As Supply Excellence’s Managing Editor (which is a euphemism for “Principal Cat Herder”), I would be a remiss if I didn’t point out that the blogging efforts by many of our contributors are a byproduct of their ‘day jobs.’ These folks spend their days digging deep into their respective categories to uncover the opportunities and risks that impact buying decisions, global markets and supply chains. Their findings are published quarterly in SupplyWatch, a collection of category/commodity analyses, LCCS country spotlights and supplier profiles.

If you’ve found the posts from our contributors insightful, I invite you to take a look at some of their latest SupplyWatch articles:

• Rachel Rutkoski - Transportation & Logistics: Hot on the heels of her Truckload and Less-Than-Truckload posts (which pointed out opportunities for savings and improved contract terms for shippers), Rachel’s Transportation & Logistics Core Category Detail dives further into the excess capacity brought on by the soft economy. The most important point, which she touched on briefly in the blog, is that it’s wise to look at freight contracts more holistically, rather than simply trying to cut short terms rates. If you can lock in better terms for accessorial charges (which have risen a staggering 900% in the last 10 years!), the savings over the life of the contract could be substantial.
• Mike Petro - Metals: In a 2 part post, Mike broke down the real root causes of the steel price surge (Part 1 & Part 2). Taking that analysis quite a bit further, he and the rest of the metals team discuss strategies for dealing with the challenging market. The case study of a medical instruments manufacturer saving 33% on syringe manufacturing by outsourcing it to a specialized partnership of suppliers is a great example of spend management savings in spite of rising raw material costs.
• Bob Zieger - Plastics, Rubber & Raw Materials: Recently Bob explained the diminishing dollar’s impact on oil prices…and why that means high prices for some time to come. Now he and the Plastics, Rubber & Raw Materials team dig further into how decreasing demand in some categories and the credit crunch further complicate the pricing equation.

Let’s also do a quick community poll: Which article in this quarter’s SupplyWatch best helps you address a current challenge in your supply chain? Leave your answers, questions or observations in the Comment section of this post and I’ll make sure they find their way to the right Category Manager’s desk.

Justin Fogarty is Managing Editor of Ariba’s Supply Excellence blog. He can be reached for story ideas, feedback or questions at jfogarty[at]ariba[dot]com.

When we last left our daring trio of Spend Management Town Hall panelists, they were debating the best ways to get a handle on services spend in the ever tightening global economy. The esteemed panel, which included the CPOs from both Kellogg’s and Whirlpool, had turned their sites on services spending to counter the double-digit inflation striking the core commodities their teams buy.

Another key strategy on the panelists minds: global trade. As is often the case these days when discussing low-cost country sourcing (LCCS) or global trade, the panelists spent most of the time discussing their China strategy. While the debate ranged all over the map — from rising labor prices to the emerging consumer class — three core themes emerged for Supply Excellence readers to consider when crafting a global sourcing plan.

Buy where you make - With the dollar’s demise and oil and transportation costs skyrocketing, Kellogg’s and Whirlpool are both re-evaluating their global sourcing strategies. And nearshoring is once-again becoming more prevalent. Factor in an increasingly skilled workforce in our neighbors to the South and Whirlpool SVP of Global Strategic Sourcing, Mark Brown said, “it’s kind of a jump ball between Mexico [and China] to service the US market.”

Alistair Hirst, Kellogg’s VP of Global Procurement, stressed the importance of sourcing “as locally as we can,” albeit for different reasons: to hold down transportation and tariff costs, satisfy local content needs, and get products to market faster. After all, consumers like their Corn Flakes as fresh as possible.

Michigan State University Professor Joe Sandor noted that the cereal king was following up the ”buy where you make” philosophy that has been so successful for leading Japanese automotive manufacturers, such as Honda or Toyota.

The panelists noted a number of new dynamics when sourcing South of the Border, including banditos and local government corruption. But, when weighted against the rising costs of doing business in China, the lower transport and border crossing cost, Mexican truckers newfound ability to transport deep in the US, and a host of other factors are making nearshoring a more attractive proposition for many companies.

