Buyers' business optimism rests on fragile foundation
By Staff -- Purchasing, 1/14/1999
With the exception of major manufacturing commodities--such as metals and semiconductors--the general economy can only be described as buoyant, according to Purchasing Magazine's new monthly grassroots business and supply conditions survey.While 23% of buyers nationwide say business is down in the past month, fully 37% say business continues to rise, and 40% say conditions have been at least stable in the last month. Meantime, 54% of buyers surveyed nationwide say business is still up over year-ago, compared to 32% who remark an annual decline, and 14% who see no appreciable change from year-ago. More important, a majority of buyers (53%) say they're optimistic about the next six months compared to 34% who classify themselves as neutral and just 13% as pessimistic.
In many cases, these high spirits are well founded as the optimists appear to be resting their impressions on solid order books, substantial backlogs, internal capacity constraints, or hot-selling new products. "New products are selling very well," says the PM for a firm in Greensboro, N.C. "We're getting 25% more orders than anticipated," says the PM for a manufacturer in Lincolnshire, Ill. The purchasing agent for a major tire company says, "We're continually over sold; it's been necessary to subcontract products." Meantime, the PM for a hardware firm in Ill. says, "We keep seeing steady growth and expansion of our goods." The optimistic buyer for a major U.S. mobile home manufacturer says, "Our market is growing rapidly and our growth rate is outpacing the marketplace."
In other cases, however, this general sense of business optimism is more precariously founded, relying, for example, on strong sales forecasts or aggressive marketing plans. The optimistic PM for a fastener firm says, "There is potential at our customers' facilities to increase the amount of business." An optimistic PA in Boyertown, Pa., says, "the electronics industry is expected to turnaround in the U.S."
The purchasing agent for a steel firm in Atlanta says her company will become, "more aggressive at marketing." The purchasing agent for a food company in Norcross, Ga., says her firm has, "aggressive sales and manufacturing plans in place without any capital spending." In addition to opening a new branch, the PM for a Chicago distributor says he's optimistic about the future because, "We consider ourselves to be one of the better wholesalers; we're open minded about new technology."
Surplus stocks
Inventory data provide another sign that current business optimism may be rather tenuously founded. Strong economic growth in the second and third quarters of 1998 was largely the result of rising business inventories, but Purchasing's grassroots survey suggests the buildup was largely unintentional.
The worst of the unwanted inventory build appears to have occurred in materials. Purchasing's new diffusion index tracking desired materials inventory-to-sales comes in at a disturbing 70 this month as nearly half (44%) of buyers say materials inventories are too high relative to sales. Just 5% think materials stocks are too low, while 50% say they're just right. This result may help to explain the sharp buying curtailment recorded in Purchasing's commodity demand indexes (derived from the monthly Leadtime survey and reported on page 134 of this issue). It may also help to explain why prices for production commodities remain so weak in the U.S. market (more on this later).
Inventories appear somewhat less out of hand at both work-in-progress (WIP) and finished-goods levels, explaining why finished-goods pricing remains relatively stable while commodity prices continue to plummet. Purchasing's new diffusion index tracking desired WIP inventory-to-sales registers at 56 this month while the index tracking desired finished-goods inventory-to-sales comes in at 55. Still, as both indicators exceed the 50 threshold, it seems safe to assume that producers will curb production somewhat in the coming three to six months.
Trouble-free buying
Only 20% of buyers queried say they've experienced any supply shortages in the past month, compared to 73% who say they've experienced no problems.
Among the 20% who have experienced supply glitches, most say the problems are typically supplier-specific and not reflective of market demand-supply imbalances. But while virtually no items are in short supply, a number of buyers are experiencing "headaches" particularly with custom, specialty, long-leadtime, or low-turnover items purchased through distributors. One buyer complains of, "delivery on long-leadtime items," noting that, "several capital projects have been delayed."
