Procurement Trends & Tips

August 7, 2007

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Between mounting materials prices, skittish supply and inefficient p-card programs, today's procurement professionals are facing intense issues ... but have the tools and know-how to overcome them.

Despite the housing bust, the overall economy still is growing. In fact, manufacturing activity in July expanded for the seventh consecutive month, according to Purchasing magazine's monthly survey of buyers.

At the same time, however, the index of business activity was the slowest since January. And in a recent survey of 356 buyers by the magazine, most agreed that the United States economy will grow at a sluggish pace in the second half of this year.

Rising Prices In addition to the housing market slowdown, one of the key factors buyers cited for the slower pace was materials prices. "Strong global growth has pushed industrial commodity prices to new heights in 2006 and 2007," the trade pub recently noted. "This has wreaked havoc with procurement budgets and created a quandary for buyers trying to forecast pricing trends in the second half of this year and into 2008."

Although there was no real consensus whether commodity prices will level off and decrease slightly in the second half of this year, most buyers polled said they expect prices to stabilize with a softening of the economy in general, at least.

"Raw material pricing continues to pressure and depress the overall economic outlook," one purchasing manager told Purchasing magazine, adding that second-half sales at his company will be down 5 percent to 10 percent.

Several buyers cited energy and fuel prices as having a major impact on the second-half economic direction. Second-quarter prices for petroleum-based products are 22 percent higher than first-quarter prices, while natural gas prices are 5 percent higher, according to Purchasing's June 29 edition of the Energy Flash Report.

With materials prices seeming to go up each week, it puts extra burden on managing the business. Procurement professionals, in particular, face a major challenge to keep prices low while inflation rises, leading specialist consultancy ADR International has warned.

For monthly and daily price forecasts regarding specific materials, see Purchasing.com's Business Intelligence Center. Also, refer to the Institute for Supply Management's monthly Manufacturing ISM Report On Business (ROB). See Aberdeen Group's May 2007 The Direct Materials Sourcing Benchmark Report (May 2007).

Facing Rising Prices To avoid price increases in tight and rising markets, "the first step is to gain enough market knowledge to forecast pricing and the resulting impact on the business," Dave M. at the Buyer Analytics blog recently noted.

The following are 10 forecasting tips for buyers, from Resin Technology Inc. (via Purchasing):

1. Determine corporate price goals; if necessary, adjust them to economic realities. 2. Reduce purchasing pricing strategies to 30, 60 or 90 days. 3. Adjust actual timing of buys to weekly, monthly, quarterly events. 4. Analyze and, if necessary, adjust the structure of supply-contract agreements. 5. Pay attention to inventory levels to determine comfort of spot versus contract buys. 6. Ensure true supply tie-in with the buying company's operational action plans. 7. Study global pricing and sourcing trends of commodities — and their feedstocks. 8. Survey primary suppliers' operating rates, inventory and costs. 9. Analyze the secondary sourcing market for alternative suppliers. 10. Determine potential alternatives of supply and prices of commodity products.

Once you've gained enough market knowledge to forecast pricing, "you'll need to develop strategies to mitigate the price increase," according to Buyer Analytics, which offers a few suggestions:

1. Lock in prices with long-term contracts. 2. Leverage and consolidate purchases in highly competitive markets. 3. Work with suppliers to develop joint cost reduction opportunities. 4. Negotiate favorable price adjustment terms. 5. Use "should cost" modeling and value stream mapping.

Jason Busch at Spend Matters' Tips for Avoiding Price Increases in Tight and Rising Markets adds to this short list "the importance of developing a very detailed cost breakdown analysis for each category, supplier and item/service."

Busch writes:

Understanding all of the cost drivers — e.g., in a metals category, what percentage is raw material versus what is value added such as heat treating? — can put sourcing teams in a much better position to negotiate for other price breaks even as the underlying commodity markets are rising. After all, in rising commodity markets, savings does not … always have to be elusive. It just needs to be found and implemented in more creative ways.

