April 2011
Surging silver prices hurting businesses dependent on the precious metal  Silver prices have surged over 150 percent during the course of the last 12 months. This week, silver futures neared their highest-ever levels as investors scooped up the metal to protect against economic and political instability throughout the globe. The run-up in prices, however, is hurting major users of the metal, according to a recently published report.

Silver has a number of industrial uses that have also contributed to its rise in value. In fact, roughly 75 percent of the world's silver stockpiles is used to make film, jewelry, mirrors, batteries, solar panels and other products, the Wall Street Journal reports. With silver prices soaring, companies have moved to find alternative metals and lock-in hedges against future price increases. The uptick in silver futures is eating into profit margins at a number of businesses.

Eastman Kodak, which reported disappointing quarterly earnings this week, has struggled to grapple with surging prices. "We're raising prices, indexing contracts, hedging and moving as fast as we can with the part of the portfolio that's not silver dependent," affirmed the company's chief executive, Antonio Perez.

Illustrating the monetary pain that Kodak has felt with the run-up in silver prices, for every $1 increase in the per-ounce price of silver, the company loses about $10 to $15 million from its bottom line. Though the company has raised prices and tried to minimize its use of the precious metal, it's had a difficult time keeping up with the metal's seemingly endless upward price trajectory.

On Friday, silver futures settled at $47.52 per troy ounce. The last time silver futures topped $50 an ounce - a level many analysts expect them to break in the coming weeks - occurred over 30 years when the Hunt Brothers tried to corner the market. This price rise, however, is driven primarily by burgeoning demand, leading some analysts to contend silver futures could continue to drive past that critical $50 an ounce threshold.

Mining companies have also been hit by the price jump. U.S. Silver Corp, which operates a number of silver mines in Idaho, promised to sell 500,000 ounces of silver at a price of $27.50 an ounce; that figure represents about one-fifth of the company's planned silver output for the year. However, with prices hovering nearly 100 percent higher, the company had to post more collateral.

"I wouldn't have expected it to be this high, and I don't have any better crystal ball than the next person," said company chief executive Tom Parker. "You can always look into the past and say that's a dumb decision. But at the time, it seemed to be a prudent thing to do."

Nonetheless, U.S. Silver has learned from its mistakes, Parker said, and will not hedge any more of its silver production at the current price.
Auto suppliers report strong earnings - but concerns over Japan's manufacturing linger  Despite suffering supply chain disruptions in the wake of a slowdown to Japan's infrastructure, automobile suppliers issued their quarterly earnings this week, handily topping Wall Street expectations.

Reuters reports that the rebound in profits at carmakers and automobile suppliers could suggest that the recovery in the global automobile market remains robust, even as energy prices continue their steady climb and Japanese factories work to resume production. This week, Goodyear Tire & Rubber, American Axle and Manufacturing Holding all topped analysts' expectations on burgeoning global demand.

Despite the fact that Japan's production plummeted 32 percent during the first three months of 2011, global automobile production rose by five percent in the time period compared to the first quarter in 2010. Though a number of automobile suppliers touted their strong earnings, they warned that continued supplier disruptions emanating from Japan could hurt future production.

"Obviously, it's all about volume," affirmed Morningstar analyst David Whiston. "With a lower fixed cost and a better top line, it's not a surprise to see earnings doing so well." On the other hand, Wall Street Strategies analyst David Silver said that ongoing difficulties in Japan could affect manufacturing capacity going forward.

"I wouldn't call it a party right now. It's more of a get-together," Silver told the news service. "The profitability of the North American automakers is much improved from 2007 and 2008, but the Japan disaster is an overhang."

With corn supplies dwindling, China faces quandary  As the world's fastest-growing economy, China increasingly demands a wide variety of goods to satiate its huge population. According to a recently released report, China's demand for corn will outstrip supplies over the next decade, potentially leading to higher grain prices.

Shang Qiangmin, the director of the China National Grain & Oils Information Center (CNGOIC), told Grain News that rising livestock production in China, along with an increase in biochemical manufacturing, will combine to drive corn demand higher over the next 10 years. Shang told a grain conference that the industrial sector increasingly craves the commodity, asserting that demand over the past few years has "exceeded imagination."

According to Bloomberg, Shang was cited as saying that through September 30, corn used to produce starch and other biochemical products will soar to 50 million metric tons - up precipitously 5 million metric tons from the same period in the year prior.

However, soaring grain prices and limited supplies are effectively forcing China to curb demand. Last year, CNGOIC pegged Chinese output at 172.5 million metric tons and consumption at 172 million metric tons. Nonetheless, analysts contend the output is grossly overestimated, and that figures do not take into account soaring commodity values.
Patients, health care industry to benefit as popular name brand drugs set to lose patent protection  In the pharmaceutical industry, patents are granted for new drugs - but only for a limited time, usually seven years. Medco Health Solutions, a pharmacy benefits manager for employer health plans, stands to benefit mightily from the upcoming expiration of a number of patents of some popular 'blockbuster' drugs.

Medco handily beat analysts' expectations when it reported its quarterly earnings this week, but the company's shareholders are more excited about the company's future growth potential. In December, the patent expires on the hugely popular cholesterol-lowering drug Lipitor, and Medco expects to see an additional 3 cents per share in the last month of the year on projected sales of a generic version of the medication.

Lipitor, however, is one of many patented prescription drugs whose patents are set to expire. By 2015, nearly $75 billion worth of branded drugs are set to lose their patent protection, according to Towers Watson's North American pharmacy practice leader, Nadina Rosier. Companies like Medco, CVS Caremark, Express Scripts and AmerisourceBergen stand to profit from the coming onslaught of generics, analysts assert.

The switch from prescriptions to generics will also benefit consumers, who spent $307 billion on prescription drugs in 2010. Generics are chemically comprised of the same active ingredients as their name-brand counterparts and are as efficacious, doctors assert. Though pharmaceutical companies will stop profiting so handily from their prescription drug offerings once they lose their patent protection, it could help the health care industry to cut costs and boost efficiency.

Currently, generic drugs comprise 78 percent of all prescriptions, but by 2012 four of the most popular medications in the U.S. will lose their patent protection, leaving the door open for competitors to manufacture generic versions of the drugs. Pfizer's Lipitor, AstraZeneca's Seroquel, Merck's Singulair and Plavix, which is put out by Sanofi-Aventis and Bristol-Myers Squibb will all lose patent protection by 2012, Fortune Magazine reports.

Generic drugmakers routinely storm the market once patents expire. In fact, when a drug goes off patent, generic companies take over 80 percent of the prescription volume within six months. With the medications so popular, the health care industry stands to profit.

According to Express Scripts, "drug price inflation for branded products was the single most important trend driver in 2010." Branded medications actually jumped in price by nearly 10 percent last year, compared with a fall of 10.2 percent for generic drug costs. The substantial cost savings that insurance companies stand to make from the coming generic versions of popular drugs is music to the ears of industry officials.

