In the world of business, one of the things that is mentioned continuously is to expect the unexpected. Even the most successful companies are vulnerable to events that they cannot control and can affect the future of their organisation. In this article by Mckinsey & Company, they explored the importance of stress testing your supply chain and one of the outcomes was to develop risk mitigation processes. Companies with a continuous supply chain are one of the industries that are familiar with disruptions and can weather them, and one of these recommended ways is to explore emergency inventories to boost supply chain resilience.
Emergency inventory is reserving stock of goods or materials that a business keeps on hand to address unexpected disruptions. This type of inventory is typically maintained to ensure supply chain resilience and that operations can continue smoothly even during supply chain interruptions, natural disasters, unexpected equipment failures, or other unforeseen events such as stockouts.
The role of an emergency inventory is to mitigate risk during emergencies, ensuring that key products or materials are available when normal supply channels are disrupted. It involves careful planning with internal stakeholders and supply chain partners.
While developing an emergency inventory can look different depending on the industry, the general principles can be applied to ensure cost-effective and functional preparation for supply chain resilience.
- Risk assessment: Identifying potential risks is an important way to start. These will vary from business to business and usually include natural disasters, transport disruptions, health crises, technical failures, unplanned demand surges and security issues. This recent article on Amazon shows how the organisation used a similar data collection model to prepare for emergency delivery to nonprofits and community patterns during natural disasters.
- Identifying inventory levels: By analysing recent usage patterns, you’ll understand normal consumption rates and lead times for topping up critical items. With this information, you’ll establish minimum and maximum inventory levels for each item, which assists in ensuring you have enough to cover the emergency period without overstocking, keeping flexible for supply chain resilience.
- Internal response plan: Your team plays a critical role in ensuring your developed plan goes smoothly. It is essential to document your emergency inventory plan so that it can easily be found when needed by your team. Relevant personnel will also need to be trained on emergency inventory procedures, including how to access and manage the inventory during a crisis.
- Utilizing data: According to TechTarget, real-time tracking can assist with identifying potential risks in advance using IoT devices such as “An IoT device could alert a supply chain manager that a shipment is delayed by weather and will arrive three days later than scheduled.”
This is a continuous process. Gathering feedback and optimising the plan will need to be a constant exercise to ensure supply chain resilience.
While essential, emergency inventory can be daunting, especially when it comes to cost. There are a few ways that you can make your emergency plan cost-effective.
- Optimise inventory levels: By using advanced forecasting techniques to predict demand more accurately, you’ll be able to reduce excess inventory. This involves analysing historical data, considering seasonal trends, and factoring in market conditions. Just-in-Time (JIT) Inventory has also been effective to minimise regular inventory and this study of Toyota’s JIT strategy offers a modified approach that can reduce emergency stock levels by ensuring faster replenishment when needed. Using this approach, you’ll be able to identify suppliers who can quickly deliver critical items on short notice to ensure supply chain resilience.
- Negotiate with suppliers: By leveraging your relationship with suppliers, you can negotiate better pricing with suppliers by purchasing in larger quantities or entering long-term agreements, even if it’s for emergency stock. You can also work with a smaller number of suppliers who can provide multiple products or services, potentially reducing costs through stronger partnerships and better pricing such as favourable payment terms and extended payment periods.
- Improve storage efficiency: If you have existing storage facilities, using them for emergency inventory rather than renting additional space can be effective while also optimizing the layout of your facilities to store more items efficiently. By implementing a rotation policy to ensure that older inventory is used first, waste can be reduced and supply chain resilience supported.
While we know that all emergencies cannot be easily dealt with due to their complex nature, having a documented step-by-step plan is an important part of ensuring you’re prepared and that you are ready to achieve supply chain resilience, even during difficult times.
