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

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.

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

Lean, Green, Global Machine

You’ve heard of carbon dating — but in Japan and the UK at least, consumer product companies have begun rolling out “carbon labels” on what they sell. The labels tell purchasers the amount of carbon dioxide released during the manufacturing, marketing, distribution and likely disposal of the product.  Procurement professionals are adept at looking back through a supply chain — but this approach also has us “forward thinking” through the whole lifecycle of a product.

I think sustainability initiatives are likely to be with us over the long haul. They are themselves sustainable, if you will, so we should be prepared to manage them. One of the basic steps is to establish your enterprise’s standards for evaluating environmental impact. The rise and fall of ethanol is a great example of how an idea for moving away from fossil fuels was tarnished by questions about its overall impact and the pressure it puts on food supplies.

Japan, the UK, and Scandinavian countries are moving quickly to create independent assessments of sustainability. The carbon labeling is just one example. Here in the U.S., we have Leadership in Energy and Environmental Design (LEED) standards for buildings. A Green Restaurant trade group has set up a certification process for “sustainable dining,” and you can look to your own industry groups to find out how they are setting standards for sustainability.
In the absence of industry metrics – you might follow the example of Herman Miller, which set itself these goals by 2020:
•    zero landfill
•    zero hazardous waste generation
•    100% green energy
•    all buildings LEED Silver certified
•    100% of sales from products designed for the environment
Those targets may be aggressive for your company, but they do provide a good framework for prioritizing and measuring green progress. Back them up by planning and executing steps to reach them. Once your own house is in order, you can turn to your suppliers – wherever they are – and negotiate standards for them.
What is absolutely clear is that companies can no longer ship their environmental issues to offshore suppliers. Even in countries where regulations may be lax, watchdog groups are vigilant, and bad news travels at Internet speeds.
The imperatives are clear, but like any transformation, it may not happen overnight. Still, with continuous support, you can turn your company into a lean, green, global machine.

Riding the economic Tsunami

Darwin probably said it best – the fittest will survive. That’s also the assessment of my colleague in the UK, Robin Jackson, CEO of ADR International. If you haven’t seen ADR’s newsletter, this is what he had to say:

“The business environment has changed fundamentally and we will have to look back to the great depression of the 1930s, the collapse of South American economies in the 1970s and 1980s and Japan’s “lost decade” of the 1990s to draw lessons.

In this radically changed environment it is vital for the survival of businesses for procurement leaders to consider new ways of handling these challenges and develop new offensive and defensive sourcing strategies.

Remember this is a once-in-a-century readjustment of prices. Only if you are bold and act speedily will your business survive. Your competitors will be doing it and to survive you will need to do it too.

It’s time to call in the favours – if ever there was a time for strategic co-operation with key suppliers, this is it. If they don’t live up to their part of the strategic partnership billing, move swiftly to find alternative partners. Leverage your strategic supplier relationships. Be demanding and move rapidly.

Conserve your cash. Even if your business can borrow it is more expensive to do so now. So extend payment terms to the maximum without damaging the viability of your suppliers.

If you receive a price increase request then the supplier must be having a joke. With basic commodities falling in price by 40 per cent or more (a barrel of oil is down 70 per cent) how can any supplier claim their input costs are increasing? Any increases caused by the fall in the value of currency will be more than offset by the collapse in input prices.

Your defensive strategy should include preparing now for possible disruption of your supply chain. Disruption can result from suppliers going bankrupt, economic meltdown in countries, significant currency fluctuations and political unrest, so plan carefully how your business will manage it by developing detailed countermeasures.

In China the number of bankruptcies has increased significantly and this has led to an increase in social instability – imagine the chaos if a new political regime closed China’s borders to the West again, or Russia switched off the gas.

We need more than ever to be aware of currency movements and take them into account in all our procurement decisions. Given the volatility now inherent in the world economy, today’s low-cost destination of choice could be tomorrow’s high-cost country to avoid.

In this climate, it almost certainly makes sense to shorten your supply chain to reduce risk and vulnerability, so local sourcing could become the new must-do procurement strategy to replace the obsession with low-cost country sourcing of recent years.


These are unprecedented times. So our strategy for 2009 should be: be bold, be brave, act swiftly and be ruthless. Develop new offensive and defensive ideas and ways of working. Only then will you and your business have a chance to survive this economic tsunami.”

Thanks, Robin. We should all bookmark this. Post it on our desktops and build it into our work plan every day for 2009.

Find more articles by Robin and others at our ADI International web site. 