China's booming manufacturing sector threatened by country's poor trucking industry  Analysts have taken to referring to China as the world's factory as it has become an increasingly important manufacturer of goods that consumers throughout the globe buy. Though China's factories function like well-oiled machines, they are but one part of a complex supply chain that relies on private companies to transport those products.

The problem, however, is that moving goods from the factory to a Chinese seaport is an incredibly difficult task for a lot of companies, the New York Times reports. Even though the trucking industry is exceedingly important to the China's long-term growth prospects, analysts contend the Chinese government is neglecting to overhaul the industry, resulting in slower delivery times and increased business costs.

The country's dilapidated trucking industry was on full display last week when over 2,000 truck drivers went on strike in Shanghai to complain about soaring energy costs and what they deem to be unfair transportation fees levied on them by the government.

Amidst surging commodity prices, China has moved to prevent unrest by forcing price controls on companies and lowering some taxes. For its part, China is very wary of civil unrest as the last major outburst by Chinese citizens resulted in the Tiananmen Square massacre when the government cracked down on the nonviolent dissent, killing thousands.

Conducting matters in a manner consistent with its normal behavior, the Chinese government similarly cracked down on the striking truck drivers this past weekend, arresting protesters and threatening strike organizers. Nonetheless, the government said it would lower some fees that trucking companies must pay to use roads and seaports.

As coastal cities in the country become increasingly industrialized, though, factory construction has started to move inward, which could lead to even more disruptions in transportation as the inland manufacturing plants are located farther from the seaports. China's $1.5 billion export machine is at risk of suffering from supply chain disruptions, and consumers around the globe could be affected.

"Our concern is that as these factories move away from the coast, the service standards won't keep pace," affirmed Ken Glenn, an executive at transportation services company APL. "Rail and barge are even less developed."

The largely unregulated trucking industry in China is dominated by small, family-owned businesses. These companies function by promising to deliver goods at cheaper rates than their competitors; to accomplish that, they often overload their trucks and routinely pay out bribes to inspectors to squeeze profits any way they can.

As energy costs soar, the trucking companies are struggling to stay afloat. "We're paying a lot more money for fuel than we did three years ago, but what we get paid for freight has stayed the same," truck owner Qi Zhenwei told the Times. "How am I supposed to survive?" 

Because of policies enacted by the Chinese government, transporting goods in China is actually more expensive than in the U.S. - surprising given the relative bargain rates businesses pay to manufacture goods in the country.

The average cost of moving goods in the U.S. stands at about $1.75 per mile, according to the American Trucking Associations; in China, trucking costs in the Yangtze River Delta and the Pearl River Delta - the two biggest export regions in the country - reach $2.50 to $3 per mile. That figure is especially high considering Chinese truck drivers earn roughly 25 cents an hour, far lower than the $17 an hour rate of their American counterparts.

U.S. Fulbright Research fellow Rachel Katz is living in China while she studies long-haul truck drivers. She asserts that drivers are constantly hit up for fees by corrupt government officials. "There's every kind of fine you can imagine," she said. "There are many different people regulating the roads and finding a way to tax the truckers. I can't believe the system operates this way." 
Glove could help stroke patients and hospitals alike  Hospitals and health care providers are plagued by soaring costs and are being pressured by insurance companies and policymakers to cut business expenses. A new medical device developed by undergraduate engineering students could help stroke patients and boost efficiency at hospitals.

Undergraduate mechanical engineering students at McGill University in Canada developed a medical device in response to a design request from the startup company Jintronix Inc., according to the school. The Biomedical Sensor Glove was designed by the students to help stroke victims recover - without having to visit their doctors for regular checkups.

The glove works by allowing patients to exercise in their own homes with little supervision. As the patients perform basic physical therapy exercises, the glove charts their relative progress, sending back the results to their doctors through the Internet. By eliminating the need to make regular hospital trips, the globe helps patients save time, and frees up doctors to see other patients while still monitoring their results.

Moreover, patients are also able to monitor their progress through the glove's software, which generates 3-D renderings of the patient's musculature. Though similar types of gloves exist on the market today, this latest device designed by the students is far cheaper to produce at $1,000. According to the school, the glove could be used in developing countries to help treat stroke victims.
What would the real state of the economy be if the government was not running such huge deficits? I follow Dave Short's blog. He does a great job of showing objective facts about the state of the economy.

In a recent post, by guest writer Randy Degner, a graph of real Gross Domestic Product is shown - that is GDP without trillions in government borrowing. Randy points out that the average real GDP would be minus 0.3% since 1980 instead of the 2.7% reported had the government not been on a borrowing binge.

Basically, we have borrowed to fuel our growth for over 30 years. Can it continue indefinitely? How and when will it end? Time seems to be running out. Who will bail out the FED?
Exelon to buy Constellation Energy in $7.9 billion deal  In a bid to become one of the biggest generators of electricity in the U.S., Exelon Corp announced this week it plans to buy Constellation Energy Group in a deal worth a reported $7.9 billion.

On Thursday, the boards of directors at both companies said they had reached an agreement to merge the two companies in a stock-for-stock transaction. The move is strategic as Exelon boasts a large, environmentally-advantaged generation fleet that will complement Constellation's customer-facing business. According to the two companies, the merger would help drive growth going into the next decade.

Per terms of the deal, the merged company would retain the Exelon name and would be headquartered in Chicago. The renewable energy divisions of both companies would remain located in Baltimore, Maryland, as would Constellation's retail and wholesale businesses, which will be consolidated.

Exelon chairman and chief executive John W. Rowe affirmed the deal would create a power company that is equipped to deal with the unique energy challenges the U.S. faces over the next decades. "This merger creates the number one competitive energy provider with one of the industry's cleanest and lowest-cost power generation fleets and one of the largest commercial, industrial and residential customer bases in the United States," Rowe said in a statement. 
Chip shortage affecting car companies around the globe  Computers have infiltrated nearly every industry - even if consumers aren't aware of their presence. New model cars, for example, rely on computers to do everything from open windows to power GPS systems. According to a recently published report, automakers around the globe are reeling from a shortage of chips that control those computer systems.

The New York Times reports that a majority of the critical chips are manufactured in a plant in Japan that was walloped March 11 by the 9.0-magnitude earthquake and subsequent tsunami. Without the electronic devices, many carmakers have had to either shutter or temporarily reduce manufacturing capacity.

In Japan, the carmaking industry is reeling from the destruction, and its automobile production has sunk by over 50 percent in the wake of the natural disasters. The supply chain disruptions emanating from Japan have hurt businesses, resulting in lower revenue at companies like Coca-Cola, but the auto industry has been particularly affected.

One Japanese manufacturing facility is responsible for a majority of the chips used in cars, but the factory was particularly hard-hit. Even though Renesas Electronics, which owns the facility, has poured manpower and money into getting the manufacturing plant back online, company officials acknowledged that the damage is so extensive the workers have only made a dent in necessary repairs. In fact, the company said it would only gradually come back to full capacity as it grapples with the challenge of repairing cracked walls, collapsed ceilings and damaged equipment.

