Procurement Challenges In A Hot Economy

How Do Economic Conditions Create Procurement Challenges?

PurchTips Edition #386

The economic statistics are both great and concerning.

The Dow Jones Industrial Average – an indicator of the strength of the stock market and the economy – hit a historic high point near 23,000 during this past week. The U.S. unemployment rate dropped to 4.2% – its lowest/healthiest point since February of 2001.    The latest Producers Price Index shows an inflation rate of 3.8% from this point last year.

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The economy is on fire. And most people find that to be a great thing.  But an economy this hot can make things tough for procurement professionals.  Here are three challenges that procurement professionals face in a hot economy:

Supply Availability.  A strong economy, evidenced by a strong stock market, means that companies have money.  When companies have money, they spend money.  When more companies are spending more money than usual, this can create capacity challenges for suppliers who aren’t investing in growth as fast as demand is increasing.  As such, lead times are likely to get longer.  In the worst case, suppliers will be in a position to pick and choose which customers get the shipments of limited supply and which will have to wait or even be declined.  If you’ve treated your suppliers well enough to be their “customer of choice,” this is when that treatment will pay off for you.

Supplier Quality & Service.  A low unemployment rate means that good jobs are relatively easy to find.  That means that some of your suppliers are probably losing some good people to higher paying companies.  In this job environment, there is a shortage of good employees able to replace departed employees.  As such, companies are forced to hire less talented employees and, as a result, the quality and service you are used to getting from your suppliers is likely to decline.

Price Pressures.  After years of relatively flat market prices, suppliers are able to finally raise prices and get away with it.  Whether you’ve smartly contracted your prices to be tied to an index or gambled with buying at current market rates, you are likely to be paying more for goods and services than you did last year.

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Copyright 2017. This article is the property of the Next Level Purchasing Association and may not be copied or republished in any form without the express written consent of the Next Level Purchasing Association. Click here to request republishing permission.

By Charles Dominick, SPSM, SPSM2, SPSM3