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Strategic Sourcing Lessons from the Chicago Stock Exchange (Part 2)

29 January 2008 - Features - Editor

Strategic Sourcing Lessons from the Chicago Stock Exchange (Part 1)

A disaster of any kind is not an event from which anyone should draw advantages, but the fact remains that acutely adverse incidents expose vital inventory linkages. Stock investors can observe how badly individual companies are affected, and also how quickly they resume normal operations. Another set of signs relate to terms of trade: items that companies pay for in cash or even in advance must be scarce.

Investors can also use linkages between companies to understand strategic sourcing strengths. The customers of companies that rapidly expand gross operating margins without losing market shares must be heavily dependant on such vendors. Overall, studying strategic sourcing makes detectives out of stock investors! However, the benefits of this ‘business archaeology’ are extremely valuable. The generic chemical industry is a telling example of how generic producers in a low-margin segment, can generate profits and dividends through the sourcing route.

Sourcing as a Risk Management Perspective of Stock Investing

Branches of the US military forces are also avid users of strategic sourcing principles. Denying uranium to unfriendly governments is a cornerstone of Washington foreign policy. Stock investors can learn from our government that strategic sourcing has risk management applications. Ask ‘what if’ questions and you may find that some of your best stocks are actually unacceptably risky for your portfolio. You will probably feel that you should move some of your capital out of the stock market in to gold, realty, or at least in to bonds.

The average corporation will typically have hundreds of items in its list of purchased materials and outsourced services. You cannot study all of them to know if stocks are vulnerable to sourcing risks. Focus on unlikely but serious risks, and grill executives for their preventive and contingency plans. Your capital is at risk if you are not satisfied with proffered answers! This is how professional investors should interact with the manager community, and it is worth emulating for small players. All stock investors attach far more importance to safety of capital over returns, and that is why attention to strategic sourcing is a sound approach to all stock exchange decisions.

Are you a materials requirement planning expert? Do you have experiences with stock outs, and brand switching because of sudden loss of shelf space? Would you like a custom study on a particular stock with respect to its resilience with respect to sourcing risks? Please join our forum and let us have your invaluable feedback. We would love to hear from you!

 


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