Recession blows fear through management ranks in the business world. The old maxim that it is an ill wind that blows nobody any good is however true for procurement and supply chain practitioners at present. downturn in business, whether short- or long-term, sharp or gradual, poses headaches for purchasing managers.
However, when the CEO calls, the best equipped procurement managers can use the circumstances to improve the bottom line and create more robust and favourable long-term vendor relationships.
The proactive procurement manager recognises that the market is or believes itself to be in recession. Existing purchasing tactics and some purchasing strategies will need to be modified. The change in customer demand will flow back up the supply chain, causing short-term distortions and longer-term changes to the supply market. The proactive purchaser is able to take advantage of the distortions and shape the supply chain to their advantage long term.
A detailed knowledge of the supply market is essential. The purchasing manager needs to concentrate resources on the “strategically critical” items without taking an eye off the ball on other high exposure or big-ticket items. There needs to be clear vision of what needs to be achieved.
It helps to remember that the talk of recession has conditioned vendors and internal customers to expect change. You must drive that change.
Implications of recession
Economists define recession as the failure of national economy to grow in two successive quarters. As end-user consumption falters and declines, the reduction in demand flows back up the supply chain. Each adjustment downwards in production and capacity to meet the decline in demand also ripples out to other sectors complementary to the original service. Thus self-propelling downward spiral is created. Interlinkage of the modern global economy means that if major national economy stalls, that effect ripples its way around the world.
The US economy has been on the brink of recession all year, despite the best efforts of the Federal Bank. The impact of the terrorist attacks on American businesses is still unfolding, but it will certainly be enough to push their economy into recession.
The fall in consumption in the September 11th inspired recession is likely to be sharper (at the beginning anyway) than the historical norm. Therefore, despite leaner supply chains, faster methods of transferring information and greater awareness of this recession’s start, there is every probability that inventory build up will be as high as previously. It remains very difficult for number of sectors to reduce production quickly to match consumption.
Vendor priorities are likely to follow patterns seen previously. Retrenching to core activity (ie the ditching of marginal activity), aggressive activity to maintain sales volumes, including some use of predatory or marginal pricing to force weaker vendors from the market. Thus capacity will reduce back to equilibrium with demand.
Having established new equilibrium position, when growth does return, some areas of supply will be able to respond quite quickly to increased demand. However, there will be areas in which that is not immediately possible.
As demand picks up so vendors will seek to recover lost margin, using short-term supply shortage as the principal lever. The procurement manager must correctly position their company during the recession to deal with these changes.
Internal opportunities
There are quick wins to be had internally. The climate is often good for progress to be made on internal issues or ideas that have been snagged or sidetracked by other stakeholders previously “too busy” to work with procurement teams on added value and cost reduction opportunities in the supply chain. Elimination of rogue buying, squirrel stocks, standardisation of purchased products, etc are all realistic goals for the procurement manager.
Lead and challenge stakeholder team to take hard look at the specification of the goods and services that you consume. Do you need the branded product? Can the tolerances be relaxed or the frequency of the serviced reduced? Be systematic in the way you target items for analysis. The recession moves the burden of proof away from purchasing saying this is the potential saving/value add, can we change, to others having to justify why change should not be made.
Having established stakeholder working parties, you can involve your key suppliers with mixture of incentive and implied threat. “We need to get significant cost reduction on this product and we would like you to help us in achieving this goal. We don’t necessarily want to squeeze your margin and we are looking at our internal costs as well, but we must achieve this reduction or our product will be uncompetitive in the market place.” The supplier knows their product, they will have suggestions on ways to add value without additional cost or reduce the cost of what you are buying if they fully understand how and to what purpose you use the product.
Contracts and
commitments
An early review of supply commitments and contracts is prudent. Obvious trouble spots are minimum volume commitments, demand notice periods, volume-related cost schedules, escalation clauses, agreed payment terms, rebate schemes, exclusivity clauses and termination dates.
Remember to look for what is missing as well as at what is present. When reviewing your contracts, you may also wish to consider items that may have moved from the “strategic critical” box into the “tactical profit” area, due to perturbations in the market.
It may be that you may wish to exploit the short-term profit opportunities created by the decline in demand, and therefore you might want to consider either creating room for manoeuvre within existing/future contracts.
Alternatively, you could consider delaying or dispensing with some long-term contracts. The risk here is that as the market returns to equilibrium or starts to grow, then you will be left exposed.
As buyer with contract to let, you are rare beast in declining market. As such you will receive increased attention from potential vendors. Sellers expect and will be prepared to work harder and offer more. So ensure that you have as full requirement list as possible from your internal stakeholders, form view of the likely cost of such “additional activities” and don’t be afraid to push for concessions.
Quantifying the risks
If possible revert back to your supplier preferencing matrix to assist in assessing how suppliers are going to approach you. Those who regard you as core or developable business are going to be the most willing to participate in working groups and listen and act creatively in cost reduction activity.
If your vendor considers you nuisance, then he will treat your approaches with contempt and is most likely to seek to exploit the changes in the market at your expense.
This is the time to dig out the market research that you did on this supply area and have another look at your options. If you sense that the incumbent vendor has altered his view of you ask yourself: why? is it long term? how do you want to develop the relationship? and, can you secure long term benefits?
Companies do go out of business in recessions. good supply chain manager needs to be aware of which of his vendors are vulnerable. This is easily done in number of formal and informal ways; through business news, information gleaned from annual reports, credit rating agencies etc on the one hand, through observation during supplier visits and interrogation during calls/meetings, observing behavioural change and general market gossip on the other.
Draw up plan for those that you consider the most vulnerable. The plan will vary depending upon how crucial you consider that vendor’s survival to be to your business.
At one extreme, this might include bringing forward payments, working on altering specifications to ta
