On Friday, the Associated Press issued an article entitled “US Economy Appears Poised To Start Growing Again.” This article reported that the US government estimated a drop in the Gross Domestic Product of just 1% in the April to June 2009 quarter. This represents an easing of the economic freefall that began last year and featured a GDP drop of 6.4% in the preceding quarter.
Beyond those general economic readings, the article featured a couple of paragraphs that should be a warning sign to procurement professionals. Let me just quote them here…
“Behind the better second-quarter performance were other signs of a fading recession: less drastic spending cuts by businesses, a resumption of federal and local government spending and an improved trade picture.
“Businesses did end up cutting their stockpiles of goods at a record pace in the second quarter, but that carries a silver lining. With their inventories at rock-bottom, businesses will likely need to ramp up production to meet customer demand. That would stimulate the economy starting in the current quarter.
“Some economists think growth in the July-to-September quarter could be more vigorous than previously forecast — possibly 3 percent annual growth or higher.”
Why should procurement professionals be concerned?
Because there are two opposing forces at work: increasing demand and decreasing inventory. With less inventory, suppliers are becoming less likely to be able to meet your quantity requirements on your time table.
But wait! There is a third economic prognostication that also could have a negative impact on supplier performance.
The article says: “Even if the recession ends later this year, the job market will remain weak. Companies are expected to keep cutting payroll through the rest of this year.”
So suppliers are going to have more orders but fewer people and less inventory with which to fulfill those orders.
Do you see trouble brewing?
Now is the time that procurement absolutely must be strategically aligned with senior management. If senior management predicts increasing demand for its own products and services – and is counting on it to get the company out of the red – then it must be able to deliver to its customers better than its competition. If procured goods and services don’t make it in time to allow your company to perform well, the competition may prevail at a time when your company can least afford to lose.
It will take visibility into the supply chain to know the ability of the supply chain to adapt to increasing demand – not just for your company, but for all of the companies that will be increasing their orders. You’ll need to plan how you will get what you need to get when you need to get it.
It will also take good supplier relationships to be the “customer of choice” when there is only so much inventory to go around on short notice. Part of that involves sharing your plans and estimates so that your supply base can be prepared (after all, they may be contemplating laying off the very people that you need to fulfill your soon-to-be-increasing orders).
If the demand drivers for the products and services you buy changed such that your quantities to order spiked by 10% – and all of your suppliers’ other customers demand changed just as much – what goods and services would not make it in time? How long would the delay be? What are the consequences of that extended lead time? Lost orders? Damage to your company’s reputation? Terminated contracts?
Those are things you should know.
You also need to communicate the potential impact of demand growth to your management. If they are confident in growth estimates, it may be better to discuss with them the benefits of buying more now, while availability is good and prices are low.
A procurement professional can never know too much about economics. Whether you realize it or not, economics impacts how well you can do your job day in and day out.
To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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