You can’t turn back the clock - No great shock that our panel weighed in on the side of free trade. In the words of Alistair Hirst, “we certainly encourage free trade” and “think [renegotiating NAFTA] would be a huge mistake.” Professor Sandor seemed to agree, yet took a more human angle in admitting “clearly global trade hurts some people, but the fact is it helps more than it hurts.”

In an election year at a time of economic uncertainty and populist (sometimes borderline jingoistic) rhetoric coming from both sides of the aisle, how the US deals with labor and trade issues is somewhat up in the air. So, Mark Brown’s advice that “maybe the strategy is, you better be flexible and you better be able to react quickly because our ability to predict is somewhat limited” was the smartest tip the audience heard that night.

Predicting the future - And speaking of looking ahead, all three panelists were eager to point out that anticipating what’s next is the multi-million dollar question for supply chain professionals.

So, where is the next China? For Whirlpool, the answer is currently Vietnam, where a lot of their supply chain has moved. But Mark Brown wasn’t quite willing to say where their supply chain may shift after that.

On the other side of the coin is emerging markets. Again, China is strong possibility, which as Professor Sandor said is “not just a place for cheap labor, it’s the fastest growing market for end products.” No real shock there. But luckily, Kellogg’s Alistair projected that “Russia’s going to be a huge developing market for the future.” (Although Mr. Hirst may want to check his long-term demographic trends. Russia’s population continues to decline. So the consumer boom there may be short live. Literally.)

Still more Town Hall recaps to come as we look at the panel’s discussions of Environmental & Social Responsibility and Risk Management next week. In the mean time, listen to the full podcast of the Global Trade discussion. And download 10 Tips for dealing with these trends in Global Trade so you can start taking action today.

Oh what a year it’s been for supply managers. Oil prices are up 79%. The value of the US dollar has dropped 8% against the Euro. And the price of milk (and other key food stocks) frothed up 20-60%.

It’s enough to make a guy want to swap from cream to soymilk in his morning coffee. (That is, if soy prices weren’t off the charts themselves.) It’s also enough to make the global economic situation issue #1 at the inaugural Spend Management Town Hall Forum earlier this month.

The panel of experts assembled for the Michigan State University hosted forum could not have been more representative of the global economic engine. MSU Professor Joe Sandor was joined by CPOs from Kellogg’s and Whirlpool, both of whom are consumer price index (CPI) bellwethers.

Unfortunately, the weather they were reporting was dismal. The panelists freely used the ‘R-word’ when describing the current market dynamics and suggested that the downturn started earlier and may last longer than what is being reported in the ISM index.

“This is a unique recession,” said Professor Sandor. “We feel the downturn, but simultaneously, we see rapidly rising commodity prices.”

Audience members looking for evidence of this conundrum did not have to look much further than Whirlpool. With appliance purchases closely linked to the ailing housing and credit markets, Whirlpool is feeling the pinch of waning consumer demand in the US and rising costs, particularly for commodities like steel and plastic.

“I wouldn’t call it stagflation yet, but we have two big pressures going on in our business,” said Mark Brown, Senior Vice President of Global Strategic Sourcing at Whirlpool. “We’ve seen kind of a perfect storm with the credit markets, tax calls, gas and raw material prices. The cost structure of our machines has radically been impacted by it.”

Alistair Hirst, Vice President of Global Procurement at the Kellogg Company, agreed, noting that inflationary pressures have caused the cereal giant to rethink both its supply chain and business strategies. “[The current economy] puts a lot of pressure on the inputs side, but it has also impacted the pricing side of our business model. Consumers have less disposable income” and that is changing their buying choices.

This lack of pricing power is particularly concerning because, historically, food companies have had more flexibility to pass along price increases to consumers. If consumers won’t swallow food price increases, they won’t accept price increases from other industry segments. That will put added pressure on business to further reduce costs. Yet, the panelists argued that rising fuel and commodity prices leave little room to negotiate savings.

“Nothing beats the market regularly.” said Professor Sandor. “So, the management of costs and the degree of sophistication with which you attack it is ever more important.”

One strategy Kellogg’s is using is hedging on the grain markets. “We’ll hedge out various risks of time depending upon the risk profile.” (This echoes comments from the head of supply chain at a major food service company I met with last month who said they locked into the price of wheat for a full year: “It’s the first time we ever locked into such a long-term contract.”)

