and failure of communication. Whether we’re talking a global oil industry or a domestic toy maker, the importance of being able to sit down and air disagreements between suppliers and buyers is key. Always keep your lines of communication open, and don’t be afraid to raise concerns before they become a problem too large to tackle together.

1440: The Gutenberg Press

Diving into the depths of history now, it’s important to explore the reality of positive supply shock. The Gutenberg Press was Europe’s first movable type printing press, an innovative way of mass-producing books and pamphlets that brought reading to the masses. The invention of this device is credited with a falling cost of books, huge rise in literacy, and significant boost to businesses and economies throughout Europe.

It’s estimated at the time of its invention just a few million books were produced each year across the continent. A few centuries later and the numbers produced were entering into the billions. What the Gutenberg Press demonstrates is the power of innovation to deliver change through a supply shock with huge positive impact.

This catalyst provided by innovation was equally demonstrated in following industrial and computing revolutions. Now as we enter the Fourth Industrial Revolution, connected technologies and digital opportunities from robotic manufacturing to e-procurement offer an equally powerful tool to unlock positive change through innovation in our businesses.

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