Overseas suppliers, gray markets, and the age-old question: Do you want it cheap, or fast?

Finding the right balance between cost and speed is crucial in every supply chain, especially in the OEM and aftermarket auto parts market. Distributors often face the dilemma of choosing between cheaper parts from overseas and faster, more reliable, yet more expensive domestic options. In this article, we’ll discuss how to set up a supply chain that balances these competing interests.

Gray market suppliers

The gray market refers to the trade of genuine parts that, while legal, may not be authorized by the manufacturer. While these parts are often sourced from legitimate manufacturers, they bypass official distribution networks, resulting in lower prices.

Advantages

  • Cost: Prices can be as much as 70% below manufacturer wholesale rates.
  • Rare or discontinued parts: These channels can provide access to parts that are otherwise difficult to source.

Risks

  • Availability: Gray markets often have large surpluses of a particular item in one month and then may not offer that item at all for the next several months. Having a secondary supplier is crucial when utilizing gray markets. For this same reason, it’s important to price gray market items carefully. If you lower your sell price dramatically due to low sourcing cost, customers may be displeased if you have to reverse that decision a month later due to gray market availability concerns.
  • Lead Time: Gray markets often have extended lead times, even in comparison to other overseas options. This can significantly impact service levels and safety stock requirements. 
  • Quality Issues: There is a risk of receiving parts that do not meet quality standards, as gray market suppliers may not adhere to strict quality control measures. Be willing to pay a premium to buy from sources that come from authorized vendors. 
  • Lack of Certification: Parts purchased through gray market channels often do not come with warranties or the same certifications as they do when purchased directly from the manufacturer. Remaining shelf life, when applicable, may be shorter. Worst case, the parts you buy on the gray market may not even be legal to sell in your local market.
  • Relationship Risk: If manufacturers and key approved suppliers find out about your utilization of gray markets, they may view it unfavorably, which could impact your future relationship with them.

Gap sourcing

Gap sourcing is the strategy of purchasing from a domestic, higher-cost supplier to cover a shortage while waiting for overseas or gray market materials to arrive. This approach helps maintain service levels and avoid stockouts during periods of extended lead times at the expense of gross margin. Having a secondary gap source —- even if they are a competitor — is a must when utilizing import suppliers and gray markets in your supply chain.

Setting up an effective gap sourcing program

  • Accurate ETAs: Knowing delivery dates for outstanding gray market/import orders is crucial. Communicate with suppliers about open orders and regularly audit the accuracy of their delivery estimates (both the initial estimate at the time of PO placement and at later stages). Good delivery estimates will allow you to predict future stockout periods and how long they will last.
  • Expediting: Sometimes, free expediting (i.e. simply asking the supplier for earlier delivery) may be adequate to cover a future inventory gap, with no need to find an alternate source. Failing that, a paid option (e.g. expediting shipping) may still be more economical than paying a competitor or other domestic source for a gap-covering, low-margin buy.
  • Gap lead time: The lead time of your gap source will determine how far out you need to forecast inventory shortages. If you expect to run out of stock in a month and can gap source in a week, you should wait until you are down to roughly one week of stock before placing the gap buy. If demand is lower than expected, or the import order arrives earlier than expected, you may not need to gap source at all. For the same reason, it is recommended to buy no more than a week or two of expected demand at a time from your gap source; you can always place another order next week.
  • Profit margin: Regular audits of your gap source margin vs your import margin may justify changing your primary source to the domestic supplier. Typically, if the domestic cost is within 25%, we recommend at least exploring the option of making them your primary supplier. When the cost of holding inventory, spilled demand due to stockouts during long import lead times, and dead stock are taken into account, it can often be more profitable to give up gross margin in exchange for speed.

Conclusion

Balancing the cost and speed of your supply chain requires a strategic approach that incorporates various sourcing options, including gap sourcing. By understanding when to use domestic suppliers to cover shortages and how to set up an effective gap sourcing program, you can maintain high service levels and customer satisfaction while managing costs. Implement these strategies to navigate the complexities of the parts supply chain and achieve a competitive advantage.

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