Home: Issue 3 2009 › Cover Story › A call to action
A call to action
03/06/2009 | Channel: Business
Patrick Furey, senior category manager at spend management solutions provider, Ariba, looks at the impact the global recession is having on supply markets
At a recent procurement conference an indirect materials manager made a comment that I thought summed up the current procurement environment quite well:
“I spent more than ten years in direct materials procurement, and I made the move to indirect a few years ago,” he said. “I have never regretted the move until now. Seeing raw material prices come down and supplier capacity open up puts the buyer firmly in control. I almost wish I was still in direct materials so I could turn the table on some of my suppliers.”
The bottom line is that the market for direct materials flipped completely within a six-week period starting in early October. The unprecedented plunge in raw material prices coupled with the widespread realisation that we were in the midst of a global recession left suppliers scrambling to fill capacity and buyers wondering how to adjust contracts to account for declines in raw material prices. Indirect and services markets soon followed suit, as buyers for everything from marketing and media to transportation were suddenly welcomed to the negotiating table by suppliers anxious to maintain their market share at all costs.
Examining the Data
It’s hard to believe that some market prognosticators were warning of $200 per barrel oil only six months ago. What happened to cause this sudden crash? Most economists point to a few main factors when discussing the current global recession:
There are some key indexes that procurement professionals should watch to keep up with supply markets as they react to overall economic conditions. In the US, the Institute for Supply Management (ISM) publishes an index of supply market activity for both the manufacturing (PMI) and non-manufacturing (NMI) sectors. The same data is available in Europe through Markit Economics, and manufacturing data for China is available through CLSA. The data is summarised below for 2008:
These indexes provide a decent measure of the overall health of a supply sector, since the readings factor key metrics in areas such as employment, inventory levels, bookings forecasts, and pricing forecasts. Essentially, an index reading above 50 indicates a market in expansion mode, and an index reading below 50 indicates a market in contraction mode, or recession. Using this criterion, the data indicates that both the manufacturing and services sectors around the globe are in recession, and a closer look at some historic data shows that this is a recession of historic proportions:
We are often asked by our customers for our opinion on where market pricing is heading. At a macro level, we generally look at GDP and inflation forecasts using government and world financial sources.
GDP Data
We use data from the International Monetary Fund (IMF) to track GDP data and forecasts around the globe, and while the information is available at a country level, we look primarily at two sets of data - one that charts growth rates in the US, Japan, and the EU; and one that charts growth rates in the rapidly developing economies of China and India. Analysing data for 2006 through 2011, points out some facts that many of us already know:
It pinpoints the start of a recovery in the US a little more precisely at the third quarter of 2009, or in the July-September quarter. We agree with this assessment, although we are a little more optimistic that a recovery could begin as early as May if government stimulus Recessionpackages are enacted to spur lending and job growth in both the public and private sectors.
Inflation
The most accurate and widely distributed inflation data is distributed again by the IMF. Unfortunately, this data is only available for Consumer Prices. However we are still able to draw trend conclusions using data from the same countries outlined in the GDP section to illustrate a few simple points:
Recommendations to all procurement professionals in every category and in every industry include the following three key elements:
1. Revisit Your 2009 Pipeline – Chances are that you set priorities for 2009 back in September or October, when market conditions were much different. We encourage everyone to revisit their sourcing pipelines and action plans for 2009, since many of the categories that were untouchable back in October are now back on the table. Look at everything, revise budget and savings estimates, and develop a new plan of attack quickly to take advantage of market conditions.
2. Renegotiate, Source, and Drive Savings – The unprecedented drop in raw materials prices and the excess capacity in nearly every market makes it imperative that companies take action to drive savings now. If you negotiated contracts in July through September of 2008 when prices were at their peak, arm yourself with data on market cost drivers and renegotiate with your suppliers. This could be as simple as triggering price adjustment clauses in contracts or as complex as completely
redoing contracts. If you have contracts that are up for renewal, now is the perfect time to lock in at low rates and drive competition.
