Don’t Get Caught Short During the Shortages

November 19, 2014

Shortages of raw materials including petroleum-based oils, vegetable oils and a host of other products have created supply issues for lubricant formulators. At the same time, OEMs are continuing to demand product differentiation, while emerging trends, such as the “greening” of American industry, are adding technical challenges that formulators need to address.

In this environment, many are questioning their suppliers for advice to keep costs down and production smooth. As always, getting the right answers depends on the questions.

To my mind there are three things you should be asking your supplier: 1) How can you help me manage my inventory? 2) What support can you provide to help me deal with the escalating costs of materials? 3) What technical expertise can you provide if I need to reformulate?

How your supplier answers these questions will give you a good idea of whether they are in a position to help you through these supply disruptions.

Supply

Most formulators follow a “just in time” ordering model so that they can maintain the minimum level of product needed to keep production flowing smoothly. They count on their suppliers to maintain a stockpile so that they can order as they need and hold onto as much cash as possible.

However, maintaining this minimum level can create kinks in the supply process if the supply chain is disrupted. Therefore, most maintain some sort of inventory management system to avoid this situation.

One strategy is to buy from several suppliers to try to get a lower price on a particular item. However, many suppliers only stock product when there is an order. So, this purchasing strategy can backfire if you don’t regularly place orders with that supplier.

Another strategy is to keep several supplier relationships “warm” so that your suppliers are more likely to have what you need when you need it. Still, when push comes to shove, you may still be caught short.

A better strategy is to choose a primary supply partner that can help you manage your inventory.

To get a sense of whether a supplier has this competency, you need to investigate several things. First, they need to have a stable supply of product themselves. Find out if they work with reputable manufacturers that have good infrastructure and steady production.

Second, they need to have a process for tracking your inventory. Do they have a process for tracking your product? For example, we use our customers’ buying history and economic forecasts to gauge how much product we need to keep in inventory at any given point in time.

Also, how does your supplier automate the inventory management processes? Most formulators use some kind of inventory management software. The ultimate goal of these systems is to get as near to real-time data reporting as possible.

With this in mind, you want to know how your supply partner’s compute inventory management software system integrates with yours. Does it help you maintain an “end-to-end” supply chain tracking system so that you can know where your products are in the supply chain?

Reformulation

Another way your supplier can help you to manage shortages is by providing assistance with reformulation. An experienced supplier will have technical staff who can provide this expertise.

In most cases, this means finding a substitute when the cost of a particular additive becomes too high. For example, we are working with a number of clients to find alternatives to Common Degras, which seeing sharp cost increases due to reduced Chinese production of 10 to 15 percent this year.

Another example are customers for rapeseed oil, a highly stable natural oil with good thermal properties. Many applications do not require these properties. Therefore, we have helped a number of customers switch to canola oil, which is less expensive, but provides similar lubricity.

Another way that a supplier can help is to help formulators anticipate market trends and prepare for their impact. For example, automotive OEMs will require new specifications for engine oils on a regular basis. As a supplier, we track this information and proactively inform our customers so that they can stay in compliance.

Another trend is increased emphasis on the production and use of biolubes. The European Union (EU) has been a leader in the adoption of environmentally friendly lubricants. A number of EU nations have adopted standards requiring their use, especially near waterways and other environmentally sensitive areas.

The market for biolubes is expected to grow six percent annually according to the Frost and Sullivan report “European Market for Biolubes.” In fact, the demand for biolubes in the EU is growing much faster than the lubricants markets overall.

Indications are that this is unlikely to remain just an EU issue. Dependency on foreign oil and increasing environmental accountability are likely to result in requirements for the use of biolubes in the U.S.

So, if your company is considering investing in biolubes, you will want to work with a supplier that understands green chemistry. They should also understand the regulatory side as well as formulation. Then they are in position to support you as you integrate biolubes into your product portfolio.

Squeaky Wheel Gets the Grease

The cliché rings true – the squeaky wheel does get the grease. Don’t be afraid to speak up to your supplier when you have problems. An experienced supplier will have the technical expertise and ability to help you manage your inventory.

Keep in mind that the relationship is two-way. To make sure your supplier has the product you need, bring them into your forecasting process. Also, if you use multiple suppliers, keep the relationships warm. That way, they are more likely to have what you need when you need it.

Finally, engage your supplier in conversation about trends that will affect your business. They can help you stay abreast of changing OEM demands and far-reaching trends such as the use of biolubes. Their experience can help you to adapt to trends more easily than on your own.

Joe Clayton, President