Single-Source Resin and Hospital Delivery Performance
A medical device manufacturer buys medical-grade resin from a single plant in Malaysia. Annual spend is $8.4 million, 22% of cost of goods sold. Ocean lead time is 48 days; port congestion has added 12 days. The company holds six weeks of finished-goods stock. On-time-in-full delivery to hospitals has fallen from 96% to 84%, against a customer contract requiring 95% and imposing a 5% penalty on late delivery. Air freight cost $310,000 last quarter. SKU-level forecast error is 32%, and the supplier has refused to hold consignment stock. A second source in Ireland could supply 30% of volume after nine months and at a 9% price premium. Sales is promising hospitals faster delivery to win new business.
1. Map and quantify the supply-chain risks, distinguishing exposure, likelihood and mitigation.
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Exposure. The single Malaysian plant supplies 100% of a material representing 22% of COGS. A 60-day effective lead time against six weeks of finished-goods stock means the pipeline is shorter than the replenishment cycle; the company is already running negative cover. OTIF at 84% breaches the 95% customer requirement and triggers a 5% penalty, plus reputational damage in a hospital market where switching is slow but trust is fragile.
Key risks:
- Geopolitical/port disruption: high likelihood, high impact; currently manifesting as 12 days’ delay.
- Forecast error: 32% at SKU level creates both stock-outs and obsolescence; a single average safety stock will not fix it.
- Supplier concentration: no consignment stock and no second source; high impact.
- Commercial: 5% penalty and possible contract loss; quantifiable but potentially severe.
- Sales promise mismatch: high likelihood, medium-high impact because it creates demand the supply chain cannot serve.
Quantification: Air freight at $310,000 last quarter is roughly $1.24m annualised. The Irish premium on 30% of $8.4m is about $227,000 a year - cheaper than the current expediting spend, before penalties. That comparison changes the sourcing case.
Mitigation hierarchy: protect customer supply first; then reduce lead-time variability; then diversify source. Do not treat the Irish source as a silver bullet - nine months is too late for this peak, but it is valuable for the next.
2. Recommend an inventory, sourcing and transport plan for the next 12 months, with trade-offs.
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Inventory. Move from a single finished-goods buffer to segmented safety stock by SKU criticality and demand variability. With 32% forecast error, use a statistical buffer rather than six weeks for everything. A/B/C segmentation should identify the 20% of SKUs that carry most hospital-critical demand; hold deeper cover there and reduce slow movers. Consider holding resin or semi-finished goods rather than only finished devices, but test shelf life and working-capital impact.
Sourcing. Start the Irish qualification now. A 9% premium on 30% of volume is about $227,000 a year, likely less than the cost of air freight and penalties. Negotiate a ramp: 10% of volume at month 9, 30% at month 12. Keep the Malaysian plant as primary but require a capacity reservation, weekly production reporting and a business-continuity plan. Revisit consignment stock; if refused, ask for a supplier-owned buffer at a third-party warehouse.
Transport. Use a premium ocean service or a limited air bridge only for critical SKUs. Set a rule: air freight is authorised when projected cover falls below 14 days for A-class SKUs, not as a routine fix. Consolidate shipments and book capacity earlier.
Trade-offs: the Irish source raises unit cost and adds qualification effort, but reduces concentration and expediting. Higher safety stock ties up cash, but hospital penalties and lost contracts cost more. The plan should be approved as a resilience investment, not a pure purchase-price decision.
3. Sales is promising faster delivery to win new business. How should procurement and supply chain respond?
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Do not let sales commit to capability the supply chain cannot deliver. The current OTIF of 84% is already below the 95% contractual requirement; promising faster delivery would increase the penalty exposure and damage credibility. The response should be evidence-based and commercial, not a blanket refusal.
Actions:
- Produce a capability statement by SKU and customer: current lead time, reliable lead time and premium-service lead time with the cost and risk attached.
- Agree a sales-promise policy: standard delivery commitments only where projected cover and source capacity support them; non-standard promises require supply-chain sign-off and a priced premium service.
- Give sales a positive alternative: offer faster delivery only for A-class SKUs where buffer stock or the Irish source can support it, and price the service accordingly.
- Review customer contracts for penalty clauses, force majeure and allocation rights. Port congestion may not excuse performance; legal should assess exposure before new promises are made.
- Communicate transparently with existing hospital customers, with recovery dates and mitigation. A credible recovery plan protects the relationship better than silence.
The underlying judgement is that revenue growth pursued through unrealistic service promises destroys margin and trust. Procurement should support growth where it is costed and deliverable, and challenge it where it is not.