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Supply Chain Technology Components Availability Risks

Balancing Supply Chain Risks Against Costs: Four Reasons to Pay More for Components

Price has long been the primary consideration by manufacturers in their selection of suppliers of necessary components. Supply chain disruption in the wake of Covid-19, however, has caused many companies to re-examine every aspect of their purchasing process, including the true cost of a component, relative to its inherent risks.

When selecting a source for a low-value commoditized component, such as a cable, cost is typically the primary driver. That type of product is often widely available, and its suppliers don’t add incremental value. So why would a company pay more for something like a cable? One reason is supply chain risk.

With the increased supply chain complexity, failure to properly assess risk when sourcing a product can sometimes end up costing more than the anticipated savings in buying the cheapest product. Even a low value component such as a cable can become mission critical if, for a range of unforeseen reasons, availability or quality of the cable becomes an issue that affects production or client satisfaction.

So how should product / component risk be assessed and balanced against price? Consider these four factors.

PRODUCT IMPORTANCE

Determine how critical the component is to the finished good that’s being manufactured. Is the component core to its operation? Will not having this component cause costly shipping and sales delays? If those risks exist, then it’s important to buy from a dependable supplier, even if the price is higher.

PRODUCT SPECIFICATION

Examine the specification document to determine if the component can be easily swapped for an identical or similar component. If a particular OEM or part number is specified, there may be less flexibility in switching from one part to another. In that case, a higher price may be justified to ensure supply.

PRODUCT SOURCING

Identify where the product can be sourced. If it’s far from your location, there will likely be higher shipping costs as well as transportation risks. The greater the distance, the more likelihood there will be shipping disruptions, or trade and political issues. Again, a higher priced supplier closer to your location may prove to be less expensive in the long run.

SUPPLIER RELIABILITY

Evaluate the dependability of suppliers based on their past performance. Do they understand your business and the impact they have on its manufacturing capability? How strong are their relationships with component manufacturers, and will they advocate for you if there are constraints? Will they help you mitigate risk? Peace of mind based on these factors can justify paying higher prices for components.

The old expression “cheap is dear” rings true in the current supply chain environment. Manufacturers no longer can afford to assign cost as the primary factor in selection of product / component suppliers without examining all of the inherent supply chain risks.

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