20 January 2011 | Lindsay Clark
Global economic uncertainty, natural disasters and high oil prices are set to make 2011 a challenging year for purchasers, as Lindsay Clark reports.
The new year has brought a varied set of procurement challenges. While prospects for growth globally are putting pressure on the prices of key commodities and Mother Nature is hitting supply, procurement professionals are struggling to keep costs down in the face of regional economic uncertainty.
Developed nations have seen the oil price, which underpins the cost of many goods and services, rise by around 30 per cent in the past year, according to the International Energy Agency. Meanwhile, copper has hit an all-time high on the London Metal Exchange, as manufacturing PMIs on both sides of the Atlantic show strong growth. At the same time, floods in Australia have held back supply of coal and mined metal ore, and grain prices continue to see the impact of last year’s fires in Russia.
Mike Flanagan, equipment procurement manager at supermarket chain Safeway, says buyers have been struggling for some time to avoid passing on these increased costs to customers. “Pressure has been growing since mid-2010. We have been fiercely fighting and pushing back on all fronts. With mostly wins so far.”
He is among the 53 per cent of buyers who are preparing for higher prices during 2011, according to the SM100 survey.
Cost inflation is reflected in the rise in input prices in the latest set of PMIs. For the UK manufacturing sector, the input price index hit 81.2 for December, where 50 indicates no change, up from 73 in November. The index for input prices has been this high only once in the past decade.
The steepest cost rises were reported in the textiles and clothing, food and drink, and chemicals and plastics sectors, according to the Markit/CIPS UK Manufacturing PMI report.
Chris Williamson, chief economist at Markit, says there has been some interruption in supply caused by poor weather. “Alongside that you’ve got stronger demand globally. A lot of commodities are priced globally because there is such a synchronisation of supply chains.”
Although the economies in the UK, US and parts of Europe have been sluggish, there has been very strong growth in China and Germany, Williamson says. “If these countries are sucking in oil and metals, textiles and soft commodities, then UK buyers are going to be competing in that market.”
When supply is interrupted and demand is high, buyers will try to protect themselves by buying safety stock which can drive prices even higher, he says. Speculators can also drive up prices.
This creates problems for buyers in weaker economies, Williamson explains. “If you’re a Greek manufacturer at the moment, and you supply your domestic market, you will struggle to pass on prices rises, because demand is collapsing, but your input costs are rising. There is a mismatch between input and output prices in many countries.”
Gary Moore, commercial and procurement governance manager, defence information solutions and services at BAE Systems, says the fundamentals of supply and demand are inescapable for buyers. “If anyone out there is able to beat the law of supply and demand in a competitive market then they may be unique.
“Of course, there are some players in the markets able to shape supply and demand, influencing prices – the big name supermarkets and milk, for example. An apparently healthy arrangement for the buyers; not so for the sellers,” Moore says.
According to Guy Strafford, client director for procurement consultants buyingTeam, procurement professionals need to change the way they describe their successes during a period of cost inflation. “It requires more sophisticated measurement on the part of procurement to demonstrate its success,” he says.
Now is the time for buyers to start educating the CFO, and others with demands on procurement, about how they are measuring success, before the worst of the inflation starts to hit prices, says Strafford. Meanwhile, he adds, it is wise to watch suppliers closely to ensure they do not sneak additional price rises in with a package of inflationary cost increases.