More Inflation Cautions

The Institute of Supply Management’s Purchasing Managers Index (PMI) for October that was reported today made its biggest jump since 2006. — from 52.6 in September to 55.7 last month. (See the news release.) That’s good news for the economy as a whole, but it bolsters our cautions that pressures on prices are likely to increase faster than the pace of economic recovery over the next few months.

The PMI is considered a leading indicator of economic business conditions. Purchasing managers are already reporting price increases in 11 commodity categories. Furthermore, inventories have been contracting for 42 consecutive months. Those facts suggest that price pressure is likely to go up.

Suppliers may be trying to recover from their losses over the last year and perhaps betting that shortages might drive prices higher quickly. It’s also possible that tight credit is still limiting manufacturers to add production capacity. Whatever the reason, buyers must remain diligent in their efforts to contain cost.  As companies recover and work to improve their bottom line, cost containment will be the core focus in managing suppliers in 2010. It will be necessary for buyers to review their tools for containing costs and develop new methods for dealing with price escalation.

In southeast Michigan we see the same kind of pressures on prices, but there was also a drop in the local PMI, released by the Institute of Supply Management – Southeast Michigan.  The ISM-SEM reported that its October purchasing managers index was 51.3, a drop of more than 10 points, but still in the range that demonstrates some modest improvement in economic conditions. The three-month trend of the index also remains positive.

We likely had an uptick in September as a trailing result of the ‘Cash for Clunkers’ automotive incentives. The October composite figure shows a slight cooling off, but looking deeper we see local purchasing managers reporting higher prices in a number of categories. That suggests there is finally demand building that can drive new growth.

The drop in the southeast Michigan index might suggest a note of caution about the national figure, too, because Michigan’s PMI often leads the index for the rest of the country. October’s big jump in the national PMI might be followed by a lower index next month, matching Michigan’s pattern. With so many uncertainties, we shouldn’t be surprised if the recovery has some fits and starts. Overall the outlook is still positive.”

Have we hit the bottom …. of prices?

Governments around the world have pumped billions. Wait. Trillions into economic stimulus and bailout programs. Although you may still be able to leverage prices down right now — my colleague in London, Robin Jackson suggests that you ought to be prepared for rising prices ahead.

Here’s his analysis and list of tips.http://www.adr-international.com/BusBrief-Oct09-golden-age.shtml

To see the all latest ADR International commentary and analysis use this link:

http://www.adr-international.com/eshot/eShot_Oct09.html

Think “Low Cost Supplier” not “Low Cost Country”

I’ve been on Internet radio talking recently talking about the change at the top of global procurement at GM — and what that means to the huge push they had been making to source from China and other low-cost countries.
This excerpt from a column by an ADR International colleague based in Prague, Czech Republic makes a good point about that. Here’s the excerpt and a link:

“Experience shows a clear erosion of the traditional split between low-cost and high-cost countries, as many suppliers in emerging countries are unable to deliver benefits because of poor performance and productivity and high logistics costs.

Buyers are therefore seeking companies which offer the most advantageous relationships, whether they are located in an emerging region or, for example, Western Europe.

Global companies such as Unilever, for example, no longer focus on regions or countries. Instead they use a database of vendors capable of supplying their global network for best total costs no matter where the vendors are located.

Of course, this requires active and capable sourcing resourcing all around the world.

It should be borne in mind that low-cost status does not last forever. Every country wants to move from being regarded as emerging to being seen as developed. Some countries, South Korea, Singapore or some central-European nations, for example, have already achieved this.

The US has benefited from a weakening dollar for a couple of years, while Europe became very expensive with its Euro. In recent months currency rates are moving even more into foreground. Economic crises have caused a substantial fall in the value of some currencies such as the UK pound and some central-European currencies.

Nevertheless this brings unexpected opportunities. Offerings that appeared lucrative a month ago may mean a loss today or next month.
The global economic downturn has brought the factors of trust and reliability into focus. The ability to deliver goods and the ability to pay have increased the need for trust and risk mitigation.

Such proven business relationships will last even when the economy recovers, and risk management with those companies which have proved they can deliver the goods will be more important in the future.”
Robert Sobcak, ADR International, Prague.

Link: Think Company, Not Country

Still at risk …

The economy may be topsy-turvy, but issues such as risk management are timeless.

I was reminded of that when Jan Husdal recently reviewed an article our consultants Jim Kiser and George Cantrell wrote in 2006 for Supply Chain Management Review.  It lays out six steps necessary to manage risks in the supply chain. Here’s the link:

http://www.scmr.com/article/CA6329866.html

One of the messages we often forget is to look beyond direct suppliers right through the supply chain. As we were saying on the PI Window on Business Blogradio program recently purchasers are prone to focus on what’s immediately in front of them. I like to use the term “supply management” or “sourcing” rather than “purchasing” because they both imply a deeper approach to the profession.

How “New” is the New GM?

It’s obvious a lot of us are waiting to see how “new” the new GM is going to be in its supplier relations. Jason Busch recently chimed in with this posting. (The link is also in my link list.)

