Longer supply chains, more players, more volatile markets, more counterfeit parts. These forces are changing the risk created by shortages, so buyers need to understand the implications and take direct action to protect themselves.

In a perfect version of the real world, buyers would resolve a shortage by searching a single catalog for trustworthy parts quickly, easily, without haggling over price or worrying that the order might not arrive on time. Shortage buyers are not just worried about the perfect order. They are worried about perfect ordering.

Tip 2 of this ongoing series is to re-evaluate potential suppliers on your Approved Vendor List (AVL) for their ability to deliver the ease, reliability and speed of the primary market with the flexibility and responsiveness of the secondary market. AVLs should be regularly reviewed and re-prioritized to promote those firms whose processes and systems weed out components that ever passed through the grey market.

The Pain of "Slow"
Imperfections in the grey market slow buyers down. Verical research with leading OEM and EMS purchasing departments shows that buyers waste 40 percent of their time just chasing shortages — which amount to a mere 1 percent of their total annual spend.

One of the biggest time killers is figuring out who actually has the parts and negotiating with them to the point where you can place an order. Google a part number and you can instantly find any number of people who claim to have the part. You would think that would do the trick, but the real search is just beginning.

The challenge isn’t search — it is quality search —filtering out the untrustworthy distributors who lurk throughout the dark corners of the secondary market. To understand what slows down shortage purchasing so much, you first have to compare it to production purchasing in the primary market.

Primary Market: Fast but "Too" Lean
The primary market is efficient and fast. Comprehensive information, established relationships, and pre-negotiated prices all bring transparency and accountability to the purchasing process.

However, a problem occurs in a shortage, and that problem is "lead time." Expert at managing their risk, franchised distributors and component manufacturers will not stock parts that are too expensive or not used broadly across their customer base.

When demand appears at the last minute, authorized channels can sell the needed component, but only with unacceptably long waits, which increases the odds their customers will have to turn to the secondary market. The real trick, then, is how to deliver franchised distributor quality parts without the lead times that force buyers to go grey.

There are two major time killers that trip up buyers: the false security of AVLs and the pricing dance. AVLs are not much help in finding trustworthy parts quickly. A buyer has no visibility into where their approved vendor really gets its parts. The AVL supplier may point to the latest standards or ISO procedures, but as noted in a BusinessWeek cover story, fake parts are so realistic that "it takes a forensic scientist to distinguish them from the real McCoy." Unless the forensic scientists test every part of every shipment, you are not safe.

Unfortunately, if a buyer shows up with a large enough order, opportunistic brokers will bend the rules for the chance to make their quarter’s numbers in a single transaction. There is no standard in the world capable of stopping a broker from selling shady parts if the upside is big enough.

Another shortfall of AVLs is that rarely will shortages be filled from in-stock inventory sitting in the vendor’s warehouse. Informal statistics suggest independents have inventory in stock for only about 15 percent of their orders. Otherwise, they claim parts are "available" or at their "overseas warehouse." This is usually code for their buying the needed parts from another broker.

Shortage buyers also move slowly because of variable pricing. Brokers make their money by exploiting information asymmetry: they know something the buyer does not. Prices in the grey market are based on how badly the buyer needs the parts. If the buyer sounds stressed or needs the parts on very short notice, the price will go up. Way up.

Making things worse, to avoid sending out a false demand signal, shortage buyers will contact only a few potential suppliers, even though that limits their ability to find the part they need quickly.

Trust enables speed. Openness and transparency make deals happen quickly. In the shortage market, though, a way to deliver an efficient negotiation does not exist. Brokers will exploit buyers at every turn, and that slows down everything.

Conclusion
Buyers face a changing landscape and need to adapt their practices to protect themselves. The risk from the grey market is greater than it ever has been. Leaner, longer and faster supply chains are increasingly vulnerable to sophisticated counterfeit components, and the risks are growing exponentially. Not many firms will be able to make this transition to the new reality. Will your current suppliers be able to? Will you?

Author: John P. Brown is co-founder and VP of Marketing and Strategy at Verical.