Renesas' factory 70 miles northeast of Tokyo supplies about 40 percent of the world's supply of the critical computer chips, known as automobile microcontrollers. The automobile industry has evolved so that the chips are normally customized for each car model, and as a result the production halt has been especially pronounced, analysts assert, as carmakers can't simply turn to alternate suppliers.

Tetsuya Tsurumaru, the senior vice president in charge of manufacturing for Renesas, said on Wednesday that the company played an important role in the supply chain of automobile companies throughout the globe - a role it takes seriously. "We have an important role and responsibility," he affirmed. "We are aware of this and are doing our best to restore the supply chain as soon as soon as possible."

The company plans to restart production on June 15 - a month earlier than estimated - but its manufacturing output is projected to be only about 10 percent of its capacity. The company has thus far refused to forecast when production would resume at normal levels as repairs are ongoing.

In the interim, the company has shifted its production to another factory in Japan that was undamaged by the tsunami and earthquake, and has also contracted some of the production to GlobalFoundries, a contract manufacturer based in Singapore that has manufactured the critical chips in the past.

Nonetheless, shortages are projected to persist for the short- and medium-term, if not longer. "Let's show Renesas's inner strength and unite our hearts to restart in June," a banner on the company's factory reads. "Customers from all over the world are waiting."

Illustrating the strategic importance of the manufacturing facility, automakers, auto parts companies and other customers have sent as many as 2,500 workers to the plant to assist with repairs, the news publication reports.
J&J CEO: We've learned from our manufacturing mistakes  Johnson & Johnson, the U.S. consumer products giant, has suffered through a spate of embarrassing recalls during the past year resulting from complaints about its over-the-counter medications. Nonetheless, the company's chief executive told investors that the company has learned from its mistakes and is poised to emerge "stronger than ever." 

The New York Times reports that William Weldon, who assumed the chief executive role in 2002, said he, along with employees, were not pleased with the recalls that plagued the company last year. J&J recalled millions of bottles of its medications like Tylenol and Motrin after consumers complained of foul odors emanating from the bottles and pieces of metal were found, among other issues.

A majority of the recalled products came from a manufacturing facility in Pennsylvania that the company shuttered a year ago; it is currently building a modern plant to replace it. "You would be right to ask if we made mistakes, and yes, we did," Weldon affirmed. "Our goal is to restore McNeil Consumer Health Care to the highest level of quality … thus restoring confidence in McNeil."

Following the recalls, J&J invested millions of dollars to inspect its production facilities around the globe, Weldon said. 
Dwindling stockpiles, robust demand sending silver higher  The run-up in silver prices over the past year was caused by declining stockpiles, robust industrial demand and other factors. According to an executive at the biggest U.S. producer of the metal, silver futures could continue to climb throughout 2011.

Bloomberg reports that Coeur d'Alene Mines Corp chief executive Dennis Wheeler is bullish on the white metal's growth prospects for this year. At the Bloomberg Link Precious Metals Conference in New York this week, Wheeler affirmed that burgeoning demand for silver, coupled with rapidly diminishing stockpiles, would send silver prices higher.

"We're in a legitimate market driven by financial interest in silver and strong industrial demand," Wheeler said. "Supplies are relatively inelastic," he noted.

In the past 12 months, silver futures have surged over 150 percent, boosted by a 40 percent advance in investment demand for silver, according to GFMS Ltd. Industrial use similarly climbed in 2010, rising 21 percent; it could increase even further this year, GFMS said.

Frank McGhee, the head dealer at Integrated Brokerage Services, said that simple supply and demand fundamentals are driving silver's current bull run. "There is no manipulation going on in this market," McGhee told the news service. "It does not take a lot to stop the market until this market decides to go. I'd like to categorize silver as a freight train." 
Boeing to boost manufacturing capacity to meet burgeoning demand  Although it has come under fire in recent months for manufacturing delays and defects in its older-model jetliners, Boeing said this week it plans to boost its manufacturing capacity over the next three years.

According to the company, it will increase its production by 40 percent through 2014 to keep up with burgeoning demand for its aircrafts and to make room for new jetliner models that are scheduled to hit the market in the coming years. The move, however, has divided analysts as it is risky for the U.S.-based aerospace giant.

"That's a bigger year-to-year jump that I’ve seen since the 1960s, when companies ramped up production practically overnight at the introduction of the jet age," affirmed Frost & Sullivan aerospace analyst Wayne Plucker. "And once you've established a rate, you've made a serious commitment of personnel and equipment."

Now, airlines are clamoring to update their fleets as oil prices soar and eat into their profit margins. Boeing has witnessed an uptick in business from the soaring demand, and the production shifts are meant to satiate its customers, the company said.

MarketWatch reports that Boeing's order backlog has risen over the past few years and now stands at over 3,400 jetliners valued at $263 billion.
Attack on Egyptian pipeline leaves Israel and Jordan's energy supply at risk  The recent spate of uprisings that swept throughout the Middle East and North Africa resulted in the overthrow of the Egyptian and Tunisian governments. As Egypt moves to shift its political model from autocratic rule to a democracy, it faces a myriad of challenges. On Wednesday, a bomb detonated on a natural gas pipeline, halting the supplies from reaching electric power plants in Israel and Jordan.

The Wall Street Journal reports the supply chain disruption is the second such event in the last three months in the North African country. The explosion occurred during the early morning hours on Wednesday when five masked gunmen attacked a measuring station located about one mile outside of the Sinai town of El Arish.

Though no one was injured during the attacks, the effects of the blast are far-reaching, according to analysts. While no group has claimed responsibility as of yet, suspicions are largely aimed at Bedouins, a sect that has been battling Egyptian security forces for several years in the region.

With the Egypitian government struggling to transition to a democratic model, the attack spurred concerns that the country's security forces might be ill-equipped to protect infrastructure - especially pipelines that are so critical to Israel and Jordan's power supply. The early February explosion of a pipeline resulted in supply interruptions to the country's border nations for 38 days. The pipe that was attacked on Wednesday supplies nearly 25 percent of Israel's electricity network.

Israel, which is known for its expansive security apparatus and military, has beefed up security on the border between the countries, and following the February attacks it allowed Egypt to deploy additional personnel to protect its interests in Sinai.

In Israel, the country's citizens are criticizing the supply agreement with Egypt that was struck in 2005 and annexed to the peace treaty between the countries that has endured for the past 32 years. According to critics, the supply chain leaves Israel vulnerable to similar attacks and could potentially affect its economic output if further cuts in electricity occur.

"The Egyptian administration has a clear interest in a clear policy in providing the gas. And only the Egyptian regime can resolve the matter," Israel's director of the defense ministry's political security staff, Amos Gilad, said in an interview with Israel Radio. "The sabotage is not directed against Israel, but has to do with problems relating to law enforcement in Sinai."

A cutoff like the one that happened on Wednesday forces Israel and Jordan to rely on alternative, more expensive energy sources, including coal and diesel fuel to fuel their power plants.