Not taking any chances on the economy, it appears that distributors may be operating with razor-thin stocks, creating spot problems for buyers of such things as specialty resins, MRO items, specialty grades of stainless steel, and mature-market integrated circuits. "Resins [are] not stocked by [either] manufacturer or distributor, making leadtimes long," says one buyer. Another complains about, "backordered MRO items." Yet another purchasing pro--one who has recently implemented an integrated supply relationship--remarks, "low stocking levels at suppliers," adding that, "like us, many companies are keeping low shelf quantities." A metals buyer, noting problems with specialty metal sheet, plate, and bar, remarks that, "[service] centers have reduced inventory items to standard materials. [They're] less likely to quote competitive prices on specials."
Skilled labor is another continuing source of supply problems. Precision metal machine shops appear to be suffering greatly in this area. Yet another ongoing buying headache stems from an apparent shortage of shipping containers in the Far East. With so many manufacturers trying to export in this direction, buyers who source overseas say their leadtimes have been stretching, especially for goods out of China. As one buyer describes it: "Ships are slow to come over until full due to insufficient loads to transport back overseas."
In other cases, buyers say their sourcing problems are less a function of short supplies than of customers' unreasonable demands. As end users press for more rapid deliveries, some buyers say they're being forced to expedite supplies, often leading to higher costs. "[Our] customers are requiring their products on extremely fast turnarounds to satisfy their customers' time requirements," says the PM for a service firm in Ambler, Pa. "It's costing us an arm and a leg to get material in-house via overnight transportation companies." What's more, he says, "coordinating orders often involves as many as 4-5 different people and companies."
Another buyer says, "[Our sales department] has promised short leadtimes," forcing them to "get purchased parts on short notice." Another complains of "rush projects pushed by our sales department," with "unrealistic time frames that we must push our suppliers to meet."
Commodity prices plunge
Initial data from Purchasing's new grassroots business survey shows severe weakness in commodities pricing and continued stability in pricing for most finished goods (with the exception of computers). Trend reports from buyers suggest that prices for long-leadtime capital goods may even be inflating slightly. By major commodity segment, here are the highlights:
* Pulp. National trends show both price and leadtime erosion. Diffusion index tracking price trends nationally comes in at a paltry 32 as the number of pulp buyers reporting falling prices exceeds the number reporting increases. Index tracking leadtime trends comes in at weak 38 this month. By region, pulp pricing appears weakest in the Midwest and Northeast markets. Southern buyers report more stable price conditions and even some leadtime stretching.
* Paper. The national indicators show mild price erosion with relatively stable leads during the past month. Weakest price markets for sellers of paper are West/Pacific Northwest (PNW) followed by Midwest. Northeast and South regions show more moderate price slippage, while Mid-Atlantic paper buyers report stable pricing on average. Paper leadtimes look generally stable.
* Corrugated. National index tracking corrugated price trends registers this month at 33%, indicating that discounts are more prevalent than increases. Price indexes for all regions are below 40%, suggesting the trend is well dispersed nationally. Still, the data detects some minor variation in price weakness from region to region. Corrugated pricing appears to be weakest in the Mid-Atlantic followed by West/PNW, Midwest, Northeast, then South. Index tracking corrugated leadtimes comes in at 41 this month as the number of buyers reporting shrinkage exceeds the number reporting stretching. Greatest improvements are reported by buyers in the Mid-Atlantic and Northeast.
* Industrial chemicals. Leadtimes are relatively stable nationwide. National index tracking buyers' recent pricing experiences averages at a deflation-signaling 41. West/PNW is the weakest price market for industrial chemicals followed closely by the South. Price trend indexes are between 45-50 in both the Midwest and Northeast, indicating less frequent discounting in those regions. Mid-Atlantic buyers report near stable pricing for industrial chemicals.
* Plastic resins. National resins price index comes in at 40, indicating that prices are tending from stable to negative. Weakest market for producers appears to be the Mid-Atlantic (price trend index there is just 25). Midwest and West/PNW price indexes fall into the 35-40 range. Pricing appears somewhat more stable in both Northeast and Southern states. On a national basis, leadtimes look generally stable.