I’ll be talking about GM and supplier relationships in general in a few weeks with Jon Hansen at Procurement Insights’ Internet radio show. More on that as we firm up the details.

Time to Rethink

As light begins to appear at the end of the economic tunnel, there are some key steps businesses should take to streamline their procurement —

Read more of this article published in the ADR International e-Newsletter.
Also in the current e-Newsletter, an article by Rebecca Howard about getting the most out of every training dollar. Professional development for procurement teams is usually a slam dunk return on investment — but training programs are not all equally effective.  Read more here.

ADR has recently launched its own ADR Academy with nine online courses on fundamental topics — from portfolio, cost and market analyses to global sourcing. Here’s a link to an article about it, and another link directly to adracademy.com.

So long, Bo

Nobody should be surprised by the news from General Motors that the global purchasing czar, Bo Andersson has abruptly left the company “to pursue other career interests.”

[See Crain's Detroit Business: http://www.crainsdetroit.com/article/20090612/FREE/906129997/-1 ]

Andersson came from the school of thought where squeezing razor thin supplier margins, bankrupting suppliers and pushing undercapitalized vendors was the order of the day. Clearly that approach cannot be sustained.

Domestic automakers are realizing that the supply chain will be playing an increasing important role in the future. The new era will bring suppliers with healthy margins, viable suppliers, innovation, and value based purchasing.

With R&D dollars scarce, OEM’s need suppliers to bring them innovations and no smart supplier is going to send its best new technology to its worst customer.

It does not surprise me that both Chrysler and GM appear to be making the necessary changes in purchasing to create a better culture for supplier relationships.  We’ll have to see if they can make the changes stick.

(Find a longer version of this article on Mlive.com — with suggestions for the new czar, Bob Socia.)

Purchasing Briefs

Here are a couple of quick reads from my colleagues at ADR around the world. Robin Jackson is CEO of ADR Intl., Simon Aldred is a consultant, and Robert Sobcak is managing our new office in Prague, Czech Republic. Worth a look.

Now is the time to review everything procurement does or else face downsizing, says Robin Jackson.

http://www.adr-international.com/BusBrief-April09-Times.shtml

Managing the big, core areas is the easy part, but the 20 per cent of less obvious spend can yield big savings too, says Simon Aldred.

http://www.adr-international.com/BusBrief-April09-Manage.shtml

Changed world conditions mean we need to think of companies, not countries, when looking for low-cost sourcing opportunities, says Robert Sobcak.

http://www.adr-international.com/BusBrief-April09-LCC.shtml

Chemicals

I recently had a good conversation with Richard Weissman at Purchasing Magazine about buying chemicals. I can tell you a few things I told him — or you can read the whole article (with good comments also by Tom Brossart, the director of global logistics and trade and compliance at W.R. Grace in Columbia, Md.).

http://www.purchasing.com/article/CA6635527.html?q=bill+michels

1. Nothing really replaces an in-person supplier visit. Travel budgets are tight, but risks from low-cost country sources are significant.

2. An example of an area of risk is environmental practices. You can no longer “export” pollution to countries that have less stringent laws than the U.S. Organizations are monitoring practices around the globe, and consumers hold companies here accountable for what their suppliers do abroad. Sustainability and the environment are critical issues that reach through the whole chemical supply chain.

3. The chemical supply chain is suffering from the same effects of the credit crunch as other products. Buyers are extending terms. Suppliers are squeezed and risks of disruptions are increasing. We work with clients to run simulations that gives us clues where the stress is greatest, so we know where we ought to line up standby sources.

It is easy to think of chemicals as commodities that need to be evaluated almost exclusively on price, but when you add considerations of risk — environmental, logistical or financial — procurement strategies have to more carefully constructed to accommodate them.

Pro to Know, Five in a Row

Bill Michels, chief executive officer at ADR North America LLC, has been named by Supply & Demand Chain Executive magazine as a “Pro to Know” as a consultant advising companies about purchasing strategies and managing supplier relationships.
Every year the trade magazine for purchasing executives honors industry leaders who have made substantial contributions to the supply chain field. This is Michels’ fifth time earning the “Pro to Know” designation; Michels was recognized for his leading expertise in identifying troubled suppliers and mitigating the risks if they fail.
Michels is a nationally known expert on strategic purchasing, cost and change management.  He has pioneered new methodologies and theories, practices and tools for the transformation of the supply chain, helping businesses increase profitability and value. Michels writes regularly for trade publications and general business periodicals and is called on to present his expertise at seminars and conferences in manufacturing, wholesaling, chemical, pharmaceutical and commodity industries. His blog is www.sourcingguy.com.
“This year’s Provider Pros to Know have shown themselves to be thought-leaders in their respective supply chain segments,” said Andrew K. Reese, editor of Supply & Demand Chain Executive. “Their efforts in developing the tools and processes have enabled companies to weather risky economic conditions and place themselves in a position to surge ahead in better times.”