Nonetheless, the latest attack won't cut off Israel's electric supply, according to the country's national infrastructure minister, Uzi Landau.
Manufacturers increasingly worried about rising inflation  As U.S. companies began announcing their quarterly earnings last week, analysts were interested to see how their margins stacked up amid rising consumer prices and weak, though consistent, economic growth. Manufacturers are increasingly growing concerned about inflation, according to a recently released report.

MarketWatch reports that manufacturers reported solid growth during the first three months of 2011, but that a majority of that expansion comes from overseas. Further, inflationary pressures that are starting to eat into margins are worrying executives.

Manufacturers have benefited from a historically weak dollar that has helped make American-made goods more competitive abroad. However, the sinking greenback is also boosting commodity prices and spurring inflationary concerns, according to industry watchers.

In its quarterly earnings report, consumer products giant 3M said inflation is hovering around 4 percent, and while inflation hasn't had too big of an effect yet on its business, it projects consumer prices to continue to rise as the dollar declines against a basket of six major currencies.

In fact, some analysts are so concerned about surging commodity prices and rising inflation rates they project the industrial sector to decline - rather than grow - through the rest of the year.
Johnson & Johnson to acquire medical device maker Synthes for $21.3 billion  U.S.-based consumer products giant Johnson & Johnson has suffered through an embarrassing spate of public relations issues over the past year as consumers lobbed complaints against the company, affirming some of its medications contained metal in their bottles and had foul smells emanating from them. The company paid a hefty fine for the manufacturing errors, but this week it announced it plans to buy Synthes Inc.

Per terms of the deal, J&J will acquire the manufacturer of orthopaedic medical devices for $21.3 billion. If the deal gains regulatory approval, the company will vastly increase its market share in the burgeoning - and increasingly lucrative - medical device industry. Synthes specializes in the manufacturing of innovative devices that help in cases of trauma, spine, and cranio-maxillofacial; it also is regarded for its work in improving power tools.

J&J chief executive Bill Weldon affirmed the deal would help boost the company's medical device division, making it more competitive around the globe. "DePuy and Synthes together will create the most innovative and comprehensive orthopaedics business in the world and enable us to better serve clinicians and patients worldwide," Weldon said in a statement. "Orthopaedics is a large and growing $37 billion global market and represents an important growth driver for Johnson & Johnson."

The deal is expected to close during the first half of 2012.
Soaring commodity prices increasing business costs and hurting profit margins  Higher commodity prices have been squeezing profit margins at U.S. businesses for some time and this week, consumer products giant Kimberly-Clark said it plans to raise prices for its goods as surging commodity prices have caused the company's projected commodities tab to double.

MarketWatch reports that the Texas-based company missed analysts' expectations with its first quarter earnings, and cut its 2011 full-year earnings range to the lower end of forecasts on soaring commodity prices. The company faces the sensitive task of offsetting higher business costs on consumers without alienating them, which would further erode revenue.

Other businesses that are reeling from climbing commodity prices - like Newell Rubbermaid, Church & Dwight and Arm & Hammer - have suffered declines in share price as investors are leery of their long-term prospects should commodity prices continue increasing - as they are projected to.

Kimberky-Clark posted a 4 percent rise in sales during the first fiscal quarter from 2010, but the increased business costs ate into its margins, with profits falling to $350 million from $384 million the year prior. The company plans to raise prices of Huggies diapers by three to seven percent, and Cottenelle and Scott 100 bathroom tissue by about seven percent.

In a statement, Kimberly-Clark chief executive Tom Falk said consumers should be ready for price increases. "A number of our businesses will be raising selling prices, including most of our North American consumer products businesses," Falk affirmed.
Many sourcing and procurement professionals find MRO (Maintenance, Repair, and Operational Expenses) one of the most complex categories of spend to source. The reason for the difficulty in sourcing this category starts with simply defining what the category is. A plant manager will usually define MRO as anything that is not a raw material or labor cost. A finance person of procurement manager would surely take issue with that, segmenting out MRO as something different than administrative expenses or shared services.

Regardless of what you categorize as MRO, the ultimate need you are looking to satisfy remains the same - it includes any of the “stuff” you buy to keep your plant running in a safe, efficient, and effective manner. The easiest way to figure this out is by looking at the catalogs and line cards of the major suppliers in the industry and understanding what they sell. This typically includes electrical supplies and components, bearings and power transmission products, fasteners, lubricants, filters, pipe valve and fittings, motors, safety supplies, machine parts, and even cleaning products. Depending on your industry, you may add or subtract from this list.

Adding to the complexity of the category, MRO products tend to span across multiple business units with spend falling under the purview of many different stakeholders. Some supplies relate to the prevention of safety hazards. Others are associated with providing a comfortable working environment for employees. Another portion relates to making sure there is very little disruption to actual production.

MRO means different things to different people, and the diverse definition of the category is indicative of the substantial size and scope of the industry. Thousands of suppliers exist in the marketplace; some provide a wide range of products and others are more niche or specialty players. At the highest level, the market includes:

Manufacturers - These include the companies that make the motors, bearings, and electrical components, etc. Examples might include WEG (for motors), Gates (for belts) and Philips (for lighting and other electrical supplies). In this industry, the manufacturers control the market, and often dictate pricing on a customer by customer (rather than distributor by distributor) basis.

Specialists - These are distributors with a single focus, such as pipe, valves, and fittings (PVF), electrical supplies or safety supplies. Specialists, such as Columbia Pipe and Fitting or Arbill, market their technical experience and ability to help customers not just by supplying parts, but identifying what parts a customer actually needs to perform a particular function or stay within compliance rules and regulations. Most offer engineering and design support as well.

Generalists - These include distributors that provide a wide array of parts over a wide variety of categories. They may provide electrical supplies, fasteners, general industrial supplies, and safety supplies, all in one catalog. Examples of Generalists include Fastenal, MSC, Grainger, and McMaster-Carr. Generalists focus on providing a “one stop shop”, easy ordering, and value added services such as vendor managed inventory or free next day shipping. Their focus is ensuring that you have the part you need (any part) at the time you need it (any time).

Partnerships - Partnerships can be fairly diverse in nature, but normally include a group of specialists (and sometimes manufacturers) in a particular industry that come together to compete on a regional or national level. In the category of electrical supplies, partnerships such as Vantage Group or Vanguard National Alliance have pooled in some cases hundreds of individual local companies together in a loose affiliation or even through the formation of a new company to compete with national (semi-)specialists such as Wesco Distribution. In the area of bearings and power transmission, national partnerships such as Precision Industries were developed to compete with the likes of Motion Industries, Applied Industrial Technologies, and Kaman.

Integrated Supply - Also known as outsourced storeroom management or consolidators, these companies will take over the entire process of purchasing MRO on your behalf. This includes ordering product, managing inventories, and paying for goods. Integrated suppliers cater to companies that want to focus on their core competencies and outsource the day to day activities of parts procurement to someone else. Companies utilizing integrated suppliers expect to see value in leveraging the overall volume purchased by integrated suppliers to reduce their per unit cost when purchasing parts and benefit from processing one vendor invoice a month rather than hundreds or even thousands. Suppliers focused in this area include supplyFORCE and Storeroom Solutions, although Generalists such as Fastenal or Barnes Group or Specialists such as Motion Industries are also beginning to offer some level of integrated supply services.

