ISM CEO Paul Novak

October 27, 2009

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In this edition of the Expert's Corner, Institute for Supply Management CEO Paul Novak weighs in on commodity and energy prices, risk-management strategies and Wal-Mart's Sustainable Product Index.

As supply chains become more complex, businesses are finding it increasingly difficult to respond to global challenges. The continued economic downturn has added more complications to an already precarious global supply network, including resource constraints and volatile material prices.

As the third in a new series that highlights the views of industry experts, IMT recently picked the brain of Paul Novak, the chief executive officer of the Institute for Supply Management (ISM). Based on data compiled from purchasing and supply executives nationwide, ISM's monthly Manufacturing Report on Business® takes into account the approximate weighted number of days ahead for which production materials commitments are made.

Here Novak weighs in on future commodity and energy prices, Wal-Mart's Sustainable Product Index, adequate risk management and the biggest challenges facing supply chain professionals today.

IMT: Between weak nonresidential construction activity and a sluggish market for building materials, not to mention generally lagging Detroit auto sales, are most supply chains still in survival mode? Or have many adapted to view the economic downturn as an opportunity to expand business?

PN: Supply chains, other than automotive and housing/building related, are suffering problems — but nowhere to the same extent as before. Most large companies have dealt with the issue of financially weak suppliers and have turned their attention toward assuring they will be able to meet demand as the economy recovers.

IMT: Looking ahead, many buyers are concerned about near-future price increases for various commodities. Based on ISM's outlook, should purchasers expect inflation, in the form of rising raw materials prices and energy costs, to affect them significantly over the next year?

PN: While ISM is not in the business of long-term forecasting (we employ no economists), I do have frequent occasions to interact with the chief procurement officers of large companies. Based on these interactions and what I have read in the business media, I have formed some opinions.

For one, it is likely that we will see increasing prices for some commodities, including energy, over the next year. However, if the economic recovery is slow, it is likely these price increases will be manageable. In the longer term, it is likely that commodity and energy prices may well rise to a problematic level.

IMT: This summer, Wal-Mart announced an initiative that will establish a single source of data for evaluating the sustainability of products. What will be the immediate and long-term effects of Wal-Mart's Sustainable Product Index on its 100,000+ suppliers, at a time when many are struggling economically?

PN: Wal-Mart's Sustainable Product Index is laudable in its intent. Because it is Wal-Mart, it will help move the whole concept forward due to Wal-Mart's size and buying power.

The index is in its infancy and may lack the completeness that it will eventually achieve. There can be significant barriers to full implementation. Cost to the supplier is certainly one barrier. Also, the supplier or someone somewhere else in the supply chain may not be willing to disclose some information because they view the information as proprietary.

Wal-Mart is also taking significant risk. Somewhere down the line, a product or products index is going to be challenged by some group who has better information which discredits the index. It is however, a beginning.

IMT: While on the topic, risk has become a top priority for almost every job function across nearly all organizations today, but especially for those in sourcing and purchasing. What are the key drivers and characteristics of an adequate risk response strategy?

PN: When we speak of risk, we tend to focus on external risks, which makes sense. However, we have internal risks that also should be included in our strategic development.

For example, we look at the risk that key suppliers may have financial difficulties. We also should take care to see what the internal financial risks are in our own company. That is, our company may be profitable but still burning cash at an unacceptable rate.

We must recognize that risk can seldom be eliminated; rather it needs to be managed. We must educate ourselves to always evaluate the trade-offs between risk and reward. We must ensure that our company has a clear strategy about managing risk. This is essential if we are to decide and act in a manner that the company can and will support.

IMT: What are the biggest challenges facing supply chain professionals in the near future?

PN: Clearly, the biggest challenges facing supply management professionals in the future will come in two broad areas. One is your personal skill set, which will need to include an understanding of financials such as balance sheets, P&L [profit and loss] statements and cash flow. These skills help you understand the situations of your company and your suppliers and their supplier.

The other is the environment, both internal and external to your company. Understanding the business environment your employer is in is vital. It is not enough to simply know times are tough. You need to know what business your employer is in, how it makes money and how you can best support both the short- and long-term needs of your employer.

Paul Novak, CPSM, C.P.M., A.P.P., is the chief executive officer of the Institute for Supply Management (ISM). Paul has been with ISM since 1988 and led the institute in the implementation of a Board of Directors comprised of senior officers at major companies. Following this change, Novak led the organization in broadening its focus from purchasing to supply management. Paul was the staff editor of ISM's four-book Knowledge Series on purchasing management. He is in his second year of a two-year term as president of the International Federation of Purchasing and Supply Management and currently serves on the Federal Acquisition Innovation and Reform Institute's board of directors.

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