3. Monitor Supplier Financials – The biggest concern that I have encountered as I have encouraged buyers to source and drive cost savings has been the financial health of their existing and potential new suppliers. This is a legitimate concern that absolutely, positively needs to be addressed. Let’s face it—times are tough, and they will stay tough through 2009. You will need to monitor the financial health of your key suppliers closely and perform periodic audits to ensure that you have continuous supply of goods or services. Assess risk in each relationship, and develop contingency plans along with distressed supplier action programmes. If necessary, you might need to be flexible with payment terms or assist suppliers with operational cost improvement projects in order to ensure that they remain solvent.
The market for buyers has never been better, and procurement professionals are in a unique position to drive cost savings to companies that need some financial stimulus.
Patrick Furey
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Patrick Furey currently serves as senior category manager in the Global Sourcing Operations organisation of Ariba. In this role, he leads a team of 14 category managers who cover markets ranging from steel and thermoplastic resins to temporary labour and transportation. Patrick was previously a category manager for the metals and plastics & rubber industries, where he provided technical expertise and managed the business pipeline for commodities ranging from injection-moulded plastics to metal stampings and steel.
Ariba
Ariba, Inc. is the leading global provider of on-demand spend management solutions. Our mission is to transform the way companies of all sizes, across all industries and geographies operate by delivering software, service, and network solutions that enable them to holistically source, contract, procure, pay, manage, and analyse their spend and supplier relationships.
www.ariba.com
“I spent more than ten years in direct materials procurement, and I made the move to indirect a few years ago,” he said. “I have never regretted the move until now. Seeing raw material prices come down and supplier capacity open up puts the buyer firmly in control. I almost wish I was still in direct materials so I could turn the table on some of my suppliers.”
The bottom line is that the market for direct materials flipped completely within a six-week period starting in early October. The unprecedented plunge in raw material prices coupled with the widespread realisation that we were in the midst of a global recession left suppliers scrambling to fill capacity and buyers wondering how to adjust contracts to account for declines in raw material prices. Indirect and services markets soon followed suit, as buyers for everything from marketing and media to transportation were suddenly welcomed to the negotiating table by suppliers anxious to maintain their market share at all costs.
Examining the Data
It’s hard to believe that some market prognosticators were warning of $200 per barrel oil only six months ago. What happened to cause this sudden crash? Most economists point to a few main factors when discussing the current global recession:
- The housing slump in the US that then spread to Europe
- The financial crisis that resulted from the housing slump, which rapidly spread across the globe
- The overall consumer spending slump that resulted from the financial crisis as banks tightened lending requirements l The decline of the US manufacturing sector (led by the automotive industry) that resulted from the consumer spending slump and started the steady stream of layoffs
- Irrational exuberance and speculation in commodity markets that had artificially inflated prices before the market crashed
There are some key indexes that procurement professionals should watch to keep up with supply markets as they react to overall economic conditions. In the US, the Institute for Supply Management (ISM) publishes an index of supply market activity for both the manufacturing (PMI) and non-manufacturing (NMI) sectors. The same data is available in Europe through Markit Economics, and manufacturing data for China is available through CLSA. The data is summarised below for 2008:
These indexes provide a decent measure of the overall health of a supply sector, since the readings factor key metrics in areas such as employment, inventory levels, bookings forecasts, and pricing forecasts. Essentially, an index reading above 50 indicates a market in expansion mode, and an index reading below 50 indicates a market in contraction mode, or recession. Using this criterion, the data indicates that both the manufacturing and services sectors around the globe are in recession, and a closer look at some historic data shows that this is a recession of historic proportions:
- The November NMI reading of 37.3 in the US is the lowest ever reported by ISM, and the PMI reading of 32.4 in December is the lowest since June of 1980
- The NMI of 42.1 and the PMI of 33.9 reported by Markit in December are the lowest activity readings ever for Europe
- The PMI for China has now been below 50 for five consecutive months, which is unprecedented for this rapidly expanding economy
- We are in a global recession
- The recession is hitting the manufacturing and services sectors equally as hard
- Suppliers have excess capacity that they need to fill, and they will compete to maintain business levels or simply to remain solvent
We are often asked by our customers for our opinion on where market pricing is heading. At a macro level, we generally look at GDP and inflation forecasts using government and world financial sources.