Retailers - Purchases from home improvement stores such as Lowes, Home Depot, and Sears Hardware, often fall under the MRO category as well. Retailers offer easy access to thousands of general items, but if you are looking for a part that is somewhat unique, or a specific manufacturer, you probably will not find it here. In addition, most retailers do not offer anything substantial in terms of corporate discount programs, so you are paying premium (retail) rates when buying from one.

The industry is further broken into local, regional, and national players, with some overlap. For example, your local electric distributor could fall into several categories. They may stand on their own and service your local plant, but they could also partner with other local distributors to offer programs nationally through an organization such as Vantage Group to accommodate companies looking for local service but consistent pricing across locations.

Just as diverse as the suppliers in the industry are services available and the sales teams that work day to day at your facilities. Sales representatives at national companies may be able to tout service offerings, technology, and consolidation opportunities, with local companies able to provide engineering support and technical expertise. Some reps can be highly capable, and others fairly unqualified, unknowledgeable, or down right sleazy - all within the same company operating under the same contract and service level agreement.

As you begin to analyze spend data and undertake an MRO sourcing initiative, you should keep this diversity in mind. You may see that multiple suppliers are used for the same type of purchase, or even the same part, either within the same plant or across multiple facilities. This may represent a consolidation opportunity, or there may be valid reasons for using multiple suppliers. Before digging into a project, make sure you understand these distinctions and plan accordingly.
Japanese supplier disruptions hurt earnings at U.S. businesses  Since the 9.0-magnitude earthquake and subsequent tsunami battered Japan on March 11, industry watchers have wondered how the devastation and halts in factory production would affect companies throughout the globe. Businesses began reporting their recent fiscal quarter earnings last week, and now analysts are gauging the actual effects. 

Reuters reports that the ongoing crisis in Japan is cutting into the sales and profits of U.S. companies that Japanese consumers buy products from. Japanese companies supply critical electronic components for businesses around the globe. Japanese consumer products makers and store chains were especially hurt by the effects of the natural disasters, and they're struggling to keep production up.

Luxury leather goods maker Coach said nearly 20 percent of its sales come from Japan; because of the cutbacks in consumer spending there, Coach said it could lose between 2 cents and 3 cents in profit per share in the current quarter, illustrating how the supply chain disruptions and other manufacturing problems are hurting businesses' bottom lines.

Moreover, Coke, a perennial powerhouse on Wall Street, announced earnings that missed analysts' expectations in part because of the lost revenue in the Japanese economy. In a statement, the company said that supplier disruptions were impeding its ability to produce products in time for the summer, when it usually witnesses an uptick in sales.

The shocks to infrastructure in Japan are having far-reaching consequences still, even more than one month after the earthquake and tsunami hit, according to Coke chief executive Muhtar Kent. "Overall, I think the supply chain is still stressed in Japan in terms of being able to supply the market," Kent said in a conference call with analysts.

Consumer goods giant 3M is greatly exposed to the Japanese market through its business model, and it has been forced to reassess its full-year fiscal guidance as it adapts to the ongoing crisis. The Japanese crisis caused the company to cut its first quarter earnings by roughly 3 cents a share; further, it could reduce its full year profit by 10 cents to 13 cents a share.

Nonetheless, businesses are optimistic that the crisis won't hurt earnings in the long-term. "We don't see any long-term damage," Coach chief executive Lew Frankfort told Reuters in an interview. "We believe Japan will return to normal."
Tear in Boeing jet during Southwest flight likely caused by manufacturing defect  On April 1, a Southwest Airlines flight suffered a hole in the riveting of its roof in the midst of a flight. The plane's pilots were able to safely land the aircraft without any injuries, and this week investigators released a report detailing the crash. According to analysts, manufacturing defects are most likely to blame for the tear.

The plane was a Boeing 737 that was delivered to the airline in 1996. According to a report from the National Transportation Safety Board, the plane had accumulated 48,740 hours of service and 39,781 cycles - defined as a takeoff and a landing - at the time of the accident. Investigators who inspected the plane immediately upon landing said the hole measured nine inches across and 59 inches in length in the roof of the plane.

The report concludes that rivet holes on one layer of the plane's skin did not line up properly with an underlying layer. Experts said the aluminum skin had not properly bound together, which made the plane more vulnerable to cracks and was likely caused by a manufacturing defect.

Though the government's report did not draw any conclusions in its findings, industry watchers contend a manufacturing error was likely the culprit. "It means the assembly was wrong, it means the wrong tools were used, it means they were careless in drilling the holes, and maybe the drill was dull," John J. Goglia, an aircraft maintenance expert and former member of the safety board, told the New York Times.

For its part, Boeing - along with the Federal Aviation Administration - recommended in the wake of the incident that all airlines operating late-model Boeing 737s check the planes to ensure there were no cracks in the skin of the planes. Like the plane that suffered the tear, however, five other Southwest aircrafts that had about 40,000 cycles each were also found to have cracks in their skin; Boeing had not previously advised inspecting those planes until 60,000 cycles.

Some industry analysts are unconvinced a manufacturing error is to blame for the incident, including Tecop International owner Hans J. Weber. "This is a real puzzle," Weber told the Times. "I am not fully satisfied with the explanation. The manufacturing of aluminum is very well understood."
Higher business costs from rising energy prices eating into profits  Since the depths of the recession, the U.S. economy has recovered with some industries expanding at a fast clip. Railroads and trucking companies have benefited with an uptick in business from the nascent economic recovery, but according to a recently published report, higher energy prices are starting to eat into their profit margins. 

The New York Times reports that railroad and trucking companies have been especially hurt by the precipitous rise in the price of oil since the beginning of the year. Diesel prices are currently at their highest levels since 2008 and the increased business costs were on display when Union Pacific and Arkansas Best Corporation posted quarterly earnings that were below analysts' expectations.

Though the U.S. manufacturing sector has experienced over 20 consecutive months of growth, the higher diesel prices could heavily impact the industry, according to analysts. "The manufacturing sector is hit disproportionately hard by higher diesel prices," Manufacturers Alliance economist Donald A. Normal told the news publication. "Simply to move all this stuff around, it is really hard to affect any cost savings. You have little in the way of alternatives."

It's the increased costs that are starting to worry investors and consumers alike; the former is concerned that growth will taper off as businesses battle rising costs, while the latter group isn't confident with the current economic climate as they pay more at the pump - and at stores as well.

This week, President Obama called on members of OPEC to increase the supply of oil, but analysts are not confident that a sudden rise in oil supplies will occur. Moreover, the recent spate of uprisings in the Middle East and North Africa, along with the ongoing conflict in Libya, are spurring unease among industry watchers as they predict future shocks to the oil supply may happen.

In its first quarter earnings report last week, Union Pacific stated that it paid an average price of $2.88 per gallon during the quarter, representing a rise of 33 percent from the price it paid the year prior; during the first three months of the year, Union Pacific spent $200 million more on fuel than in the same time period in 2010. Though the company posted its best first quarter earnings ever, the rising fuel prices are portents of what's to come, investors fear.

