2007 brings lower prices, and innovations from distributors
Purchasing professionals and industrial distributors forecast prices and the economy for 2007.
By Susan Avery -- Purchasing, 1/18/2007 2:00:00 AM
With the new year comes a softening economy, more stable prices, a smaller supply base and ideas to improve productivity and reduce cost.
MRO purchasers and industrial distributors agree that the booming economy of the past three years has started to slow, but they still expect business conditions to be strong in the next 12 months. They also say that while prices of some raw materials that go into MRO items still may be high, they are likely to be less erratic than in 2006.
Buyers and suppliers continue to see consolidation in 2007. Taking a more strategic approach to MRO, purchasers are paring the supply base, and looking to distributors for help with improving productivity and reducing cost. Suppliers are responding by offering more services, including taking on sourcing responsibility and introducing private label brands.
After three years of good growth, distributors see slowing economic conditions, but are still upbeat about 2007. Bruce Judkins, vice president—electrical business at Graybar in St. Louis, Mo., expects the economy to be “very good in 2007, although it may not be as strong and robust as in 2006,” while Nick Lundquist, executive vice president and COO at Fastenal in Winona, Minn., calls current conditions “sensitive,” adding that the economy could “spring back in January and February, and we'll be off to the races again.”
Bob Summerlin, executive vice president of sales and marketing at Motion Industries in Birmingham, Ala., watches the housing and auto markets and notes their effects on the economy. “Everyone is crossing their fingers that housing and auto will not have a huge impact on industrial production,” he says.
More specifically, distribution has been on “a real growth tear, at double-digit levels, driven by organic growth by customers and a wave of commodity price inflation,” says Adam J. Fein, president of Pembroke Consulting in Philadelphia. The industry will continue to grow, he says, “although our forecast is that growth will slow to single digits.”
Grainger of Lake Forest, Ill., is one distributor that's looking at growth in 2007 of 7-10%, says Kevin Peters, senior vice president, supply chain management. Attributing much of that to the company's market expansion and product expansion initiatives, he also bases the expectation on forecasted growth in GDP of 2.6-2.8% and a 3.2-3.5% increase in U.S. industrial production.
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Adam Fein of Pembroke Consulting: “Distribution will continue to grow.” Grainger’s Kevin Peters: “We expect industrial production to increase.” Motion Industries’ Bob Summerlin: “We watch the housing and auto sectors.” Gerdau AmeriSteel’s Paul Ford: “Tool steel pricing is a good indicator.” |
“Chaotic” is how Graybar's Judkins describes pricing of raw materials such as steel, copper and oil in 2006. Other distributors and purchasers say they have not experienced such increases during careers that span 25 years or more.
To monitor pricing trends, executives at Grainger and purchasing professionals such as Paul Ford, director of procurement operations at Gerdau AmeriSteel in Tampa, Fla., and a member of Purchasing's All-Star MRO Buy team for 2006, track the Producer Price Index (PPI). Other buyers refer to Purchasing's Business Intelligence Center. Ford says his company ties pricing adjustment mechanisms of strategic agreements to the PPI. Looking at the PPI over 2007, he says that it probably will edge up a point or two.
Prices of commodities Ford watches include tool steel used to make bearings. “An understanding of tool steel pricing provides a good indication of where things will go,” he says. “A softening economy in North America will impact the market. However, globally, there's still a lot of strength.” He also studies oil prices.
“In the past, it's been gold, silver or platinum that's impacted other markets,” says C.L. Patterson, senior procurement manager—maintenance at Pilgrim's Pride in Pittsburgh, Texas. “This time it's base metals—steel and nickel.”
A colleague, Ron Pittington, director of procurement, concurs. “In 36 years, I've never seen one factor causing such concern for 2007,” he says. “We think it's short term and will plateau, but we don't see when that's going to happen.” Nickel is used to produce capital equipment Pilgrim's Pride buys for food processing, so Pittington monitors the market nearly every day and regularly reports on its activity to management.
Chris Martus, global commodity manager for chemicals, lubricants and MRO at Alcoa in Pittsburgh, looks to the Bureau of Labor Statistics to identify trends. “We see if published data corresponds with what we hear,” he says.
Martus encourages his team to talk to suppliers to learn what they anticipate for their markets and for downstream businesses. “Clearly, we do that with a grain of salt,” he says. “We take different sources and try to triangulate and see if it jives with other sources. It's not a clean process, but there's nowhere else to find what we need. We bounce this off different places around the world where we buy similar products such as Brazil, Australia and Europe to see if there are common points.”
To keep costs in check, purchasers like those at Pilgrim's Pride continue to consolidate the MRO supply base, concentrating spending with fewer suppliers where it makes sense. They negotiate with distributors and their manufacturer suppliers and look to a smaller supply base for a wider array of MRO items and services.
Gerdau AmeriSteel is looking at reliability engineering and is expanding capabilities internally to encourage cooperation and integration with suppliers in the areas of training and new product development, says Ford. “We're taking a more holistic approach to how they interface, and are looking at kaizen events as ways to reduce costs or improve performance.”
As Summerlin at Motion Industries sees it, “there's new emphasis from purchasing on using the supply chain as a competitive advantage and to create value.” Likewise, Graybar's Judkins sees “the definition of MRO expanding to include services. Schneider Electric, one of our bigger suppliers, now offers circuit board repair services, for example. It takes the idea of consolidation to the next step. Now you can buy your locknuts, wire and conduit and some services and have it all wrapped in that MRO basket.”
Their comments are indicative of a growing trend among buyers to evaluate suppliers on impact on productivity, labor savings, time-to-market, or other metrics that ultimately affect the bottom line, says Fein of Pembroke Consulting.
Distributors, in turn, have expanded service offerings to encompass training, fabrication and assembly, light construction and design of factory systems. In some cases, distributors take the lead and act as an extension of customers' sourcing operations. Graybar's Judkins and Grainger's Peters are two who've seen increased demand for sourcing activities.
Another way distributors are strengthening relationships with customers is by offering private label brands. “Forward-thinking distributors take it further, working with purchasing to develop custom products,” says Fein, pointing to safety products distributor Arbill Industries from whom customers can request specific features be added to a product. “They act as a sourcing agent as well as traditional distributor.”
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