 

Follow the Money When You Rescue Detroit’s Big 3

People throughout the Midwest are stunned by the barrage of questions hurled at the captains of the automotive industry by Washington insiders, but there is a question that hasn’t been asked that probably should be: Where is the money going to go?
All three Detroit companies argue that they are the engines behind a huge supply chain of companies that forms the backbone of the U.S. manufacturing base. And while that still has some truth, the fact is that GM, Ford and Chrysler have all been backing out of U.S. manufacturing for years.
Caught between the unrelenting cost pressure of foreign manufacturers and union, pension and health obligations that could take a generation to shed, Detroit’s original equipment manufacturers, or “OEMs” have enthusiastically embraced the strategy of sourcing parts from low-cost countries. They started in Mexico, but over time, they have pushed suppliers to eastern Europe, China and other Asian sources.
Three years ago Bo Anderson, General Motors vice president of global purchasing and supply, proudly announced that GM had increased the share of parts it sources from low-cost countries, saving from 20% to 30%. He said to GM’s supply base, “if you are a world-class runner, your competition is global.”
Just last August, John Campi, Chrysler executive vice president of procurement, said Chrysler aims to cut supply chain costs by 25%.
In a way, the strategy of price-buying and low-cost-country sourcing has decimated and bankrupted the entire supply chain.  It is not difficult to understand that a bankrupt supply chain eventually worked its way up to the Big 3.
The key question that comes to mind as these executives prepare their plans to save the industry is: How much of the federal tax money will flow down the supply chain, and where precisely will it go?
Will the strategy of off-shore sourcing continue under the federal assistance? Members of Congress and others argued that funds shouldn’t be subsidizing job banks in America where people are paid for simply showing up. Should they instead be subsidizing factories in China, Russia or Vietnam?
Congress seems to be insisting that the industry restructure itself, but the way that is going now is by driving the automotive supply chain overseas. If the national interest in the automotive industry is to maintain and grow a domestic manufacturing base – how does that reconcile with the direction the industry has been heading for a decade?

Roller coaster diesel prices may be masking a new carrier pricing cycle

They took off like a rocket and fell like a stone. The spike and subsequent plunge in diesel prices over the last six months has quieted many analysts who are normally quick to give you a prediction of fuel costs. Roll in the unknown effects of a global credit freeze, a stock market free-fall and you have a shipping environment unlike anything we have seen in the past.
David McClimon, who has spent over 28 years in the transportation industry and most recently ran Con-way Freight, is now advising some of our clients on their transportation and logistics issues. I asked him to contribute to this blog, and here’s what he had to say….
——
Before the spike, carriers had been chasing a declining level of tonnage, keeping rates low. During the price spiral, fuel surcharges swung the price pendulum emphatically the other direction. As fuel prices came down, common wisdom would expect the pressure to keep rates down would exert itself again. This seems especially true as shipments in core industries such as auto have dropped dramatically. In short, any company that is still shipping should be in the driver’s seat on prices.
Before we all celebrate too much, though, there are warning signs ahead. The surge in diesel fuel prices put many marginal carriers right out of business. According to America’s Commercial Transportation research group, more than 45,000 vehicles, or 3% of the tractor fleet, have disappeared from the industry since last year. Carriers with at least five trucks are going out of business at an accelerated pace. The American Trucking Association reports that in the first quarter of 2008, 935 operations shut down. This is up from 385 in the first quarter of 2007 and is the highest quarterly failure rate since the 2001 recession.
Don’t expect the contraction to end quickly, either. There are analysts projecting truck capacity in the U.S. to drop at a rate of 2% per quarter, or 6% by mid-2009. Add that to the number already gone and we might have a total capacity loss of more than 10% over an 18-month period.
When the economy turns, capacity is not likely to come back as quickly as demand, and prices may rise accordingly. Of course, no one is ready to predict the timing or the pace of a turnaround, so there is considerable uncertainty in the market.
Whenever uncertainty is high, risk is also preeminent. Here are some ways to mitigate risks if your business expects to survive this recession and capitalize on a recovery:
1.    Be sure your fuel surcharges are current – based on latest, falling prices. With barrel prices collapsing a week’s change could be a big change.
2.    Assess the financial health of your most important carriers. Do they have the resources to deliver right through a recession? Failure of a strategic supplier could disrupt your supply chain during a downturn. Weigh the benefits of leveraging now with the risk of losing the low-bid carrier to bankruptcy and the cost of lining up new carriers when the capacity is scarcer and carriers have the upper hand.
3.    If you see an opportunity to take advantage of current overcapacity, do so carefully. Evaluate each situation individually. You might be able to lock in long-term base rates that make you look very good in 18-months, but only if your carrier is still in operation. There is no good reason to leverage your current advantage into a supplier failure.
In summary, look through the wild swings of fuel surcharges to the fundamentals that are still at work in logistics. Don’t get caught up in driving prices down unless you have carefully assessed your supplier.
Establish relationships, because if you plan on being in business 18 months from now, you want your primary carriers to be in business as well. Those shippers that have been able to develop long lasting relationship with their carriers, vs. taking advantage of short term pricing pressure opportunities will be in the best position when the power of the pricing pendulum swings in favor of the carrier.