Liquidity Lock: Buyers' strategies key in surviving the credit crunch
An unprecedented credit crunch is raising procurement's profile as companies try to cope.
By Tom Stundza -- Purchasing, 11/13/2008 2:00:00 AM
These are confusing and aggravating times for buyers of manufacturing materials, who say they are bracing for several months of supply and pricing volatility because of the credit crunch. The crunch squeezed business and industry particularly hard early in October, then let up slightly by mid month. Nevertheless, "the seriousness of the nagging uncertainty and utter lack of confidence regarding the financial system continues," says Kevin Swift, chief economist of the American Chemistry Council in Alexandria, Va.
But, the good news for buyers is that the credit woes are giving them a chance to show the value of supply chain management excellence. Indeed, a recent Purchasing survey of buyers shows that many in a variety of industries have initiated a series of performance audits and other supplier reevaluations, materials-needs adjustments and purchasing-budget revisions.
Those are just a few of the actions buyers say they can take. They can also use the economic slowdown to better understand how their own practices match recognized best practices, identify and quantify specific financial opportunities and develop plans of action to create near-term wins and strategic transformation, says Robert Rudzki, president of consultant firm GreyBeard Advisors. "Now is not the time to hunker down in a fox hole," he says. "It's time to be proactive."
Dru Rachaner, vice president of purchasing at Milbank Mfg., is one purchasing professional who is being proactive. "We envisioneven higher levels of volatility and price fluctuationsin the future than we experienced in 2008," he says of his team at the electrical meter sockets manufacturing firm in Kansas City, Mo. And that means that existing strategic relationships with suppliers may have to be scrapped or redesigned to match new marketplace and financial realities.
Rachaner says Milbank actually began internal cash management projects two years ago and intensified those efforts early in 2008 when the cost of steel and other raw materials spiked. Another cash-management project is in place now: "With all that is going on in equity and commodities markets," he says, "we are doing all that we can so as not to make knee-jerk or short-term purchasing decisions."
Phil Welton, materials manager at Nicolet Plastics, a custom injection molding company in Mountain, Wis., says "purchasing has anongoing task of stayingin tune with market conditions and supply realities." He says that "disrupted supply will result in our shopping for additional suppliers because that has the potential to disrupt delivery of manufactured products to our customers."
Among the realities purchasing professionals have to monitor is the effect of the credit crunch on commodities buying. Rachaner says that many commodity prices are falling dramatically in the fourth quarter and he believes the battered credit markets "will constrict product pricing elasticity" in 2009, "as many companies will be paying more attention to their bottom lines and their conservation of capital, rather than growth in manufacturing or market share." And then there is the subject of corporate credit policies. Kyle Stavig, president of steel drum manufacturer Myers Container, says from corporate offices in Portland, Ore., that "we are tightening our credit policy with our customers." Presumably, other suppliers in other industries will be doing the same.
While some of the purchasing pros we polled are very concerned about the viability of what they call "small mom and pop suppliers," other buyers say all suppliers need to be watched. They point to the massive supply disruptions to automakers earlier this decade when a large group of motor vehicle parts firms went into bankruptcy reorganization, closed or were gobbled up by competitors. Now, the global banking system is going through the same restructuring in an attempt to reinflate liquidity and credit.
Federal Reserve Bank of Boston President Eric Rosengren says in a speech that an unprecedented "liquidity lock" is preventing short-term loans and shattering old assumptions about basic economics. Rosengren says the nation's financial system has entered uncharted territory due to a "new and unwelcome wrinkle" that basically boils down to "extreme risk aversion" among institutions to loan even short-term money.
In a national survey of chief financial officers and senior comptrollers conducted by Grant Thornton of Chicago, more than half (55%) said they have seen credit costs increase. Almost two-thirds (64%) of respondents have found credit more difficult to come by than one year ago. And that has caused chief purchasing officers to believe that credit costs will increase even as commodity costs decrease. That's why most of those surveyed already have initiated cost-reduction and cash-control programs.
"Business economists became more negative on the economic outlook for the next several quarters as a result of the tightness in credit markets and weakness in consumer spending and export demand," says Chris Varvares, president of Macroeconomic Advisers in St. Louis. He is just one of many economists who now believe that if financial conditions fail to improve quickly, near-term economic prospects will deteriorate markedly—and growth in domestic product will be well under 1% in 2009. And it hasn't helped that the Dow Jones Industrial average has dropped 38% in value in a year.
