The US economy shrunk by .3% in the last quarter. Should another negative quarter follow, the government will have to declare what has been obvious to all but the eternal optimists; the US is in a recession. This most recent, long economic downturn calls the relevance of the “shrinking GDP” recession metric into question. The government tinkers with metrics for unemployment inflation and the S&P to obfuscate or forestall bad economic news, so one has to wonder why the GDP metric stands firm. Or maybe one need not wonder at all. The historical nature of the GDP metric ensures that the bad news gets a 180-day delay. That’s one heck of cushion for telling the truth. The moral to the story is “if you don’t like the answers, just change the questions, or at least put them off for a long time”.

But as they say, every cloud has a silver lining. The economic downturn is shining brightly on purchasers of fossil fuel/petroleum and petroleum based products. Those products, as we have mentioned in the past, have a deep and wide reach across price points from the most strategic to completely tactical buys. The shrinking economy will, as the law of supply and demand dictates, drive prices for goods and services down overall. It’s not unthinkable that procurement teams will gather the benefits of these shifts and market them internally as cost savings. But just like the delayed recession story, the cost savings story isn’t the most accurate report. It is important then, that procurement staffs and executive teams dig a little deeper into evaluating the hard dollar results of cost containment/savings efforts. Taking credit for cost savings that occur by incident is precisely as fair as being blamed for cost increases that arise by incident.

Rather than rate procurement performance respective of market shifts, it’s wise to live by the mantra that “only that which can be measured can be improved”. Accurately measuring procurement performance hinges the application of developing market indices and pricing formulas rather than accepting arguments against developing dependable baselines for commodity driven prices on finished goods.

It’s easy to become bogged down in the mindset that procurement’s pricing performance on commodity driven items cannot be measured in light of market fluctuations. But consider the sensibility of that notion from the producer’s side. For instance, take one of the most widely purchased items today, the corrugated box. Corrugated box prices are directly affected, lost often, by market price movements for 42 lb Kraft linerboard. Because linerboard prices are variable, how then does the box manufacturer set the pricing that will ensure profitability? In the most basic terms, the box manufacturer’s performance (profitability) hinges on its ability to accurately measure costs that are predictable or “fixed”.

It stands to reason then, that for procurement, the same rules apply. The fixed and variable cost equation is as fundamental a concept as exists in business (as president Bush would say, “It’s not rocket surgery”). Still procurement teams are loath to employ this methodology in measuring performance because the “code” that teams must crack often requires (insider) industry specific information and can be specific down to the site level. Still, even if the specific inputs vary, the formulas contain the same basic components and a probably just a handful of industry assumptions. Whether one is determining something as basic as the variable cost/ board foot cost for a simple RSC container, versus the fixed cost and thru put economies for that same box, or the volume of natural gas required to cook a gallon of ethylene glycol, side by side with the plant economics, the information exists. It exists and is as dependable a metric for procurement performance as it is for manufacturer profitability.

So for those who haven’t embraced the metric mindset for commodity driven purchase prices, the “make love not war” ethic we see in economic downturns represents a great opportunity to pick your suppliers brains and call them on that “partnership” they’ve been espousing. Their help in cracking the code can go a long way in accurately measuring and optimize procurement performance.

Do you have a commodity price driven purchase for which you need to construct a dependable baseline? Source One can help you. Please contact us for an in depth review.
Share To:

Strategic Sourceror

Post A Comment:

0 comments so far,add yours