Buyer Analytics

No doubt buyers and sellers are concerned about the economic crisis. Buyers need to be concerned about their supplier's ability to maintain access to capital. It is highly possible that you may receive a bid response that is subject to the supplier obtaining adequate financing.

Some good articles to get up to speed, hot off the press from the Economist:

This week governments made three spectacular moves to save the system: a coordinated rate cut by the world's main central banks, a decision by America's Fed to lend directly to companies, and a comprehensive rescue package for British banks. We assess those moves, we look at the consequences of the continuing panic, and we publish a 19-page report on the world economy in crisis.

Need some strategies to optimize cash flow? Be sure to check out an Ariba white paper titled: Strategies for High-Yield Working Capital in Today’s Economic Environment.

Some of the strategies and measures they have taken to remove supply chain liquidity risk while raising their return on cash and reducing their net working capital are:

1. Discount Management – Gives the ability to use cash to finance supplier early payment—preserving the suppliers’ health—while at the same time generating excellent short-term returns for the company.
2. Third Party Financing – Introduces a third party to fund accelerated payment to suppliers at very low rates—again removing supply chain risk—thus enabling the extension of Days Payable Outstanding (DPO) and lowering net working capital needs.

In a recent McKinsey Quarterly article the authors reviewed tactics aimed at maintaining the best balance possible between sales volume and profit margins in the current challenging environment. Here are a couple of examples that your suppliers may using to manage pricing.

Watch Sudden Shifts in Price Structure

Declining demand means that some customers may be collecting volume discounts they no longer deserve. Best-practice companies are reviewing much more frequently their pocket margin waterfalls, which show how much revenue companies really keep from each of their transactions, and adjusting their pricing policies accordingly—for example, by adding delivery fuel surcharges to every order.

Monitor Customer Level Profitability

Many customer groups are becoming simultaneously smaller and more costly to serve. One industrial company found that more than 20 percent of its customers had fallen below break even profitability, forcing it to raise prices selectively and, where possible, lower cost-to-serve by decreasing delivery frequency, reducing sales support, or fulfilling orders through alternate channels.

Adjust to Changing Customer Needs

The best companies are constantly assessing—through market research and direct contact—how economics are changing for their customers. Even more important, they are reacting quickly by retooling their price and benefit offerings accordingly.

Monitor Your Industry's Microeconomics

Radical shifts in costs and demand have thrown previously predictable market pricing mechanisms into chaos. Responding correctly requires a keen understanding of the microeconomic forces at play at the industry level.

Tactics for Procurement Professionals

To counter these sales tactics buyers should work with their supplier's to reduce costs and eliminate waste. Suppliers that provide some transparency and a willingness to cooperate will be favored by their customers.

• If purchase volume is declining due to soft sales, buyers should consolidate or reallocate volume among suppliers to maintain price discounts. If this isn't possible, consider changing the sourcing strategy to increase competition through the qualification of new suppliers.
• Work with your supplier to revalidate EOQ's, payment terms and volume discounts.
• Fuel surcharges are acceptable as long as terms are spelled out to remove them when prices decline.
• Work with suppliers to reduce the cost to serve. Optimizing systems while making collaboration more efficient will help offset higher costs to serve.
• Evaluate cost savings approaches that were considered unacceptable in the past. Lower cost materials that slightly increase internal production labor costs may now be an opportunity.

Plastic Pallets Let Shippers Calculate Fuel Savings, Greenhouse Gas Reductions
Monday, July 28, 2008
The calculator uses data issued by the U.S. Environmental Protection Agency that quantifies relationships between cargo weight, fuel usage and greenhouse gas emissions. .. read more..

Is China Ready to Flood the Market with Low-Cost Pole Dancers?
Friday, July 25, 2008
After reading this New York Times story -- and watching the video -- I can't help but wonder if this is what the Chinese government means when it says it wants to encourage higher margin, less polluting industries by changing the VAT rebate structure... .. read more..

Supplier Relationship Management -- Supplier Relationships Can ... - MarketWatch
Thursday, July 24, 2008
Supplier Relationship Management -- Supplier Relationships Can ... MarketWatch - 21 hours ago In addition, the Vectren Corporation, in the utilities industry, demonstrates how a highly successful strategic sourcing strategy powered by a supplier ... .. read more..

Building Category Credibility
Thursday, July 24, 2008
Being confronted with an unknown category can easily make buyers feel uncomfortable, particularly in indirect goods and services, where buyers are likely to influence a higher proportion of the organization’s spend. While supply chain professionals may feel capable of applying procurement techniqu.. .. read more..

Hold your Clydesdales: InBev & Anheuser-Busch “synergies” aren’t just layo..
Thursday, July 24, 2008
The global economy can do a lot of things to a man…but if you threaten to mess with his job AND his beer, that may just be the last straw. By many of the reactions - from TV and barstool talking heads to the 31,000 member Facebook Group protesting the deal - the InBev purchase [more] .. read more..

Entrepreneurial Edge: Bartering Expands in the Internet Age
Wednesday, July 23, 2008
Thomas Daley, who runs an online barter site, is helping to lead a trend that has grown broadly over the past 25 years. .. read more..

Aluminum Hits Record High
Wednesday, July 23, 2008
China's top 20 aluminum smelters announced they would cut production 5%-10%. .. read more..

Rethinking Supplier Relationships with Tool Providers
Wednesday, July 23, 2008
Collaborating in advance with cutting tool providers can pay off in improved productivity and quality. .. read more..

No doubt the surge in energy costs has been felt in the cost of many petroleum based products. Suppliers in their quest to maintain market share have held off price increases. This has been a result of slow growth and production moving out of the U.S. to low cost markets.

The end result is pressure on margins. Have you monitored your key supplier's margins? At some point the pressure will be too large to bear and they will come calling.

Take Dow Chemical for example, according to the Associated Press:

The chemical maker's profit margins shrank from 9.8 percent in 2005 to 7.6 percent in 2006, and to 5.4 percent last year. During the 12-month period that ended March 31, the margin narrowed to 5.1 percent, according to Capital IQ.

Now for the triple slam from Dow:

1. A 20% across the board increase effective June 1
2. Another increase effective July 1 by as much as 25%
3. A freight surcharge for North American customers of $300 per shipment by truck and $600 per shipment by rail effective August 1

What should the savvy buyer do?  Include pre-determined escalation provisions in all of your major contracts. Best time to do this is during the bid process - have supplier's compete to provide the best price adjustment terms.