Whirlpool is also taking this approach, but in a more limited fashion. “There are no missing links in the supply chain that can’t have predictability driven into it,” said Brown. Although he quickly followed up with a joke, asking if there were anyone in the crowd with any great ideas on hedging steel.

Hedging is just one of the strategies the panel recommended as an antidote to the down economy. Professor Sandor suggested that companies begin to attack new spend on categories that are not directly linked to commodities like oil, gas, metals, or plastic. “Spend management in the indirect space is becoming more critical and a differentiator.”

Later this week, we’ll examine how Kellogg’s and Whirlpool are controlling indirect spending, including business services purchases. In the meantime, listen to the podcast of the Spend Management Town Hall here. Or download the Spend Management for the Economy platform for additional best practices you can use today.

In the analyst industry, we used have a saying that “when the mainstream press catches on to a trend, it is certainly almost over.” I’d like to think that is the case with the automotive supply chain dilemma, but I’m afraid I would be wrong.

While Supply Excellence has been tracking the ongoing instability and decline of the U.S. automotive supply chain for some time, an article in yesterday’s USA Today predicts that the worst is yet to come. In the piece, my own colleague, Pat Furey, head of Ariba’s automotive sector business, calls the recent rise in bankruptcy filings among automotive suppliers “just the tip of the iceberg. Unfortunately, more will come.”

All the other pundits quoted in the article agreed. In fact, one analyst went so far as to predict that more than half of small- to mid-size automotive suppliers will go out of business within the next five years, either closing their doors or selling to a larger conglomerate.
What’s the problem? Well, the article points to the following pressures as the main culprits for the auto supply chain’s decline:

• Declining vehicle sales. Automakers trying to curtail production, as evidenced by recent production cutbacks at Ford and Chrysler. However, labor contracts have kept automakers from cutting production to required levels. Union agreements also assure workers wages, which keeps automakers from realizing the full potential savings of such cutbacks.
• Price pressure. To make up the difference, automakers continue to demand price concessions from suppliers, many of which are already in financial dire straits.
• Global competition. North American auto suppliers must compete not only with each other but with suppliers in China and India, where labor costs are much lower. And, thanks to recent concessions from the United Autoworkers union (UAW) allowing automakers to bring some parts and assembly manufacturing back in house, auto suppliers must also compete with their customers.
• Commodities inflation. Raw material prices, from oil to metals to plastics, continue to skyrocket. Suppliers must hold down these costs while delivering lower prices to customers.
• Cash flow. As noted here in an earlier post, automotive suppliers are strapped for cash. And credit lines are drying up fast. Auto suppliers are literally dying of thirst for cash.

Fixing the automotive supply chain will take more than just government bankruptcy protection. It will require a complete overhaul of the industry, including ensuring that the entire supply chain — not just the OEMs and Tier One suppliers — engage in more effective strategic sourcing and supplier management strategies, including more effective commodities hedging and a better balance between in-sourcing and outsourcing and on- and offshoring. And, while the Big Three have their own problems to grapple with (the most prominent being non-competitive labor costs), they would be wise to rev up their efforts in supplier development, joint ventures, and co-sourcing or contract sharing arrangements, that allow lower-tier suppliers to purchase materials at the automakers’ preferred contract rates.

But, just in case, let’s hope the pundits are wrong.

With the outcome of what some are calling “the most important U.S. Presidential race ever” still uncertain, many business executives are fretting over the economic, tax, and trade policies of the eventual President No. 44.

Yet, savvy procurement and supply management professionals aren’t waiting for the election outcome. They know that, regardless of who wins the White House, they must devise strategies and tactics to overcome the prevailing issues of the day: global economic malaise, new pressures (and opportunities) of globalization, risk management, and sustainability.

