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Supply capacity & shortage of raw materials: What matters now

Thomas Neller, purchasing manager and member of the Management Board at item

Companies around the world are struggling with delivery bottlenecks as raw materials such as wood, paper, plastics, sheet metal and aluminium have become difficult to source. So how exactly can businesses maintain their supply capability under the current pressures? Our blog has the answers. 

Scarce, scarcer, rare – the scant availability of raw materials is a big problem right now. A whole range of sectors are being hit and 2021 is seeing demand for steel, wood, plastics and aluminium continue to grow. In fact, supply is struggling to keep up. There are many reasons why the shortage of raw materials has become so drastic, as a brief look at the aluminium industry shows.

Raw material supplies – why are aluminium supplies so scarce?

The coronavirus pandemic is having a major impact on business. At the height of the crisis, entire production plants were brought to a standstill. Now that they are back up and running, these businesses are naturally looking to secure supplies of raw materials and other resources. However, some aluminium foundries in Germany had to be completely shut down due to the pandemic, which has reduced the capacity available. On top of that, a large number of workers at German aluminium mills and pressing plants are still working reduced hours. Shifts had to be redistributed and in some cases reduced, which has had far-reaching consequences for operations and production.

There are also other factors that are exacerbating the current negative trend, such as the punitive tariff introduced by the EU that places premiums of up to 50 percent on Chinese aluminium profiles. Customers who previously sourced their aluminium profiles from China are now placing their orders with European suppliers. To sum up, the sector is facing a shortage of raw materials, resources and capacity in 2021. With availability continuously dropping across the board, prices are rising sharply.

Solutions for safeguarding supplies and avoiding bottlenecks

High availability and reliability are crucial if a business is to be successful in times like these. So how can companies keep the commitments they make to their customers, safeguard maximum delivery quotas and avoid delivery bottlenecks?

1. Adopt a predictive and strategic approach to planning raw material requirements

If a company is to optimise its processes along the supply chain, then it needs to plan its resources and capacities on a predictive basis. “Top-class teamwork in product group and supplier management and carefully thought-through sourcing strategies are crucial when trying to maximise security of supply,” says Thomas Neller, purchasing manager and member of the Management Board at item.

At item, material requirements are planned for an entire year and on a rolling basis. A central aspect of this approach is internal coordination involving all key account managers and sales managers. Thanks to the company’s structures, operational and strategic elements of the business can be closely intermeshed. The situation on the market is continuously analysed and any developments are dealt with directly. Through this approach, item is laying the groundwork for sustainable procurement.

Active management and suitable planning methods

item adopts a collective, interdepartmental approach to developing sophisticated strategies for achieving its corporate goals. Under this approach, sales and operations planning is a useful tool for making sure market needs can be met cost-effectively. It provides an early warning whenever developments in terms of stock levels, capacities and personnel resources start to stray from the annual plan. Managers can therefore take action in good time.

To optimise stock levels on an ongoing basis, item links its CRM system with an intelligent forecasting tool. This involves operations research. Mathematical processes help ensure the right decisions are made in business planning.

Precise sales forecasts thanks to intelligent software

Special software takes into account historical sales and uses mathematical algorithms to calculate optimum demand and compile precise sales forecasts. This means stock levels can be dynamically adjusted and flexibly managed.

The forecasts are updated every day. Unusual sales volumes are identified quickly and schedulers can take immediate action. “Making sure forecasts are accurate is the key to success,” says Neller. “Combined with the skills of our staff and information from our suppliers, the tool works like a kind of early warning system.”

Simulations can also be carried out quickly and easily, enabling users to check how availability and stock levels will be affected if, for example, a supplier drops out of the picture or a particular article can no longer be delivered. The tool then offers recommendations that are always geared toward safeguarding availability.

Optimised warehouse stock at all times

The demand calculated at the beginning of the year is continuously evaluated and adjusted. This ensures that foundations can be laid early on and that material volumes can be ordered on the market under cost-effective conditions. By contrast, short-term planning forces companies to buy raw materials at the latest prices, even when those prices have increased sharply.

“In 2021, we took care of most of our aluminium requirement for the year during the first quarter,” points out Neller. “As a result, sudden price rises don’t impact our system.” Optimised warehouse stocks safeguard the high availability of item products – for the entire year. Fluctuations in stock levels from one year to the next are also taken into account. Moreover, item does not reduce stock levels at the end of the year only to increase them again in the first quarter of the following year.

An important cornerstone of efforts to safeguard supplies of raw materials involves maintaining close and trusting partnerships with suppliers.

2. The importance of supplier relationships

The central item warehouse in Solingen has enjoyed a steady inflow of materials from long-standing suppliers across the whole of Europe for a great many years. “Some of our contractual relationships have been in place for over 30 years,” states Neller. “Our procurement strategies are based on multiple sources. We have as many as ten suppliers to fall back on, which means we are not tied to individual suppliers or pricing conditions.” Some of the suppliers take care of basic requirements while others are brought on board when demand peaks.

Thanks to the long-standing nature of our partnerships with these suppliers, we have especially trusting relationships and gain an in-depth insight into what is happening on the market. We share information proactively and intensively on a regular basis. item also benefits from “economies of scale” and can always get hold of a certain amount of aluminium profiles. Supplier agreements that run for terms adapted to current market conditions ensure supplies are continuously replenished at competitive prices.

 3. Looking ahead

Where is the aluminium sector headed? What are competitors doing differently? How can staff be integrated into the company even more closely and given the best possible support? Companies do well to ask themselves questions like these and constantly re-evaluate their internal processes. Open communication, flexibility and a constant readiness to continue developing – these are the foundations for a successful future. “In the past, procurement was little more than an office that placed orders, but now we are integral to the supply chain. So what about the future?” asks Neller. “It is hugely important – both now and in the future – to be open to new things.”

What it all comes down to – always being able to deliver

How can companies maintain their delivery reliability – despite the current scarcity of raw materials – and prevent supply bottlenecks? By adopting long-term, resilient and predictive planning. If annual planning is complemented by rolling projections, companies can act with more flexibility and modify demand dynamically. However, optimum planning is not enough on its own. Achieving exceptional delivery quotas requires sophisticated strategies, special software support, dependable partners and forward-looking management. That is how item keeps its delivery promises and manages to supply aluminium profiles that are ordered in Germany within 48 hours.

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