Purchasing and Shortages

Many years ago one of my job functions was purchasing for a small manufacturer of coatings and adhesives. The base of our product line was petroleum wax, brought in by tank cars from refineries all over North America. Those contracts were the purview of  senior management. It was my responsibility to manage the rest — custom packaging, plastics, resins and specialty chemicals that went into the final products. There was uncertainty at every level — demand, transportation and supply. But we had a business requirement to be able to deliver to our customers as orders came in. Matching these was my problem.

Learning about purchasing and inventory management introduced me to the concepts of restocking levels, economic order quantities and multiple sources of supply. In the course of learning about inventory management one encountered various re-order models, one of which was the hospital model. And there were special formulations for cases where the product being inventoried was perishable — in shipment or in storage awaiting use. The theory was that the optimum way to manage inventory and the capital it represented was to balance costs against the possibility of being out.  The hospital model was the one model where stock outs were unacceptable. How times have changed.

Over the years, changes have come along it the fashions of inventory management. ‘Just in Time’ was adopted from Japanese and Chinese manufacturers — the idea being that one saved money by not maintaining inventory at all because anything that was wanted could be drop shipped from the plant down the street as needed and delivered just in time to avert an expensive line shutdown. This idea has become very popular — not having capital tied up in inventory is a real savings. But the procurement world of a purchasing manager where the sources of supply were down the street is very different than that where supplies came through an intermittently porous border or the other side of the globe in containers. And we won’t even talk about the problems with quality and contamination — that is a subject for another entire rant.

One thing vendors have always tried to do is encourage their customers to go single source and shutout competition. Sometimes there are interesting financial and other incentives — both above and below board. The danger is always trading short term gain for dependency and vulnerability to changes of intent by the vendor. Once one single sources there is a relinquishing of control — both on price and availability over the long haul. ( There are sometimes cases where there are no other vendors — but for this discussion we will ignore that special case.)  This prospect always scared me so I rotated among my vendors.  But others chose other approaches — the health organizations of the provinces,  with prescription drugs.

One other interesting thing in the field of commercial drug manufacturing is the ongoing turnover of the manufacturers drug portfolio. When a drug is developed and approved for sale, its formulation is protected by patent.  This allows the manufacturer a period  of profit with competition legally excluded. When the patent runs out, a successful drug will be picked up by others as a ‘generic’ or simply rebranded by its vendor. This is generally good for consumers with one proviso — new drugs may be approved for sale without the need to demonstrate that they are better than the products they replace, just different.  Because generics are sold at lower prices there is a lot of emphasis in marketing the new stuff — that is where the big money is. And interestingly, widely used generics may disappear when they are not profitable enough, or experience an extended plant shutdown to investigate and fix vague problems. So the only real choice is the more expensive brand names. And after an extended outage the generic may simply not be available — I think the line will be something like ‘discontinued because there was no demand’.

So now we come to the current day — after squeezing the ‘fat’ out of inventories through ‘smarter’ purchasing and inventory policies, and signing of single source contracts with drug suppliers to get a ‘better’ price, we find hospitals scrambling for supplies and competing with vets for anesthetics and other compounds. Seems in the search for ever lower prices a point has been reached where the one manufacturer in Canada had a problem and shortages are cascading through the system.  And there are few alternatives thanks to relentless pruning of purchasing and product lines on both sides.

One wonders — how much of this is the result of greed, naivete, or just random chance? Recall that the fashion of the day has been to go for the newly educated (therefor cheap) rather than experienced — and the one thing that is learned over the years is an appreciation for what can go wrong.  So when one intentionally weeds out experience as relentlessly as one squeezes out excess costs — should we be surprised that perhaps the process has gone too far? How much of the ‘fat’ was there as a vital protection against uncertainty? And would the same decisions have been made if experience played more of a role in ‘smart’ solutions?


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