Looking back, 2008 has been one hell of a year. Markets peaked, then tanked, and left buyers, then suppliers, in a panic. Long term planning has been replaced with short term fixes, and the viability of many markets is now in question.

We’ve seen new trends pop up in 2008 due to this market instability, and We’ve also seen some old trends come back with a vengeance. This blog will discuss a few of the worst sourcing trends in 2008, and examine how these short term fixes can have a negative effect on long term sustainability.

Extended Payment Terms
One thing I have seen over and over again in sourcing this year is the move to 60 day or longer payment terms as a minimum requirement to qualify a new supplier or renegotiate with an existing supplier. Normally, this directive is handed to Sourcing from Finance, with the idea that implementing the policy company wide should buy about 30 days of cash.

Sourcing will present this requirement to suppliers, and after initial hemming and hawing, suppliers will agree to the terms, but that agreement is typically not free-of-charge. In most cases, suppliers will roll the cost of those extended terms into the base price per unit. In fact, I have overheard discussions where buyers preemptively tell suppliers just to add the extra cost into the base price.

At the end of the negotiation, the buyer can go back to management and present the new terms. Not only did they get the 60 day terms, but they now have a 2% discount for early payment. They are able to showcase their negotiation prowess, and the fact that prices just increased is normally overlooked.

This begs the question, what is more important, the cash flow, or actually having the cash? Short term, cash flow might be the right answer. But the trend to move to extended payment terms will undoubtedly continue down the supply chain, and then back up. Eventually, the customers of that original buyer will be asking for 60 day terms as well, and the effects of the initial changes will be completely negated. Not only that, but the base price per unit is now higher. Of course, we could always implement a policy of 90 day terms….

Recession Economics – Roll Back Prices to 200”X” Levels
As commodity markets and the stock market declined over the last year, I have had many conversations about price roll backs. For instance, once oil prices hit 2005 levels, I had a conversation with a resin buyer that he expects his suppliers to follow suit. Many management decisions over the last three months were based on negotiating raw materials prices across the board back to 2005 levels. Or 2003. Or even 2000.

Truth be told, in some markets, this strategy may very well be a viable one. However, as a one strategy fits all markets approach, the concept does not follow any basic rules of logic. Unless I missed an announcement by Bernanke, supply and demand, the framework of economics, has not been waived due to the recession at hand, not even as part of a bailout package.

Times have changed. In certain markets, capacity looks nothing like it did 2 years ago. Suppliers have entered the market, suppliers have exited the market, technologies have improved, and logistics have become more complex. These factors were probably all considered the last time the category was sourced, but now it doesn’t seem to be part of the equation. It is unreasonable to suggest that because the S&P is back to Pre-Bush levels, your price for widgets should follow accordingly. Hitting suppliers over the head without considering the entire supply chain may put additional strain on an already fragile market, and soon you could find yourself with even less suppliers to compete against each other.

Putting Strategic Sourcing Initiatives “On Hold”
As commodities markets went up over the first half of the year, an increasing number of my customers reported that all strategic sourcing initiatives were being put on hold while the company focused on keeping raw material costs in line and ensuring supply. By the time markets calmed down, many had also reduced procurement staff headcount, leaving less people dedicated to pro-active sourcing and other strategic initiatives.

Putting cost reduction measures on hold during the time your company needs it the most doesn’t make sense. Dealing with supply shortages and rising prices must be a high priority, but Sourcing should recognize that it’s possible to offset a good portion of raw material cost increases by effectively sourcing other categories at the same time. In addition, since your competitors are also likely to be scrambling, it’s a good time to get a competitive edge in the marketplace while they aren’t looking. As “the doctor” mentions in his blog, http://blog.sourcinginnovation.com/2008/11/07/how-dumb-is-your-company.aspx, investing, or simply not divesting, during a recession will help you come out of it stronger than your competitors.

Reducing headcount is the wrong direction, adding headcount actually makes more sense. However, dedicating additional resources to strategic initiatives when times are bad is not an easy sell to senior management. If you can’t justify spending the money, you can always add resource by hiring a PSP, which can help execute specific sourcing initiatives without the ongoing cost.

When times are good, companies will develop proactive long term strategic visions and contingency plans. More often than not, when times are bad, these plans go out the door and the finger pointing begins. This year, the housing and financial markets have demonstrated what impact shifting away from a long term strategy to improve quarterly/monthly/weekly numbers can do to the economy as a whole. Unfortunately for many companies, the lesson has yet to be learned for supply chain.

The best trends are the ones that continue year to year and decade to decade. Short term fixes are no substitute for long term sustainability, and recognizing the impact those short term fixes might have on a supply chain will ensure success once the volatility is gone.
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Joe Payne

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