The sub-prime mortgage crisis and oil prices are playing into plans of maintenance, repair and operations (MRO) buyers and industrial distributors this year. They're also taking into account strong demand for commodities by manufacturers in China and other developing regions.

In early 2008, MRO buyers and suppliers are watching economic trends in the U.S., particularly housing starts and new commercial construction. Further softening in these markets could affect supply and demand of some MRO goods and services.

Oil prices—and growing demand from China—can wreak havoc on costs of commodities, including metals and chemicals. Higher oil prices also mean bigger energy bills and increased costs for transporting MRO items.

Supply is expected to be ample in 2008. There are no concerns of shortages or delivery delays. Still, buyers and suppliers are keeping an eye on the distribution industry as it continues to consolidate.

Fewer suppliers mean bigger economies of scale, distributors say. Their customers counter with consolidation of their own as more companies make moves to centralize MRO buying and leverage purchasing power. As such, MRO has become "mission critical" at many companies, says Dale Flanders, global category manager—MRO, procurement solutions at Accenture in New York.

No one speaks of a recession. Yet buyers and suppliers see slowing in some areas as opportunity to work together to remove inefficiencies and costs from the MRO supply chain. That way, when the economy picks up, they'll be better positioned to take on new business and be more competitive.

Ben Mondics became president at Applied Industrial Technologies in Cleveland on January 1. In 2008, he expects "solid growth in some industries, but not as strong as in the past three years."

At the same time, higher prices for some MRO items, which were caused by rising costs of the metals that go into making them, are also likely to be a thing of the past, he says. "However, many of our suppliers are seeing rising costs in their operations and some price hikes have come through. We continue to monitor this closely and ensure increases are justified and reasonable."

Ben Mondics, president, Applied Industrial Technologies, expects solid growth in some market sectors in 2008.

Cocks: “Scale drives real efficiency and produces a better result for customers.”

Williams: “We track residential construction, and what comes after it.”

On his mind: Industry consolidation. "It's been occurring for several years and it will continue," he says. "However, many people are made uncomfortable by consolidation, which is being driven by macro economic forces such as globalization. Scale drives real efficiency and, in the end, produces a better result for customers."

In the electrical distribution industry, which is experiencing its share of consolidation, executives like Mitch Williams, newly named president and CEO of Gexpro in Shelton, Conn., monitor gross domestic product (GDP) and residential housing starts as indicators of what's to come in 2008. Gexpro was acquired by Rexel, a global player in 2006.

"While we don't have a large residential business, we're interested in what comes after—commercial construction, the strip malls and shopping centers," says Williams, who also tracks manufacturing utilization capacity and internal measures such as backlogs and order rates.

Addressing the topic of consolidation specifically, he won't be surprised if in 10 or 20 years, the industry is left with mainly big players and few small niche ones. It's good for buyers at large companies looking for similar levels of service, such as product standardization and pricing across geographic areas, he says. Gexpro, in fact, has global agreements with MRO buyers at companies that have originated at locations in this country.

To track prices of some common MRO items, Accenture's Procurement Solutions Group maintains an index on the Producer Price Index. "From 1997 to 2002, pricing essentially was flat," says Flanders. "Then, in the past five years, it's taken off. Both trends align with the general economy. Now, over the past three months or so, pricing has stabilized and maybe even dipped a little." Costs of steel, energy and benefits have big impact on the prices, he says.

Mike Filitti, senior buyer, MRO, with Alliant Energy in Cedar Rapids, Iowa, tracks steel, nickel, aluminum and copper prices. The metals go into many products Alliant purchases. The company has a market analyst on staff with whom Filitti often confers.

What concerns him about business conditions is supply and pricing of some chemicals such as caustic soda, soda ash and sulfuric acid. All are in tight supply and have experienced price increases in 2007. And, prices may rise again by about 30–40%, he says. Alliant uses chemicals in boiler water treatment, and made a switch from mercury cell caustic to membrane cell caustic. Analysis by purchasing shows there are more sources for the chemical which will help control costs," he says.

"We try to minimize increases with contracts," he adds. "We leverage our spend and cut our supplier base so suppliers can be more competitive."

Eric Knoerr, procurement manager at VF Corp. in Greensboro, N.C., scrutinizes the global corrugated packaging market and says demand in other regions impacts prices.

"While there's some spot buying, most companies have contracts for corrugated and pricing is tied to an index," he says. "Our contracts have worked well, but prices are still going up in January."

Demand from overseas is going to grow and push up prices in 2008, he says adding that by 2010 new capacity coming on stream in developing regions should help balance demand and supply.

Bob Calvez, global commodity manager—MRO at United Technologies in Farmington, Conn., manages the company's integrated supply contract. Fuel prices weigh on his mind because of their impact on freight costs. "When we try to lower inventories we may increase the number of deliveries," he says. "As we do, transportation costs go up. We're watching this."

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