This is the premise behind the upcoming Spend Management Town Hall at Michigan State University (MSU) next Monday night. The first in a series of debates among industry thought leaders and top procurement, supply chain, and finance executives, the MSU Town Hall will showcase how leading companies are applying spend management techniques and approaches to address the leading business and socio-economic issues of the day. Featured panelists at this inaugural debate include:

• Mark Brown, Senior Vice President of Global Strategic Sourcing at Whirlpool
• Alistair Hirst, Vice President of Global Procurement at The Kellogg Company
• Professor Joe Sandor, Hoagland-Metzler Endowed Professor of Supply Management and Supply Chain Management at Michigan State University

I have the enviable honor of moderating this illustrious panel. And, unlike Tim Russert, I plan on pulling no punches. I will get right to the most pressing supply management questions:

• How has the declining U.S. dollar impacted your sourcing and supplier strategies?
• How have rising labor, commodities, and shipping costs caused you to rethink your China sourcing strategy?
• How are you assessing quality, performance, and supply risk in your global supply chain?
• Is the push for environmentally responsible supply a long-term business strategy, or just a passing fad?
• What can procurement do to hold down healthcare and other complex services costs?
• …and more.

I am pleased to extend a special invitation for Supply Excellence readers to attend what I’m certain will shape up as a lively debate. You can register or get more information on the Spend Management Town Hall here.

Can’t attend? Use the comments section of this post to submit a question you’d like me to pose to the panel. I will be sure to report back on the answers and approaches these leading supply management organizations are taking to overcome the challenges of today’s global economy.

Southwest Airlines has the reputation of being lean and mean, the mother of the point-to-point low cost business model that decimated legacy carriers (leaving those of us in Pittsburgh with a very large and expensive puddle jumper palace). Their clairvoyance in hedging the price of jet fuel has helped keep costs low and fuel their growth across the country. While the impact of the fuel hedge might be diminishing, Southwests’ strategy in dealing with another cost problem finds them in hot waters.

The FAA has announced that it will seek a $10.2 million fine against Southwest for keeping unsafe 737s in the air in 2006 and 2007. As product safety concerns have been receiving more attention, from foods to toys, this has created a great deal of discussion within the spend management community about purchasing’s role in managing supply risk and product safety.

While the hand wringing and thinking is interesting, one has to wonder if a function that had used its ability to drive financial value through reduced price and cost can at the same time, be the owners of this sort of risk. When savings drives incentive compensation and is the currency of the realm of influence, and disruption of operation is a death sentence, is it surprising that some companies have looked the other way when there is lead in the paint… or in this case cracks in the fuselage?

It’s not hopeless and Spend Management organizations will play a role. They are in the best position to observe supplier behavior and provide the information that organizations need to identify high-risk behaviors, and drive risk analysis into the decision making process. But managing risk is like protecting people against terrorism - it is hard to get credit for things that don’t happen. With growing demand, competition for raw materials and a generally rising cost environment, the pressure on cost is not going away. So Spend Management organizations could find themselves as the keepers of corporate integrity.

Justin Sullivan is a Senior Manager in Ariba’s Spend Management Services group. In addition to his strategic sourcing and technology expertise, Justin worked for a number of years in the White House Office of Management and Budget (OMB) where he analyzed the fiscal implications of Federal policies.

Just weeks after the Big Three shocked the industry by announcing plans to move some assembly back inhouse, a labor strike at a major auto supplier is making the automakers appear clairvoyant. Adding to pricing pressures, volume cuts, and rising material costs, the United Autoworkers (UAW) strike at American Axle is shuttering production across the industry.

American Axle is a supplier of parts to leading Tier One assemblers Lear and Delphi Corporation. According to a Purchasing Magazine article earlier this week, American Axle had stockpiled a week’s worth of inventory to maintain supplies to its key customers. As the strike stretched into its second week, depleted inventories have sent shock waves throughout the industry.

According to the Detroit Free Press, part shortages stemming from the strike have forced Lear and Delphi to layoff workers and curb production. The outages have also caused General Motors to shut down six pickup and SUV plants as well as its transmission plant in Toledo, Ohio. The paper reports that American Axle is also a sub-tier supplier to Chrysler and Toyota, although neither company has reported that the strike has caused them to curb production just yet.

However, industry watchers warn that, unless resolved quickly, the strike could have a far more negative impact on U.S. auto manufacturing. The issue? Cash flow. Already pinched by the sagging economy, many auto-suppliers have borrowed against future sales. Production halts could cause them to default on these loans, forcing more auto-suppliers to file for bankruptcy. And that’s not good for anyone.