Earlier: Combating the Sky-High Price of Raw Materials

P-Card Usage: The Battle for Cost Savings With cost savings on the top of everyone's mind, the primary goal for putting a p-card program in place continues to be processing efficiency, according to the recent Global Commercial Payment Cards report from Aberdeen Group.

Across the scope of companies, enterprises across the globe reported that p-card programs were on the rise, "a factor which can be attributed to one major benefit: cost savings." Aberdeen found that p-card programs are especially successful for small enterprises, which are generating "a high level of cost savings (12.2 percent)."

According to Aberdeen's analysis:

One glaring factor that contributes to small enterprises' level of cost savings is how much of their spend goes through a p-card. With an average of 21.5 percent of spend going through a p-card, small enterprises can easily reach a level of cost savings that is the envy of larger enterprise peers. Larger enterprises are still achieving respectable cost savings, especially considering the thousands of transaction they process on a monthly basis.

Although many enterprises have saved time and money in reporting and processing costs after moving some of their spend to a payment or corporate card, "the optimum level of adoption has not been reached."

Aberdeen recommends that enterprises take the following actions toward implementing a benefits-generating p-card program:

Small enterprises (under $50 million) should open the lines of communication between executive management and their employees to increase support for a p-card program. The more employees know about the benefits of such a program, the higher rate of acceptance for utilizing this payment method.

Mid-market enterprises ($51 million to $1 billion) need to evaluate the processes within their p-card program and eliminate any manual functions that might be involved. To achieve a greater level of cost savings, mid-market enterprises should ensure that they are tracking p-card usage and compliance.

Large enterprises (over $1 billion) can significantly benefit from capturing Level 2 and 3 data. Therefore, these enterprises need to ensure that their card providers and their internal systems can support this more detailed data.

Final Thoughts and Figures The primary role of the procurement function in strategic business initiatives has begun to shift of late, from a singular focus on cost savings/avoidance to the broader management of supply availability and risk — all while still maintaining competitive cost structures.

The sourcing and procurement market is growing at 10 percent a year, according to AMR Research's recently released The Sourcing and Procurement Market Sizing Report, 2006-2011.

The report's authors write, "Continued growth depends on technology vendors and service providers expanding their capabilities to meet the demand- and value-driven buyer requirements of the costs to deliver and serve."

For some futurists' takes on how procurement will have changed by 2082, check out Peer Into the Future.

Resources

Purchasing Business Conditions Report by Tom Stundza Purchasing, July 19, 2007

Commodities Forecasting: It's All in Your Head by Tom Stundza Purchasing, June 14, 2007

Buyers Polled Predict Sluggish Second Half by Tom Stundza Purchasing, July 14, 2007

Energy Inflation has Slowed Overall U.S. Economic Growth; No Cutbacks Forecast by Tom Stundza Purchasing Business Intelligence Center, June 29, 2007

Historical Time Series Data - Updated Monthly PurchasingData.com

ISM Report on Business Institute for Supply Management

ADR International Is an Experienced Specialist Purchasing Consultancy

Procurement Leaders Face Challenge on Inflation Says ADR International SourceWire.com, July 26, 2007

Procurement Strategies to Mitigate a Price Increase Buyer Analytics, June 20, 2007

Tips for Avoiding Price Increases in Tight and Rising Markets by Jason Busch Spend Matters, July 13, 2007

Global Commercial Payment Cards by Vishal Patel and Christopher Dwyer Aberdeen Group, March 2007

P-Card Usage: The Battle for Cost Savings Aberdeen Group, May 7, 2007

The Direct Materials Sourcing Benchmark Report by Andrew Bartolini Aberdeen Group, May 2007

The Sourcing and Procurement Market Sizing Report, 2006–2011 by Mickey North Rizza, Marianne D'Aquila and Karen Carter AMR Research, June 28, 2007

Peers into the Future SupplyManagement.com, July 5, 2007

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