adr international Procurement consultants

Riding the economic tsunami

Unprecedented economic conditions demand new ways of working, says Robin Jackson

It really was a year for the economic text books. As 2008 came to a close, massively indebted nations, companies and individuals combined with the turmoil in global financial markets, leading to a rapid and unprecedented collapse in demand.

Add to that the prospect of looming negative inflation and the likely depression as the New Year gets under way and standard procurement theory, skills and ways of working increasingly look increasingly irrelevant.

On top of all that we now have increased public ownership of banks, a fate quite likely to face more businesses too. The result is certain to mean more government interference in every aspect of the capitalist system, leading to increasingly irrational commercial decisions.

The business environment has changed fundamentally and we will have to look back to the great depression of the 1930s, the collapse of South American economies in the 1970s and 1980s and Japan’s “lost decade” of the 1990s to draw lessons.

In this radically changed environment it is vital for the survival of businesses for procurement leaders to consider new ways of handling these challenges and develop new offensive and defensive sourcing strategies.

On the offensive front, we will need to drive down prices ruthlessly and continuously. This must be more than an annual challenge which we then forget about for the next 12 months. Nor can it be just the easy leverage of products and services. We will need to achieve significant price reductions in more strategic commodities and markets.

Remember this is a once-in-a-century readjustment of prices. Only if you are bold and act speedily will your business survive. Your competitors will be doing it and to survive you will need to do it too.

It’s time to call in the favours - if ever there was a time for strategic co-operation with key suppliers, this is it. If they don’t live up to their part of the strategic partnership billing, move swiftly to find alternative partners. Leverage your strategic supplier relationships. Be demanding and move rapidly.

Conserve your cash. Even if your business can borrow it is more expensive to do so now. So extend payment terms to the maximum without damaging the viability of your suppliers.

If you receive a price increase request then the supplier must be having a joke. With basic commodities falling in price by 40 per cent or more (a barrel of oil is down 70 per cent) how can any supplier claim their input costs are increasing? Any increases caused by the fall in the value of sterling will be more than offset by the collapse in input prices.

Your defensive strategy should include preparing now for possible disruption of your supply chain. Disruption can result from suppliers going bankrupt, economic meltdown in countries, significant currency fluctuations and political unrest, so plan carefully how your business will manage it by developing detailed countermeasures.

In China the number of bankruptcies has increased significantly and this has led to an increase in social instability - imagine the chaos if a new political regime closed China’s borders to the West again, or Russia switched off the gas.

It might be tempting to say none of this is likely to happen, but history is littered with events that no one would have dreamt of – including, perhaps, the potentially catastrophic events of last year.

We need more than ever to be aware of currency movements and take them into account in all our procurement decisions. Given the volatility now inherent in the world economy, today’s low-cost destination of choice could be tomorrow’s high-cost country to avoid.

In this climate, it almost certainly makes sense to shorten your supply chain to reduce risk and vulnerability, so local sourcing could become the new must-do procurement strategy to replace the obsession with low-cost country sourcing of recent years. These are unprecedented times. So our strategy for 2009 should be: be bold, be brave, act swiftly and be ruthless. Develop new offensive and defensive ideas and ways of working. Only then will you and your business have a chance to survive this economic tsunami.

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