The irony of higher prices
By Paul Teague, Editor in Chief -- Purchasing, 7/16/2009 2:00:00 AM
Several reports, including some from this magazine, Purchasing.com, and our new community site, PurchasingBIZconnect.com, point out that some commodities prices are at or near bottom, and that they will be rising soon. Energy is one such commodity. See our cover story, on page 60.
How should you react? First, check your position and see if it makes sense to lock in prices where they are at now. Most important: Don't panic. Rising prices aren't necessarily bad.
The historically low prices buyers have been paying seem, at first glance, to be very attractive and a real boon for original equipment manufacturers. After all, one of the goals of purchasing pros has always been to get prices down. Since about last July, the market has been doing that for them.
Take steel, for example. Since July 2008 hot-rolled sheet dropped 64.5% in price, according to buyers answering our regular surveys. Cold-rolled sheet dropped 59.5%, and hot-dipped galvanized sunk 56.4%. The trend was similar for other steel products. Prices for non-ferrous metals, chemicals and electronic components also fell steeply.
But there can be too much of a good thing. The low prices are part of the larger picture of a poor economy. They are so low that, in some cases, suppliers are close to the tipping point where they can't afford to stay in business much longer. A weak economy doesn't help anyone. And, there are few bragging rights that can come from getting low prices from suppliers who are struggling.
Rising prices will reflect an economy on the mend, a good thing. And, they will offer purchasing professionals an opportunity to truly demonstrate their negotiating skills as they act to keep them from getting too high.
The upside of the downturn
Here is some great advice from Mark Mirelez, senior director for subcontracts for Rockwell Collins: Never waste an economic downturn. Mark believes there is no time like a weak economy for purchasing organizations to position themselves for success when the economy recovers. "Business units do that," he says. "Purchasing should do it too."
One strategy, of course, is to review your supply base. Monitoring supplier performance on quality, service, delivery schedules, innovation, response time and, of course, price is something you should always be doing. But during a weak economy, it's especially important to check suppliers' financial health. And to see if consolidation of the supply base is in order.
While you're analyzing suppliers, it's a good time to look at the contracts you have. There may be cases where it makes sense to put new terms into contracts.
It's also a good time to sharpen your focus on spend management and to make sure purchasing's goals are aligned with corporate goals and with the goals of internal customers.
"A lot of procurement organizations take a break during a weak economy," Mirelez says. "Those that do miss a big opportunity to streamline operations and position themselves for a better future."
To hear purchasing professionals describe in their own words how they are responding to the recession, go to www.purchasing.com and type recession reactions in the search box at the top of the page.
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