* Refined petroleum products. Serious price weakness continues to plague refiners. Index tracking price trends for refinery products registers this month at 35. Prices are weakest in the Northeast where unseasonably warm temperatures have, no doubt, left sellers with high stocks. The only market reporting stable pricing is the West/PNW. Given the considerable supply glut, it's no wonder the national index tracking leadtimes for the last month averages at a negative 42.
* Steel. National price index for steel comes in at just 31 as competition from imports continues to slam domestic markets. Price-wise, the Midwest is the weakest steel market, followed by the Mid-Atlantic, West/PNW, then South. The Northeast steel price index is highest at a mere 41. Steel buyers report widespread erosion in steel leadtimes as well. National leadtime index comes in at 40 this month. Lowest index is recorded in the Mid-Atlantic; highest index values are in the South and Midwest (44).
* Aluminum. Sellers of aluminum are facing tough pricing. National price index is just 31. Range for the regions is 25 (Northeast) to 38 (Mid-Atlantic). National leadtime index is 44 this month with a regional variation of 33 (Mid-Atlantic) to 48 (Midwest).
* Copper/brass. National price index stands at a meager 30% this month. West/PNW is, by far, the weakest market with an index of just 15. Midwest price index for copper/brass is 28. Least price erosion is reported by Mid-Atlantic buyers (38). National leadtime index is in negative territory, but not by much. In the Midwest, leads appear close to stable. Greatest leadtime shrinkage was seen in the Mid-Atlantic.
* Semiconductors. This month's survey conveys a general sense that the worst may be past for the semiconductor industry. National index tracking buyers' pricing experiences registers at a moderately negative level of 44 this month. Regional indexes show general price stability in Mid-Atlantic and Midwest regions. Still, buyers in the Northeast, South, and West/PNW say prices are tending from stable to negative.
* Computers. Price competition remains stiff in the computer industry, especially in the Northeast. National price index for computers comes in at 36 this month. In the Northeast the index is a paltry 17. Mid-Atlantic and Midwest price indexes register at 25 and 29 respectively. West/PNW buyers are seeing less price erosion of late (index is 40 this month) while Southern buyers report generally stable pricing. Leadtimes are said to be stable (even stretching a bit) in every region but the Midwest where the leadtime trend index is just 35 this month.
* Other office equipment (faxes, copiers, etc). Purchasing's survey detects definite price erosion in markets for such office equipment as fax machines and copiers. Index tracking the national price trend comes in at just 36 this month; regional range is 17 in the Mid-Atlantic to 42 in both the South and West/PNW. Leadtimes are more stable, suggesting that distributors may be cutting back on stocks.
* Industrial machinery. This is one of just two industry segments tracked in the survey for which the number of buyers reporting rising prices exceeds the number reporting price declines. National index registers at 60 this month with a regional range of 56 (South) to 67 (Mid-Atlantic). National leadtime index shows a bit of stretching. Worst tightness appears in the Northeast and South regions. Some leadtime erosion is reported in the West/PNW (index is 43).
* MRO items. Commodity price erosion has yet to filter through to the finished goods level. What's more, advances in inventory management appear to be limiting the sense of panic that might otherwise be developing among distributors of MRO goods. National price trends index registers this month at a stable 51. None of the regions record negative price indexes for MRO goods. Leadtimes are, likewise, stable on a national basis. However, buyers in both Northeast and South territories note some leadtime erosion.
* Packaging. Packaging price trends are tending to the negative in every region but the South. National price index comes in at 40 this month. Range is 32 (Midwest) to 50 (South). Buyers in all regions of the country say leadtimes are tending to the negative.
* Transportation. Price trends for transportation services are tending to the positive in all regions excluding the Midwest where this month's index registers at a negative 40. Buyers in the Mid-Atlantic region record stable pricing for transportation. Buyers in the Northeast, West/PNW, and South say transportation prices are more frequently rising than falling. Transportation leadtimes are said to be stable in all regions.
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