Tag Archives: energy costs

Economy predictions and interest rate hikes: Is it a buyer’s or seller’s market?

Setting your strategy through 2016

In today’s economic environment, how should procurement professionals look at the market?

Let’s review the forecasts. Most economists are forecasting growth through 2015 and accelerated growth through 2016 with leading forecasters predicting that the world economy will grow between 2.8 and 3.0%. Looking at the October 2014 forecast of the International Monetary Fund (IMF), world growth was measured at 3.3% for 2014. There is little doubt that the US is leading the way with strong performance and lower unemployment numbers. However, while Janet Yellen sees “some of the headwinds that have been holding the economy back are beginning to recede” and sees a possible interest rate hike in as a sign the economy is healthy, what impact will a possible June interest rate increase have on the tricky financial supply chain?

As I review these numbers, consider the decline in oil pricing, increase in consumer spending and predictions of a strong global economy, I am placing my bet that the buyer’s market of cost containment, available supplies and increasing volumes back to pre-recession levels is here for a while, even if interest rates start to raise this summer.

Buyer’s market is great news as procurement professionals prepare plans for 2016. It’s always a challenge and worry when setting standards and budgets, but it looks like buyers can go forward with a great deal of confidence. Understanding the macro and microeconomics is an essential skill required by any purchasing professional.

Go forward with some confidence and capitalize on the buyer’s market as long as you can.

Make hay while the sun shines.

Reactions to new EPA regulations run the gamut

Reactions this week to the new EPA regulations to cut carbon pollution from power plants ranged from the most dire to the most delighted, depending upon one’s industry, state or inclination for all things environmental.

On one hand, the new regulations will result in lost jobs and higher electricity rates.  On the other, they will improve our climate, our health and ultimately lead to greater innovation.

The energy space is a complex one, and the effect of these regulations will not be as cut and dried as some might think.  For example, weren’t we headed in this direction already?  Industries have been shifting to natural gas because it’s cheaper, and wind and solar are bringing up the rear.  In addition, each of the states will be able to select their own method of implementation from a menu of policy options.

This is a long way out and we’re just getting started.  There’s a public comment period, and the regulations themselves could be challenged in congress as well as the courts.  States have two years to submit their plans to achieve the targets, and it’s always possible they could get extensions to their timetables.

I’d like to hear your thoughts on the regulations.  Is the sky falling as Chicken Little squawked or is this the best birthday ever?

2011 starts with manufacturing momentum

Yesterday’s ISM Manufacturing Survey reported economic activity in the manufacturing sector expanded in December for the 17th consecutive month. Norbert Ore, chair of the ISM manufacturing survey committee said, “the average PMI for January through December (57.3 percent) corresponds to a 5.1 percent increase in real gross domestic product (GDP).” That’s based on the historical relationship between the manufacturing index and the GDP.

The story for procurement professionals in the report is that manufacturers noted price increases in 23 different categories of commodities. Metals, chemicals, fuel, and grains were all there. Since the whole world seems to be shaking off the recession, upward price pressure is likely to continue for the foreseeable future.

Oil seems to be a particularly worrisome category. According to the Wall Street Journal, Goldman Sachs is predicting crude oil prices up to a $100 per barrel again this year. However, the Journal also says OPEC has a self-interest in keeping price hikes moderate because the giant spike in 2008 was one of the factors that killed the global economy. According to the Journal, that might have been a short-term windfall for OPEC, but the more stable prices through 2010 were really a better long-term deal for oil producing countries. And consumers as well. If oil prices cannot be contained and other commodities spike as well, the slow growth out of recession could still be in jeopardy.

 

Hope that the economy’s accelerator is “sticking”

The latest ISM Report on Business finds the manufacturing sector on a quickening upturn — it’s fastest  since 2004. The results confirm what we are hearing in our discussions with clients. Stable energy prices and continuing high unemployment may be staving off significant inflation threats for the time being — although manufacturers did report more cases of rising prices in the March survey. We are continuing to watch that closely.

Here is the summation of the results from Norbert Ore, CPSM, C.P.M., and chair of the Institute for Supply Management™ Manufacturing Business Survey Committee.

“The manufacturing sector grew for the eighth consecutive month during March. The rate of growth as indicated by the PMI is the fastest since July 2004. Both new orders and production rose above 60 percent this month, closing the first quarter with significant momentum going forward. Although the Employment Index decreased 1 percentage point to 55.1 percent from February’s reading of 56.1 percent, signs for employment in the sector continue to improve as the index registered a 10 percent month-over-month improvement, indicating that manufacturers are continuing to fill vacancies. The Inventories Index provided a surprise as it indicated growth for the first time following 46 months of liquidation — perhaps signaling manufacturers’ willingness to increase inventories based on expected levels of activity.”

Link to a comprehensive summary:  http://www.ism.ws/ISMReport/MfgROB.cfm

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.

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

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

 

$100 Per Barrel Oil

They may only be bumping up against it now, but oil prices will soon hit and exceed $100 per barrel, and prices aren’t likely to drop substantially for the forseeable future. The reason for that is summed up in two countries: China and India.

Increased competition for the scarce oil from developing nations such as India and China are likely to keep the pressure on the price of oil for some time. Smart buyers who have watched the price go up have already created category strategies and relationships with their supply chain to manage the higher costs. Those who have not may be forced to look for strategic alternatives in energy and some raw materials in order to survive.

The $100 benchmark will significantly impact the Michigan, U.S. and global economies. The triple-digit price has a huge psychological impact that will affect consumers as well as every buyer throughout the supply chains that create consumer products. If they haven’t paid enough attention to the rising cost of fuel, the $100 mark is a loud wakeup call.

Buyers in every industry will be making cost containment an even higher priority than it has been, because oil provides more than just energy and fuel for shipping products. Industrial buyers will be encountering significantly higher costs for freight, plastics, chemicals, steel and travel.