What is Supply Shortage in Procurement and How to Mitigate the Impacts?

A supply shortage occurs when the demand for a product or service exceeds its available supply, leading to a disruption in the procurement process. It can be because of poor management of inventory, forecasting errors, or due to natural disasters or geopolitical events. These types of shortages can greatly affect the operations of your business and your customer satisfaction. Effective management of supply shortages is a must for the proper management of procurement. Using methods like probabilistic forecasting can help you to predict possible supply problems that can occur because of different market scenarios. Lack of proper communication is one major cause of supply shortage, so open communication throughout your supply chain helps you to avoid such problems. The use of technology can help you out in knowing your supply chain in alternative demand situations. Let’s go through the major reasons that cause supply shortages, their impact on the procurement process, and how you can avoid them for smooth supply operations.

Reasons for Supply Shortages

There are several causes that are responsible for the supply shortages. Following are some of the major reasons that you need to overcome for better supply management:

1. Increase in Demand: A spontaneous increase in demand for a product or service causes a shortage. A sudden increase in demand for certain products leads to a demand that is out of control and can create a short-term market imbalance.
2. Decrease in Supply: Decreased supply of goods is caused by several reasons, such as natural disasters, drought, etc. These factors disrupt infrastructure, causing short-term supply shortages.
3. Government Intervention: Price limits by government policies restrict the maximum prices at which goods can be sold, which leads to situations of shortages. If the prices are too low and demand is very high, it may lead to a shortage.
4. Supply Chain Disruptions: Global supply chains are affected by transport slow-downs and labor shortages that cause delays in getting products to market on time. Also, these issues are the results of poor supply chain management caused because of poor forecast and communication.

Impact of Supply Shortage

Supply chain shortages can have some major impacts on your business and consumers that are as follows:

1. Unable to deliver on customer demand: Supply chain shortages and your inability to secure raw materials have direct outcomes that may lead to product shortage and customer dissatisfaction. It not only just slows down your product delivery but a lack of customer and revenue growth puts your business in a risky position of losing customers and generating small revenue.
2. Longer Lead Times: Talent shortages and delays in acquiring necessary materials extend your lead times for both production and delivery as well. This blockage affects your production efficiency, giving you lower output with less revenue.
3. Increased Supply Costs: Higher demand and inflation causes raw material and supply costs to increase. You need to be ready for challenges like creating new supply networks and increased prices.

How can we reduce Supply Shortage?

Here are some strategies that can make your procurement process uniform and considerably reduce supply shortages:

1. Using Probabilistic Forecasting: Using better probabilistic forecasts instead of simple demand-driven traditional forecasting measures helps you to know every factor of supply risks. You can know your business deficiencies that need your prior attention and can tackle them firsthand.
2. Adopting Pre-Purchase Strategies: Know the components that require a long lead and think about pre-purchasing them. By this, you can have immediate access to essentials without the risk of them being out of stock. This way, you can predict the right amount of inventory to pre-purchase and minimize delays due to sudden changes in demand.
3. Utilizing Stress-Testing Tools: Modern solutions like Sales and Operations Planning software allow you to stress-test your supply chain. It analyzes your current demand and supply dynamics so you know what to expect in case of unexpected changes or disruptions.
4. Figure out Demand Effectively: You can influence demand to fit your supply capabilities. You can lead your customers towards other products that would be easier for you to supply. By that you are not only meeting customer demand but also ensuring your supply chain can handle changes.
5. Keeping Detailed Inventory Records: Keep inventory records online where you can actively manage your stock and keep track of orders. This enables you to track shortages closely so that you may communicate with customers about their orders before they complain and, in turn, increase customer service levels.

Supply shortages cause difficulties in the procurement process by increasing delivery time, increasing costs, and affecting satisfaction and growth in revenue. The shortages can be because of sudden spikes in demand, external factors like natural disasters or geopolitical events, and price controls imposed by governments on producers. You need to follow multiple strategies to mitigate these risks, like analyzing a wide array of market scenarios using probabilistic forecasting can help in anticipating potential supply chain issues and pre-purchasing components for any increase in demand in the future.

Also, you can make use of stress-testing tools to look at the resilience of supply chains in case sudden disruptions occur. Assuring and satisfying customers of what you can deliver is a good way to keep up the satisfaction while making the most of your available supply by guiding them towards alternative products. Finally, complete inventory records and open communication with the customers concerning order statuses would further benefit stock management practices as well as base service levels. This helps you to generate revenue and keep customer loyalty especially during supply shortages.

Procurement Resource is a leading platform that helps you to reduce supply shortage risks by utilizing advanced market intelligence and actionable insights in procurement. Our services go from supply chain intelligence for commodity prices to supplier data for real-time procurement analytics that brings our expertise into market reports and cost models. Through our category insights, you could have an idea about product markets in particular and savings on costs, while our market intelligence maintains you up-to-date with current trends happening in the industry. With Procurement Resource, you can modernize your procurement process, save costs, and effectively handle the lack of supply.

Author

Aditi Bisht (Associate Business Analyst in Procurement Resource)