How to rank & prioritize shortage risks?
Everyone who has worked in a supply-chain business during electronic component allocations knows that it is a difficult time. You’re literally overwhelmed with shortage risks. It is inordinately stressful.
You have so many shortage risks to consider that you barely have time to work on anything else. Those 5 shortage calls a day don’t allow you to properly plan production schedules. You have no more additional time to work on order cancellations or push-out requests. No time to properly train your new hires. 99% of your day is spent on trying to get missing components for the ensuing 4-6 weeks of production.
Urgency vs importance: the vicious cycle of allocation
As a result, the situation is getting worse and worse for the medium to long term. You’re well aware that the worst shortages are yet to come. You know you may lose those great new hires. You envisage that inventory will likely increase. But still… you don’t have enough time to work on anything other than the next 4-6 weeks of production.
Urgency over importance has never been the right way to deal with this situation. You should be able to break this vicious cycle, in order to be able to work again on your medium-long term goals.
Ranking your supply risks is the answer
One way to break it is to automatically rank your shortage risks for every purchase order. No matter whether it be within a short, medium or long term future, rank every single order or purchase requisition.
Once done, make sure to spend your time and effort to balance the ranking risk of shortage. If necessary, dedicate part of your team to medium to long term shortage risks.
It will pay off. Working on shortage risks months in advance is much easier than weeks or days in advance!
A step-by-step ranking method
I’d like to share a very simple step-by-step method to rank your shortage risks and help you to focus on important and resolvable risks rather than urgent and unavoidable ones. Everything is doable in a simple Excel file like this one.
1. Calculate your most likely delivery dates
For every purchase order or purchase requisition you need to calculate the most likely delivery date.
Here is an hypothesis which may help keep it simple:
- order confirmed x days in the past will arrive in 4x days in the future;
for example, if we are April the 3rd and a confirmation is on February the 3rd, we then assume the order confirmation is not reliable and its delivery date will be August the 3rd - confirmation date 4+ weeks shorter than the current lead-time is taken into account only if confirmed in the last 4 weeks;
e.g. an order released on February the 3rd and confirmed on April the 3rd despite a 16 weeks lead-time will only be considered as confirmed if it has been confirmed in the last 4 weeks - an order without confirmation will be considered to be delivered no sooner than today plus the component lead-time.
These are only examples which I offer here to illustrate the point. You should use what you think is most relevant for your business.
2. Date required
Easy: this is the date required to avoid a shortage. This should be available in every ERP.
3. BOM value metric
Next, choose a value metric for each BOM (bill of material). It can be the sales price or cost of goods sold. You can multiply this value metric by 1 to 10 for strategic BOMs if you feel it provides additional value to the analysis.
4. Ranking
Apply this simple formula for each order:
BOM value = for a given article, the highest value metric of all BOMs containing this article
a = BOM value * greatest (zero, order most likely delivery date - order needed date )
order ranking risk = a / max(a) * 100
5. Lead-time collection [optional]
Of course, you can optimize the model by collecting real-time data from the market instead of relying on those — often outdated — of your ERP. Such as your favorite vendors available stock and lead-times.
Results
This ranking should allow you and your team to focus time and energy on the important and resolvable risks rather than the urgent and unavoidable ones.
Being supply manager in an electronic component supply-chain business is difficult and risky enough without having a tool such as this.
However, if you use an alternative or even superior solution for ranking shortage risks, please comment below to help your peers and others in your position.
If not, and you think this post sense, then give up on almost everything else you have to do and get this implemented. Trust me you won’t regret it!