In October, various global commodities benchmarks fell to 20-month lows as prices of crude oil and other raw materials—ranging from metals to chemicals—came under renewed downward pressure from the worldwide financial crisis. So, with the equity market in disarray and materials prices in sudden decline, many buying groups may be forced to adjust planned purchases for 2009—especially if manufacturing growth contracts as much as forecast.
The accelerated forecasts of imminent recessions in industrialized nations have stunned suppliers of steel, base metals and other raw materials facing shrunken order books, thus setting the stage for collapsed pricing in coming months. "The banking sector problem is now spilling over into other sectors; it's obviously quite a powerful negative demand shock," says Michael Lewis, global head of commodities research at Deutsche Bank in London. "There's probably more pricing downside for industrial metals and energy to come from the credit-induced economic downturn."
Yet, chief purchasing executives say some other suppliers are blithely ignoring reality and trying to raise prices, insisting they have to offset cost increases from previous months. One buyer in Cleveland says several suppliers tried to increase prices for steel in October due to raw material and energy cost increases but "the attempt flopped" in the face of collapsed demand.
"With the general economy being in a slow-growth phase for most of 2008, we already were buying fewer higher-priced products," says another buyer in Rochester, N.Y. "Now, we are delaying buys overall and buying less expensive materials as we try to figure out what's ahead in 2009."
Buyer Phil Zander at Toro, the turf and landscape maintenance equipment maker in Bloomington, Minn., points out that suppliers trying to pass on material increases put unnecessary pressure on purchasing groups to find cost reductions in other areas—"so we do not drive our products out of the customer's hands." However, with demand crashing and materials prices generally in decline, any intransigent price-sellers this quarter run the risk of being replaced by other, more realistic suppliers.
Analysts say it's become obvious that the new U.S. administration likely will face an economy in the midst of recession on Inauguration Day, even if the credit crisis begins to ease in the first quarter. As companies find it harder to secure financing, business spending is likely to be constrained and layoffs are expected to mount. Atop that, wholesalers' inventories climbed more than expected in August, a possible sign of too much supply to meet demand—and a reflection of recent Purchasingdata.com reports that buyers in manufacturing aren't adding to in-house inventories.
"Recent data which show that the U.S. economy may have lapsed into a recession, and that growth in other key industrialized economies has either stalled or contracted, further augments anxieties over the magnitude of the global slowdown," says economist Cliff Waldman at Manufacturers Alliance/MAPI in Arlington, Va. "This raises the specter of a more rapid decline in global growth than had been expected," he says, and creates concerns about the near-term outlook for manufacturing raw materials.
For most of 2008, the feedback from suppliers has been largely about their need for price increases and that has caused adjustments by the company's sales and marketing personnel. Says Welton of Nicolet Plastics, "price increases from suppliers in 2008 already have caused us to reevaluate our pricing strategy and make changesto past methods." He notes that Nicolet Plastics has been forced to change to quarterly pricing review with customers from previous annual reviews.
Still, Welton says there already is some dumping of materials at distressed prices, resulting in a spot buyers' market. "We will take full advantage of any potential supply excess," he says, noting that suppliers are in a potential vise: "Supplierswho have controlled their spending through delayed supplies will be caught short of materials, potentially causing supply shortage. In reverse, suppliers who have continued as normal will have high-priced materials that they will need to force into the market place, with the potential result of lost revenue on their part."
A big problem, he says is a lack of visibility into the future because end-customer forecasts of planned future purchases are sketchy, at best, and suppliers have become intimidated by the credit crunch—and its potential supply disruptions from reduced operations. Import prices have declined, though, and may herald a deflationary trend that will benefit buyers in coming months.
Several purchasing professionals interviewed declined to be specific about 2009 plans, noting that the credit crunch already had made buying plans somewhat obsolete and the financial crisis could worsen still before year's end. "The issues are changing very fast, depending on the general elections in November and the availability of credit to businesses and consumers," says Ron Freiberg, director of materials at Reinke, the manufacturer of center pivot and lateral move irrigation equipment in Deshler, Neb.
Freiberg says the "real credit crunch in play today will impact 2008 and the first half of 2009, maybe longer." He suggests that, "if the proper actions are taken today, it should correct itself by 2010." He sounds more like an economist than purchasing executive, but that's because he has conducted business through a couple of these credit crunches in past decades. And, he says, "if the proper amount of liquidity is plugged into the financial markets, business in general should respond favorably.Our free enterprise economic system usually turns out to be pretty elastic."
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