The ISM Report on Business for November pegged its Manufacturing Index of 52.7 percent. That’s 1.9 points higher than the October number and continues a 28-month trend of growth. The October number was perilously close to ending that growth streak, so the increase in November suggests that the U.S. manufacturing sector continues to pass the “stress tests” of lingering high unemployment, a lethargic housing market, and global financial worries.
(Over the Thanksgiving weekend, a record 226 million shoppers visited stores and websites and spent an estimated $52.4 billion, so consumers seem to feel the same way.)
Of course, the Report also showed manufacturers are hiring, but not very quickly. As one respondent said, “Trying to do twice the output with the same amount of people.” So slow growth with minimal new hires appears to be the “new normal.”
The skills of current staff are critical to success in an environment like this. Smart companies are using the chance to upgrade the skills of staff — figuring they won’t be hiring soon, and neither will competitors, so it’s worthwhile to invest in current employees. Popular topics for training are negotiations and cost analysis — although effective procurement now requires much deeper skills in supplier relationship management building long-lasting strategic relationships. What are you doing to keep your team sharp?
In the two years since we launched the ISM-ADR School for Supply Management, we have seen remarkable demand for professional development from global companies doing business in Asia.
I’m very pleased to announce that we will be significantly expanding our presence there with a new partnership we have created with Procurement and Sourcing Institute of Asia and TransProcure Corporation (PASIA/TransProcure), both based in Manila, Philippines. Like ISM and ADR, these two organizations recognized the value of collaboration and have been working together for some time. Creating a new consortium of four organizations will ensure that any company operating in Asia will have access to consistent, high quality professional development resources. We are excited to be helping improve the skills of supply managers in this fast-growing region of the world.
Read the full release on Business Wire.
As companies bring smart purchasing strategies to new categories of spend, there is a danger for procurement professionals who are too eager to prove their worth. While management in production or engineering may have become familiar with cross-functional teams addressing a sourcing issue, marketers and other owners of indirect spend often have had very little experience working with procurement professionals except at the administrative level. They are likely to view any involvement as an intrusion into their professional relationships.
Good guidance for procurement staff is to approach those situations with a goal to collaborate, not dominate. Look for small successes to build trust, not home runs in the first few innings. Fred Parkinson wrote a nice piece about engaging stakeholders for our eBulletin last summer. Click here to read it.
I’ve been on the road for weeks now, conducting dozens of procurement workshops all over the country for global companies. We can take that as another supporting indicator that businesses are coming out of the “batten down the hatches” mentality that often comes with a recession. To meet a growing demand — real or projected — for their products, manufacturers and others must have their supply chains reliable, but lean, and providing solid value.
But the demand for training also demonstrates how much companies lost as they “retired out” experienced procurement talent over the last two years. In a way, the slow recovery is buying some time for smart companies to rebuild their supply management skills through professional development.
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.
We enjoyed a supply managers’ market for over a decade where cost improvement and value improvement was a way of life. But record commodity prices, like $100 per barrel of oil, record wheat and soaring precious metal prices, has not only penetrated many of our supply chains, it has had a profound impact on the U.S. and global economies.
Supply managers are kidding themselves if they are not planning for cost increases in steel, aluminum, plastics, chemicals, freight, fuel, capital equipment and travel resulting from the dynamics of oil and energy markets. Many suppliers, working on already thin margins, will be aggressively pushing through price increases in 2008. Before they hit, here are three things to do to prepare for them.
1. Forecast your exposure. How much do you know about your suppliers’ cost structures? How much is actually tied up in commodity materials that are rising rapidly in price? If you can’t realistically do a full cost analysis, you can do a price analysis of your suppliers’ materials inputs. Knowing that could help create a negotiation environment where costs become transparent and the discussion turns to cost containment solutions for you and your supplier both. For instance, there may be alternative designs or materials worth considering.
2. Condition against increases. Your expectation should be that over time your suppliers should be continuously improving — creating efficiencies that bring more value for your purchases, or lower your costs. Make it clear that price increases run against the grain of those principles. They should be hard to accept and suppliers should know that. Requesting an increase should be “difficult,” requiring the sales representative to work hard. Demand three months notice, in writing, of all increase requests and insist that they are accompanied by a detailed statement of the actions the supplier has taken to reduce or eliminate the need for an increase. A rigorous internal approval system will deter supply managers from recommending increases they might otherwise waive through because of time pressure or the desire for a quiet life.
3. Preempt the increase. If you haven’t already, this is a good time to investigate other suppliers, prepare RFQs or RFPs and distribute them before you receive requests for higher prices. Find out what changes your suppliers have made. A new plant might have brought productivity improvements that would justify a price reduction. The same might be argued about higher volume sales covering the same overhead. Working ahead of your supplier could change the whole structure of the negotiation in your favor.
All these actions can prepare you for the inevitable.
ADR North America, based in Ann Arbor has been a leader in purchasing consultancy for more than twenty years.
ADR North America is part of a global group of consultants – ADR International — in Australia, North America, South Africa and the United Kingdom who have worked with over 200 clients in more than 50 countries. Among our clients are many of the world’s largest companies. Our consultants are recognized experts in the field and have authored hundreds of articles and commentaries in professional journals.
Our products and consultancy services have proven their ability to transform global company purchasing operations. We can start with innovative baseline assessments, move on to create and implement purchasing category strategies, and finish by developing staff skills to bring increasing value to a company. As appropriate, our consultants can deliver all or any part of a purchasing transformation. In short, ADR is purchasing knowledge, applied.
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