Nonetheless, some analysts contend the higher energy prices are actually a good sign for the train industry. According to experts, higher oil prices tend to coincide with higher prices for all commodities; usually, such a phenomenon occurs during periods of economic expansion as higher demand drives up values.

Further, railway companies also benefit in another way from higher oil prices as more companies will shift the transportation duties to them away from trucking outfits as trains provide a more energy efficient mode of delivery goods throughout the U.S.

Still, Werner Enterprises executive vice president John J. Steele contends there is no silver lining to the surge in energy prices. "You are paying at the pump sooner than what we are able to recover from our customers," he said in an interview.

"But the biggest issue is the effect it has on the consumer," he warned. "It is taking away dollars that they can spend and that translates into a drag on the economy, and that means there are less loads in our system. Retailers are about half of our customer base."
Infor, Golden State Capital to buy Lawson Software for $1.8 billionThe mergers and acquisitions world is filled with activity this week. On Monday, Equinox agreed to be purchased by Barrick Gold in a deal worth a reported $7.8 billion. On Tuesday, Lawson Software Inc. said it will be acquired by an affiliate of Golden Gate Capital and Infor.

The deal, worth roughly $2 billion, was approved by the company following six weeks of a strategic review process that was initiated after the companies made an unsolicited takeover bid. Per terms of the deal, Lawson's shareholders will receive only $11.25 per share, representing a 7.3 percent discount from the stock's closing price on Monday. That price, however, puts a 14 percent premium on the stock's close on March 7 - the last day of trading before reports came out of the deal.

In March, Infor and Golden State Capital issued a bid worth over $1.8 billion for Lawson, which specializes in the production of software that helps businesses automate their operations. After Lawson performed its strategic review of the competitive bid, it ultimately decided to accept the offer, the Wall Street Journal reports.

"After a thorough examination of the strategic alternatives available to the company as well as extensive discussions with Golden Gate and Infor, Lawson's board unanimously concluded that this transaction is in the best interests of the company and our stockholders," Lawson Software chief executive Harry Debes said.
Silver Lake Partners, Silver Lake Sumeru look to buy Smart Modular in $645 million cash dealIllustrating the growing consolidation of the technology industry, Smart Modular Technologies said on Tuesday that it has agreed to be purchased by Silver Lake Partners and its affiliate, Silver Lake Sumeru.

The cash deal is worth $645 million, the New York Times DealBook reports. Smart Modular specializes in the development and design of computer systems; the company was acquired by TPG, Francisco Partners Management and Shah Capital Partners in 2004 for $100 million. Those private equity firms stand to profit mightily from their investment made nearly seven years ago.

Smart Modular went public in February 2006, but will now go private through its new ownership, according to chief executive Iain MacKenzie. "As a private company, we believe we will have greater flexibility to deliver to our customers the benefits of our long term strategies, while managing the volatility of the DRAM cycles that have and will continue to be part of our business model," MacKenzie said in a statement.

Silver Lake's offer represents a 23 percent premium over Smart Modular's average closing stock price over the past 30 trading days, and a 12 percent premium on the stock's close Monday. The deal is expected to close in the third fiscal quarter this year, but Smart Modular has a go-shop period where it can find other potential buyers until June 9.
Ford slows manufacturing following Japanese supplier disruptions  Japanese automakers have suffered mightily in the wake of the devastation caused by March's earthquake and tsunami that battered the country. A majority of the nation's automobile manufacturing facilities are located in the northeast part of the country - hardest hit by the natural disasters - and many production plants have had to either close or slow manufacturing. 

This week, U.S. Ford Motor Co. said it had to temporarily idle some of its assembly plants as it works to conserve parts. The Detroit-based automaker relies on Japanese suppliers for important components used in the development of its vehicles and has suffered through supply chain disruptions emanating from the crisis.

Ford's manufacturing plant in Taiwan, which produces the company's Escape, Focus and Mazda 3 models, was closed Monday for the next two weeks. The carmaker also announced this week it shut down a manufacturing plant in South Africa, and another joint-venture facility in the country.

With the announcements, Ford joins a growing number of carmakers that have been forced to slow or altogether stop their production as critical parts from Japan are not arriving on time. Many Japanese factories are still working to go online, but the country's beleaguered infrastructure and rolling electricity blackouts are impeding the process.

Last week, Toyota said its production wouldn't return to full capacity until at least the end of 2011. 
Coffee bean shortage driving price up  Over the past year, there have been shocks to global coffee supplies, caused primarily by inclement weather. Now, consumers are starting to feel the pinch of higher prices as coffee prices topped $3 a pound for the first time in over three decades.

CBS News reports that the uptick in price has resulted from supplies of high-grade arabica coffee falling, along with increased demand from a burgeoning middle class in China, Brazil, Indonesia and India who are increasingly craving the commodity. Moreover, the continued weakness of the dollar has boosted the prices of nearly all commodities over the past 12 months, analysts assert.

Arabica coffee hit $3.025 per pound in New York last week, representing its highest value since 1977. Supply shortages are driving prices higher; over the past seven months, coffee prices have soared, rising more than 100 percent.

The outlook on future prices shows the supply strain that's affecting the market. Inclement weather in Colombia, the second-biggest producer of arabica beans after Brazil, has caused the country's stockpiles to plummet to their lowest levels in 33 years. According to the Financial Times, global coffee inventories are currently at their lowest levels in over 50 years. 
Barrick Gold to buy Equinox in $7.8 billion deal  In a move that illustrates the growing consolidation of the materials sector, the Barrick Gold Corp announced on Monday it will acquire Equinox Minerals in a deal worth a reported $7.8 billion.

Equinox Minerals has been the subject of takeover bids in the past, and over recent weeks many big names have come forward as they endeavored to purchase the mining giant. Chinese miner Minmetals put forth a bid worth $6.2 billion earlier in the month, but Barrick's offer was 16 percent higher and matched the company's expectations, according to Craig Williams, the head of Equinox. Williams said Barrick presented a bid "superior to the public proposal made by Minmetals in terms of certainty and value."

Barrick's all-cash offer values Equinox 30 percent higher than its shares traded on February 25. On that day, Equinox bid for Lundin Mining Corp - it has since reneged on its own attempted acquisition and accepted the offer from Barrick.

According to data from Thomson Reuters, the materials sector - of which mining is a part - has witnessed mergers worth $133 billion thus far this year. That figure is more than double the $57.5 billion in transactions seen in the same period last year.

Aaron Regent, Barrick Gold's chief executive, said the deal would both keep with the company's business model and increase its precious metals stockpiles. "The acquisition of Equinox would add a high-quality, long-life asset to our portfolio," Regent said in a statement. The move is "consistent with our strategy of increasing gold and copper reserves through exploration and acquisitions."
Rumor: White iPhone 4 to go on sale this week  Reports of manufacturing delays have plagued Apple's suppliers for a while, leaving consumers without the choice of purchasing a white iPhone 4. Currently, there is only a standard color on the market, but that could change this week, according to a recently published report.

