Have you seen your suppliers lately? As the economy still struggles through a slow recovery — it makes sense to pay your suppliers a visit.
Are you wondering what pressures are building over the next year?
Our ADR eBulletin provides some quick insights on those two questions. It’s worth a look.
Happy New Year? Or Not?
According to the Institute for Supply Management’s latest Manufacturing ISM Report On Business®, “the manufacturing sector expanded in December for the fifth consecutive month, and the overall economy grew for the eighth consecutive month.”
Nevertheless, as we look at the year ahead we are still recovering from one of the worst economic climates since the Great Depression. There is little doubt that suppliers in commodity channels will be again at the mercy of their customers for lower costs, green products, inventory-free supply chains and stretched out payment terms.
I think we can also expect major initiatives from leading global supply managers, as they adjust to the new landscape and try to find ways to gain a competitive edge or hedge their bets to protect against the dangers of an economy recovering in fits and starts. Already we have seen a major announcement from Wal-Mart saying it wants to achieve lower costs by going to sources directly — cutting out the middle level of distribution. I have also read that there the giant retailer will push to get supplier support of green initiatives.
Many companies that have reduced demand will not be as willing to add capacity quickly until markets and customer demand level off. Consequently, that reluctance will likely bring shortages in some categories. It is also likely that we will see prices rise sporadically as demand and supply go out of balance. Overall, increasing activity in 2010 will bring increased prices and inflation.
Supply management talent, already in short supply, will become increasingly tough to come by this year, and companies will have to make investments to attract, develop and retain people who can generate value from the supply chain.
These are significant challenges, but I am looking forward to working through them as the new year unfolds.
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.”
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:
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.
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.
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.
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.
Chief executive officers, maybe you haven’t been pumping your own gas, but every one of your suppliers has, and there is no way they are going to be able to absorb 30 to 40% increases in fuel costs and stay in business. Dow Chemical just announced a 25% hike in its prices. Steel prices are also setting records. Pizza makers are spending more dough, not making it when they look at wheat prices. The world of business buying has spun completely around in the last months, and you had better sit down with your other “C-level” folks to realign your expectations of what you can deliver.
I was in a very recent meeting with managers of an equity fund who apparently have not read a newspaper in the last six months. They were still expecting the purchasing team to deliver improved margins and lower costs from the supply chain. I guess its our own fault as purchasers that over the past ten years we generally could deliver value to the bottom line by strategically managing categories, building good supplier relationships when it mattered, and mitigating risk wherever it appeared in the supply chain. CEOs have been able to wish money out of the supply chain because we could make it happen.
However, just when we had you CEOs convinced of the difference we could make, the hurricane hit, the levees broke and the world was hit with a flood of rising commodity prices. From our work with a dozen companies buying many commodities, I can tell you that what we are experiencing is a very broad trend that shows no signs of stopping.
It is time for CEO’s and CFO’s to realize that the significant decline in the economy, combined with high inflation, capacity reductions and suppliers struggling to survive have created a very different buying marketplace. Budgets built on cost improvement are now at risk. Your buying teams must focus on cost containment. In many cases they will be applying the same tools, but their goals have to fit today’s realities.
