Executive Viewpoints: The end is near, but it’s still a buyer’s market

  • 28-Oct-2009 03:13 EDT
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David Morgenstern is Vice President for Spend Management Services at Ariba Inc.

Though the pundits are declaring that the recession is over, the markets aren’t reflecting their optimism just yet. Prices for many key commodities, and the energy used to convert them into finished goods, are at two-, three-, and in some cases four-year lows.

Opportunities for savings abound across direct materials from copper, nickel, zinc, aluminum, lead, rubber, and resins to crude oil, furnace oil, and coal. Materials once deemed too expensive may now be affordable, enabling product innovations that had previously been shelved. And with U.S. unemployment approaching 10%, indirect categories such as IT consulting, contract labor, security, janitorial services, and call centers are ripe for picking too.

Pessimists look at today’s market conditions and see a glass half empty—and with good reason. After all, it wasn’t long ago that headlines were screaming that commodity prices would never come down, $200 a barrel oil was imminent, metal prices were climbing, and the purchasing power of the U.S. dollar was sliding. In anticipation of further price increases, many buyers purchased raw materials and put them on the shelf in warehouses for use in future production.

And then the bottom fell out. The recession hit, and already weak auto sales declined even further, forcing automakers to slash production. Chrysler and Ford temporarily shut down some production facilities, and General Motors shuttered many altogether. Tight credit markets got even tighter, forcing key suppliers to scale back or even cease operations. The demise of Plastech is still being felt across the industry.

As a result, overstocked materials are now worth about half of their purchase price. And the buyers who sourced them are resisting pressure to “act before it’s too late,” having already been burned by doing so.

Innovative organizations, however, see the opportunities within current market conditions and are leveraging them to minimize costs and risk and improve their competitive advantage. So what can you do to maximize what is clearly the best sourcing market in decades to fuel innovation and bottom-line improvements for your company?

Take a strategic approach to sourcing: In today’s market, everything is on sale. Now is the ideal time to be sourcing everything. Yes, volumes are dropping and future volumes are uncertain, but make some guesses and go.

Just say no to price increases: The North American auto industry has changed dramatically and the effects are rippling across Europe and Asia. The industry is smaller and will ultimately be more competitive, which means excess capacity. So sourcing markets should remain favorable for the foreseeable future. If price increases are thrown on the table, go back and renegotiate with your partners to share the burden.

Innovate: Surviving manufacturers will be looking for their suppliers to bring more than competitive prices to the table. Better fuel efficiency, lighter yet safer, and cleaner burning technology that leverages renewal energy and alternative fuels—all will be key elements of the vehicles of the future and, in fact, are part of the stipulations put on the use of funds provided by the government. Suppliers that can bring technology to the table that supports an environmental agenda will be well-positioned to succeed in the new environment.

Collaborate: During tight times, the tendency for most organizations is to shore up costs and adopt a myopic approach to conducting business. Buyers become complacent bystanders as suppliers begin to run into trouble. Suppliers, in turn, become less flexible in their negotiations with buyers, eyeing badly needed present revenue over long-term growth. Isolated and wary, organizations on both sides often find themselves navigating through tough economic times on their own. They give less, they spend less, and in doing so, they gain less. This is not the way to prepare for, or pull through, a recession. It is more important than ever for buyers and suppliers to work more closely together, share the economic burden of the times, and embrace innovative ways to ensure their mutual health. As we saw with Plastech, if a key supplier to the industry goes down, it hurts everyone.

Though many will try, no one can predict when the economy will turn. But as the saying goes, within every cloud, there is a silver lining. Enjoy the favorable buying conditions while they last and use them to your advantage to improve your cost structure, enhance your products, and position your company to compete more strongly when things do improve.

This article was written for Automotive Engineering by David Morgenstern, Vice President, Spend Management Services, Ariba Inc.

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