The Strategic Sourceror has reported this month on the manufacturing delays that have caused disruptions to Apple's iPhone supply chain in the past, but this week reports are surfacing that the newest iteration of the iPhone will soon be available to consumers in white. Unlike past models of Apple's massively popular smartphone, the iPhone 4 has so far been only available in one standard color.

Citing unnamed sources, the International Business Times reports that the white iPhone 4 could go on sale this week in the U.S. Moreover, TechLand, a blog devoted to electronics and other gadget news, has posted a screenshot from Best Buy's inventory, showing that the retail giant will begin selling the white iPhone on April 27.

Some Apple executives have said the phone would come out this spring, and reports have swirled over the past few weeks that the white iPhone would be available during the last week of April - which happens to be upon us.

Source One Management Services, LLC, a leading provider of strategic sourcing, procurement and cost reduction solutions, has announced a new strategic partnership with Panacea Healthcare Solutions, Inc., one of the nation’s preeminent companies specializing in Healthcare Coding, Compliance, Reimbursement and Financial Systems and Services.

“We are very excited at the opportunities this new joint effort represents,” said Steven Belli, CEO at Source One. “Panacea and its MedLearn Division have an unsurpassed reputation as the nation’s leading authority on medical coding, compliance and reimbursement. We think the combined offering of Source One’s spend management and strategic sourcing services with Panacea’s healthcare technology and financial consulting expertise will provide an important advantage to healthcare organizations looking for innovative ways of dealing with today’s myriad economic challenges.”

“By joining forces with Source One, we are adding an important new dimension to our core revenue management-focused approach to assisting as clients they struggle to reduce costs in response to healthcare reform,” said Frederick Stodolak, CEO at Panacea Healthcare Solutions. “The fact is, the average-sized hospital can most likely reduce its annual expenses by millions of dollars by implementing Source One’s spend management and sourcing solutions -- and in most cases clients will not need to change suppliers.”

“Since 1992, Source One has been a recognized leader in helping companies across a range of industries reduce their non-salary related spending,” Stodolak noted. “Their demonstrated professionalism, experience and successful track record in helping several major hospitals reduce their expenditures by millions of dollars were key factors in our decision to undertake this joint venture. We are so confident in our ability to identify real cost savings for our clients that we will be offering the service on a no-risk basis.”

Hospitals can register at www.hospitalcostreduction.com for more information and to find out how to get started.


Source One Management Services, LLC (www.sourceoneinc.com), based in Willow Grove, PA, is one of the nation’s leading strategic sourcing and procurement providers, offering customized strategic sourcing, cost reduction and spend management solutions to help companies realize competitive and sustainable savings since 1992. Its team of experienced sourcing professionals works closely with clients’ in-house staff to reduce spend, optimize existing budgets and increase the efficiency of operations by using proven sourcing and purchasing strategies, best practices, innovative technology, and an extensive proprietary database of market intelligence to help clients achieve the maximum level of savings possible.


Panacea Healthcare Solutions, Inc. (www.panaceahealthsolutions.com), with offices in Minnesota, Florida, Arizona and New Jersey, provides expert coding, compliance, and financial advice, publications, seminars and information technology to improve bottom line performance to healthcare providers, and other clients. Panacea’s areas of expertise included Coding, Compliance, Finance and Reimbursement and Revenue Cycle Consulting and Systems. Through its MedLearn (www.medlearn.com ) Division, founded in 1991, the Company is the nation's most respected authority on medical coding, compliance and reimbursement.
Gree to acquire California-based OpenFeint in $104 million deal  Japan-based Gree Inc. announced this week it will buy California-based OpenFeint Inc. in a deal worth a reported $104 million.

Bloomberg reports the Japanese company, an operator of social networking services, will buy the company as it works to expand its footprint in the U.S. OpenFeint provides more than 5,000 games to smartphone users and has a broad customer base. According to Gree executives, the company will have access to 75 million additional users through the acquisition.

Gree will use some of its cash stockpiles to fund the deal, according to company spokeswoman Reina Mito. The Japanese social networking giant is actively working to grow its business into new territories. The company plans to open offices in Beijing and London, and has established a partnership with China-based Tencent Holdings, which it hopes can help it gain a greater foothold in the world's most populous country.

In total, the companies' user base will reach over 100 million people. "At GREE, we are socializing the next evolution of games and, as the best-in-class US-based mobile social network, OpenFeint is the ideal partner for us to offer the best mobile social games to the largest global audience," Gree founder and chief executive Yoshikazu Tanaka said in a statement.

The deal is expected to close on Friday.
Research firm ISuppli: Apple failing to keep up with iPad demand  An Apple enthusiast can tell you how hard it is to secure an iPad2. With Apple stores consistently selling out of the popular gadget, many would-be owners have been left without the latest must-have accessory. Now, research company IHI ISuppli cut its projections for iPad shipments this year following reports of Apple failing to meet burgeoning demand for its tablet offering.

Bloomberg reports the California-based research company said Apple could ship 39.7 million iPads this year; that figure represents a nine percent decline from the company's February estimate of 43.7 million units.

There have been widespread reports about delays in iPad shipments, and with the ongoing crisis in Japan, analysts contend that additional disruptions could result through the end of this year. According to ISuppli, Apple has had trouble securing liquid-crystal displays and speakers, spurring the supply shortages.

Nonetheless, ISupply affirmed that Apple has moved more aggressively than other technology companies to find alternative suppliers for its critical components, and that delays so far have resulted from supply and demand fundamentals.

Apple currently is far and away the leader in the tablet market and is widely expected to command a dominant market share through next year.
Toyota's CEO says production won't return to normal levels until the end of the year  Toyota Motor has had to contend with a myriad of disruptions to its supply chain following the 9.0-magnitude earthquake and subsequent tsunami that struck Japan on March 11, hobbling the country's infrastructure. This week, the world's biggest automaker said it will not return to its pre-disaster production levels until the end of this year.

Though Toyota was long viewed as a model among businesses for its consistent growth and quality control, the company came under fire in 2010 following reports of electrical malfunctions in its vehicles. The company recalled 2.2 million cars and was fined heavily, but a government panel concluded that Toyota's electronic throttle systems were not at fault for unintended acceleration as consumer advocates had charged.

Now, the Japan-based carmaker is working to shore up its supply chain as it moves to resume production at its Japanese plants. The majority of automobile manufacturing facilities in the island nation is located in the northeast part of the country - the hardest hit by the natural disasters - and as a result, the auto industry has taken a disproportionate hit to its supply chain compared to other sectors.

The announcement by Toyota on Friday that it wouldn't resume its full manufacturing capacity until at least the end of the year is the longest time frame yet described by the company, the New York Times reports. Toyota has 17 factories in Japan, and though a majority were unharmed, its U.S. factory lines are working at half volume. Moreover, its overseas manufacturing facilities are operating at 40 percent capacity as the company's suppliers struggle to resume operations.

