Buyers' Biggest Challenges in 2012
January 31, 2012
In this Expert's Corner, GovPro.com's Mike Keating explains what new challenges and opportunities industrial purchasers can expect this year.
Is manufacturing back on its feet? FLEXcon's John Bennett doesn't think so. "The year 2012 has been a slow start to what was thought to be a year of recovery in the industrial sector," Bennett, vice president of FLEXcon's product identification business team, says.
"We continue to lick our wounds from the dramatic raw material price increases experienced in the first half of 2011, and even though prices have started to stabilize, most companies have not been able to pass on the pain. The perceived recovery of the automotive industry is a good sign, and it's starting to show growth in some segments of our business, but the tide has not risen yet across the whole industrial sector, so there is extreme skepticism about what 2012 will truly bring with regard to growth."
Spencer, Mass.-based FLEXcon develops and manufactures pressure-sensitive films and adhesives that are used on product labels. The company, which is family-owned and privately held, coats, laminates and embosses films.
Bennett says his firm is a good barometer for what is happening in the market "because every industrial product sold in the world needs brand identity labels, instructional labels, caution and warning labels and, in most cases, rating plates that carry a certification from either UL, the Canadian Standards Association, or both."
Bennett says he is optimistic about his firm's prospects for 2012, even though "the honest answer is, being the [market] leader, we are not experiencing the growth in this market segment that everyone expected." He says FLEXcon can rapidly respond if market demand picks up.
Some purchasing surveys show manufacturing activity is picking up. The latest Manufacturing ISM Report on Business from the Institute for Supply Management found that economic activity in the manufacturing sector expanded in December for the 29th consecutive month, and the overall economy grew for the 31st consecutive month.
PricewaterhouseCooper's (PwC) most recent Manufacturing Barometer report also had some good news for manufacturers.
"While the barometer indicates a lot of uncertainty in U.S. and world markets, it also indicates that revenue growth will continue, so the manufacturer needs to position its products in growth areas," according to Barry Misthal, global industrial manufacturing leader for PwC. "Since industrial buyers have limited capital budgets, it is important that they make strategic and impactful purchases that will enable growth."
"Things are percolating. It's not a boom year, but things are getting better for manufacturing in 2012," John Mothersole, principal economist at forecasting firm IHS Global Insight, explains.
Mothersole urges industrial buyers to keep an eye on one commodity: "We see steel prices bumping up a little bit as we move through the first half of 2012. In fact, we are already seeing signs that steel prices are starting to move, and our advice is, if you haven't already purchased or locked in for the year, you've missed the low, and if you don't move quickly, you are going to get hit with some further increases."
Steel prices, Mothersole tells IMT, are coming off their low. Hot-rolled sheet, a benchmark commodity-grade product, was selling for an average price of $757 per metric ton during the fourth quarter of 2011 in the U.S. "Our expectation is that the average price in the first quarter of 2012 is going to rise to $792 a ton, and then in the second quarter 2012, it will climb above $800 — to $847 per metric ton," Mothersole says.
"Volatility is the new normal. This is especially true in terms of predicting what will be noteworthy in commodities in 2012 as pricing could have 20 percent-plus swings," Lisa Anderson, founder and president of LMA Consulting Group, says.
"Every company that relies on components derived from oil and natural gas will need to think carefully about how much risk they're willing to absorb and develop risk mitigation strategies," Anderson adds. Her consulting practice focuses on change management (M&As and turnarounds), process control and project management.
Currency exchange rates will also be a factor in 2012 industrial buying, according to James Jenkinson, vice president at Efficio, an international procurement consultancy. "It is likely there will be significant shifts in exchange rates, given the euro situation and continued growth in developing economies putting additional pressures on exchange rates. Managing exchange rate risk is critical where it may be necessary to hedge for large spend areas and even to push suppliers to price in your primary currency (e.g. the dollar)."
On the tax front, the extension and expansion of bonus depreciation through 2012 is of high importance to industrial buyers in 2012, Andy Hammons, a principal in the federal income tax practice at Ryan, LLC, says.
"The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 permitted taxpayers to elect a bonus first-year depreciation deduction on qualified depreciable property equal to 100 percent of the adjusted basis of eligible property for the year 2011. This 100 percent rate applied to assets purchased on or after Sept. 9, 2010, and before Jan. 1, 2012," Hammons explains. "Assets purchased during the 2012 calendar year qualify for a 50 percent bonus depreciation deduction. There is no limit on the amount of the deduction, yet there are certain criteria that must be met to be eligible for it."
A couple of factors are driving companies in their purchasing approach, Hammons says. "In essence, the tax breaks and low cost of capital justifies the purchase of new machinery and equipment, as opposed to hiring new employees to utilize existing equipment."
The procurement team could see its value grow in the organization this year, according to Rosslyn Analytics' technology predictions for procurement executives in 2012.
"As executive teams realize the value that procurement has delivered for their organizations, e.g. improved profitability, finance will assert more ownership of the purchasing function. On the flip side, procurement's stature will continue to grow internally, becoming a strategic business advisor to internal stakeholders."
Rosslyn Analytics is a developer of one-click data discovery and business intelligence software.Michael Keating is senior editor for Government Product News and a contributing editor for American City and County, both published by Penton Media Inc. Keating has written about do-it-yourself market research for manufacturers and manufacturer-distributor relationships for IMT. Find out how manufacturers will be affected by 2012 government budgets in his latest forecasts at GovPro.com and IMT. Keating has written articles on the government market for more than 100 publications, including USA Today, Sanitary Maintenance, IndustryWeek and the Costco Connection. Mike can be reached through his website, MikeKeat.net.