GDP Data
We use data from the International Monetary Fund (IMF) to track GDP data and forecasts around the globe, and while the information is available at a country level, we look primarily at two sets of data - one that charts growth rates in the US, Japan, and the EU; and one that charts growth rates in the rapidly developing economies of China and India. Analysing data for 2006 through 2011, points out some facts that many of us already know:
- Growth rates slowed in every region of the world in 2008
- The forecast is for even slower growth in 2009
- Global markets are widely expected to recover in 2010
It pinpoints the start of a recovery in the US a little more precisely at the third quarter of 2009, or in the July-September quarter. We agree with this assessment, although we are a little more optimistic that a recovery could begin as early as May if government stimulus Recessionpackages are enacted to spur lending and job growth in both the public and private sectors.
Inflation
The most accurate and widely distributed inflation data is distributed again by the IMF. Unfortunately, this data is only available for Consumer Prices. However we are still able to draw trend conclusions using data from the same countries outlined in the GDP section to illustrate a few simple points:
- Inflation rates tracked higher on a global scale in 2008, but most of this took place in the early part of the year
- Forecasts are for modest inflation rates in 2009, continuing through 2011
- Rapid escalations in commodity prices are not in forecasts for at least the next two years
Recommendations to all procurement professionals in every category and in every industry include the following three key elements:
1. Revisit Your 2009 Pipeline – Chances are that you set priorities for 2009 back in September or October, when market conditions were much different. We encourage everyone to revisit their sourcing pipelines and action plans for 2009, since many of the categories that were untouchable back in October are now back on the table. Look at everything, revise budget and savings estimates, and develop a new plan of attack quickly to take advantage of market conditions.
2. Renegotiate, Source, and Drive Savings – The unprecedented drop in raw materials prices and the excess capacity in nearly every market makes it imperative that companies take action to drive savings now. If you negotiated contracts in July through September of 2008 when prices were at their peak, arm yourself with data on market cost drivers and renegotiate with your suppliers. This could be as simple as triggering price adjustment clauses in contracts or as complex as completely
redoing contracts. If you have contracts that are up for renewal, now is the perfect time to lock in at low rates and drive competition.
3. Monitor Supplier Financials – The biggest concern that I have encountered as I have encouraged buyers to source and drive cost savings has been the financial health of their existing and potential new suppliers. This is a legitimate concern that absolutely, positively needs to be addressed. Let’s face it—times are tough, and they will stay tough through 2009. You will need to monitor the financial health of your key suppliers closely and perform periodic audits to ensure that you have continuous supply of goods or services. Assess risk in each relationship, and develop contingency plans along with distressed supplier action programmes. If necessary, you might need to be flexible with payment terms or assist suppliers with operational cost improvement projects in order to ensure that they remain solvent.
The market for buyers has never been better, and procurement professionals are in a unique position to drive cost savings to companies that need some financial stimulus.
Patrick Furey
')";>')";>')";>
Patrick Furey currently serves as senior category manager in the Global Sourcing Operations organisation of Ariba. In this role, he leads a team of 14 category managers who cover markets ranging from steel and thermoplastic resins to temporary labour and transportation. Patrick was previously a category manager for the metals and plastics & rubber industries, where he provided technical expertise and managed the business pipeline for commodities ranging from injection-moulded plastics to metal stampings and steel.
Ariba
Ariba, Inc. is the leading global provider of on-demand spend management solutions. Our mission is to transform the way companies of all sizes, across all industries and geographies operate by delivering software, service, and network solutions that enable them to holistically source, contract, procure, pay, manage, and analyse their spend and supplier relationships.
www.ariba.com