The world's biggest carmaker said last week that it would slash its U.S. manufacturing capacity by 75 percent over the next six weeks; it also announced its Japanese operations would function at half-capacity through at least June 3 - though the company had refused to comment about possible future disruptions to its supply chain beyond that time frame.

On Friday, Toyota chief executive Akio Toyoda said the company plans to slowly ratchet up production through the summer months. According to Toyoda, the company will boost capacity at its Japanese facilities in July, and will have its international manufacturing plants increase production in August as parts become more readily available from Japan.

"The damage has been so widespread in this unprecedented calamity that its economic effect is being felt throughout Japan and in every industry," Toyoda told reporters.

Analysts contend the company's supply chain model has left it especially susceptible in the wake of the natural disasters. Toyota produces over half of its cars in Japan and then ships them overseas. Moreover, the company has a so-called "just-in-time" production system that keeps parts inventories at low levels and helps cut business costs. Though it was widely celebrated during the company's vaunted rise during the past decade, it is now a liability.

A reduction in its supply of vehicles couldn't come at a worse time for Toyota as global auto sales have surged as the global economy has recovered. With a shortage of vehicles, Toyota is potentially losing out on a wave of new business, especially among first-time buyers who have yet to build brand loyalty.

Toyota vice president of production Atsushi Niimi said the company currently faces a shortage of 150 critical parts - down precipitously from the 500 parts that were in short supply in the immediate wake of the disasters. "We need to procure more parts overseas, and we also urge our suppliers to make more forays outside Japan," Niimi affirmed.
It's no surprise. We are currently living in "uncertain times" in the midst of major economic transitions. No one seems to know for sure what is going to happen to our future. Media has exploited this uncertainty to sow fear and doubt into its audiences and consequently has reaped the benefits of its results in ratings and advertising.

Despite the doom and gloom and chaos, history (a great indicator of our future, if we chose to learn from it) has proven throughout our most valuable commodity of time that mankind has not only survived challenges and "storms", but he has prevailed remarkably. This only points to the evidence that our God given creativity and unsurpassable will has been designed to "carry" us through and out of challenges. This same will to preserve mankind is fueling our governments to strategize high level solutions that will ease these transitions. Private and public companies have actively sought out well known and reputable strategic sourcing companies like Source One to evaluate and come up with proven solutions for their existing budgets and spends. Where does that leave the rest of us, the average citizen?

The answer is BUDGET.

Budgeting is a very simple concept that has been generally stigmatized. A budget has become the dreaded 6 letter word of most households, which has led to external and internal conflict. This results from misinformation on what a budget is and why we need a budget.

Every financial institution requires and uses a budget. Yes, a home is a financial institution because money comes in and money goes out. Even, if we do not use a formal budget on spreadsheet and financial sheets, we use the concept of budgets on a daily basis. The negativity attached to budgets stems from when budgets are formally introduced into our lives. Budgets have not been properly taught to us when we are young (which I believe is where it should start). Budgets are mostly introduced to us when we have come to a financial "crises" when we are forced to sit down and re-evaluate our money. The result is... "Oh no, we have to budget".

A budget is merely a tool that forces us to evaluate our past, current, and future. Notice I didn't say money. A budget is an effective tool that will helps us visualize where we have been, where we currently stand, and where we plan to go with our lives (as an individual and as a family). Budgets help shape visions and cultivate dreams by empowering us with a plan.

Budgets also remove any "surprise" elements from the financials in the home. When the money flow is evaluated continually, there is no extraneous expenses from controllable overspending that "puts you in the red" without warning (outside of unforeseen incidents).

Budgets moves people from a "going through the motions" of living paycheck to paycheck mindset to a purpose driven, goal setting, and results oriented mindset/attitude.

So, how does a budget work?

A collection of "snapshots" of past spending patterns helps establish the "budget". Past spending and earning patterns now becomes the new budget. In essence, we don't want our money to "budge" from the new pattern that is being set. In order to do that, the money's activity is tracked (usually on a monthly basis) and compared to the set budget.

For example, I make $1000 a month and I want to save $200 a month after all my bills are paid. A budget will help me save the $200 every month, and if I cannot save the money, a budget will me help find out why and where I can make changes to my spending patterns to achieve my goal.

Once a budget is set (done one time), the "spend analysis" should be done continually (at least monthly). A great time to analyze spending is when bills are being paid. Making changes to your "set budgets" should be done as often as circumstances change or as new goals arise.

A budget is broken out into two main sections:

  • Income

  • Expenses
Income should include all sources where money comes into the home (wages from work, cash from side jobs, child support, gifts, interest income, etc... )

Expenses are broken down into the following main categories:

  • Fixed Expenses - monthly bills that are the same every month throughout the year (rent/mortgage, cell phone, cable, etc...)

  • Variable Expenses - monthly bills that change from month to month (electric, gas, food, etc...)

  • Seasonal/One time expenses - bills that may not occur monthly, but needs to be planned out for future months to come (school uniforms, tuition, etc...)

  • Savings - an account can be set up for each savings project and automatic transfers can be utilized to facilitate the actual moving of money from one account to another (see your local banking institution on deciding the best account for your specific needs).

  • Gifts - monthly/quarterly/annual, etc... donations to charities of your choice

Families should budget together with all input shared and valued equally. Budgets should be made transparent at all times to both spouses. Parents should always make the grown up decisions, but children should be aware and continually reminded of the family goals so that they can be actively involved in "keeping to the budget." Statements like, "Remember that we are trying to save for a new car, so we are going cook together instead of eating out tonight" are great ways to make budgeting a family effort. Involving children also helps them understand the concepts of managing money to a budget at a young age and they will retain and use these same skill sets as they mature.
For those who are techno savvy, find a free budget template and plug in your numbers from past bills and bank statements (2-3 months is a good gauge in spending patterns). Mint.com also has a great free tool that interfaces with your banking institution with little maintenance.

If you are not familiar with excel or computers, simply keep a notebook and a calculator handy to track your monthly spending. Print out the templates and record your spending patterns by hand. You can then calculate the monthly incoming and outgoing activity of your money and make adjustments to you budget as needed.

The hardest part about budgets is weighing wants and needs against dreams. Once a budget is formed and the goal is clearly established, then keeping to the budget is easy. Yes, it is nice to have the most premium sports package Comcast has to offer to catch every game of the season, but at what cost. Asking questions like, "How much do we want to save for my children's' college?" "How much do I need for a down payment to my first home?" "How much do we need to save for our next vacation?" and others helps set the goals and visions for our dreams. Then, work backwards.

For example, if a down payment for a home is $20,000 and in order to save that much in two years, $834 (take $20,000 and divide by 24 months) needs to be put away every into a saving account every month for two years (work closely with a bank to find your best option for saving accounts that yield the most interest so your money grows while you wait!).

In order to save $834 a month, "something has to give" in the monthly expenses. It might be eating out less, cancelling the gym membership (and working out at home or outside), cutting out cable TV (and watching free TV online or engaging in free creative activities with the family), car pooling to work, etc... in order to make it happen.

It is possible to reach your dreams and goals in a very realistic and practical way. Don't delay, budget today!