The events reaffirm the importance of assessing and balancing supply risks and understanding cost structures for both primary and sub-tier suppliers. (A point validated by the priority top supply execs put on supplier performance and risk management in Aberdeen Group’s latest CPO Agenda study.) It also signals a fundamental restructuring of the auto industry; one which will see automakers rethink their global sourcing strategies, bring more production back in house, and engage in more joint ventures and alliances to offset costs, balance risks, and penetrate new markets.

The dip in soybean production caused by farmers gravitating to ethanol production got you down? Well, the 2/25 issue of Business Week (sorry it’s print only, but a PDF version of the article is here) highlights another potential shortage you might see in 2008: Television ad time.

The shortage is caused by the need for Presidential candidates to broadcast their message to us in those tasty bite-sized nuggets, the 30 second commercial:

Politicians are expected to spend $3 billion on TV ads this year, according to TNS Media Intelligence and the Campaign Media Analysis Group. The spending spree, up from $1.7 billion in 2004, will do more than raise the prices in the $26 billion TV spot ad market, where rates could double in contested battlegrounds such as Ohio and Florida.

Leave it to Spend Management leader Hewlett-Packard to offer strategies to manage this short term capacity constraint and prove that good sourcing is not just for procurement any more. Scott Berg, HP’s global marketing chief plans to use good sourcing practices in a non-traditional market:

1. Increasing the use of substitutes: HP will shift their focus to spend more on internet and radio ads.
2. Identify spot pockets of unused capacity: Berg’s team will identify local TV markets where candidates have dropped out of races, leaving inexpensive ad spots available for opportunistic buyers.

Obviously TV ad time isn’t a “commodity” many of you are regularly purchasing, but HP’s silver lining approach to market conditions shows that Spend Management isn’t just a procurement department goal. And you’ve got to admire their flexibility and creativity in adapting to external events. Certainly not bad goals no matter what you’re purchasing.

Justin Sullivan is a Senior Manager in Ariba’s Spend Management Services group. In addition to his strategic sourcing and technology expertise, Justin worked for a number of years in the White House Office of Management and Budget (OMB) where he analyzed the fiscal implications of Federal policies.

Over the past year, Supply Excellence has been tracking a growing trend for companies to rethink their sourcing strategies. For example, General Motors has made re-sourcing a cornerstone of its (ongoing) turnaround plan. And just last week a major food and beverage company told me it was rethinking supply lines for core ingredients.

Mattel’s Chairman and CEO Bob Eckert recently told the Financial Times that his company is having second thoughts about its China sourcing strategy.

While most of the interview focused on how the toymaker allayed consumer concerns after recalling 20 million hazardous toys last year, the question that caught my attention had to do with China. Eckert said his firm was contemplating shifting supply out of China.

However, the move has little to do with product quality issues from the region. In fact, Eckert wisely said quality issues were the responsibility of Mattel’s own procurement and manufacturing groups: “Countries don’t make products; people do…We’ve had manufacturing problems in other markets [besides China]. So the important thing is for companies to take responsibility for their manufacturing process.”

Instead, Eckert said Mattel’s decision to shift supply from China had more to do with rising supply and manufacturing costs in the region. (Although as noted here, last year, in an attempt to appear safer than Mattel, other toymakers stampeded to bring their manufacturing back on shore.) “The toy industry has moved several times over the past decades. At one point we manufactured heavily in the United States. The toy industry’s been in Taiwan, in Hong Kong. Now it’s in the southern provinces in China. I see the economic forces moving the industry either further inland in China or perhaps to Vietnam.”

Indeed, labor and manufacturing costs in “low-cost” regions like China and India have been rising steadily due to increased demand and rising wages. Such factors are making near-shore locations – such as Mexico for the U.S. and Eastern Europe for Western Europe – more attractive for sourcing. In fact, many Asian and European companies are now viewing the U.S. as an affordable sourcing market.

Sure, China still offers a cost advantage over these more developed regions, but the delta is shrinking. And, when weighed against transportation costs, cycle time benefits, and access to major consumer markets, these near-shore locales are becoming more appealing sources.

The message to supply managers: there is no optimal supply region. Changes in market dynamics and your company’s business strategy, will force you to constantly reevaluate and balance your supply portfolio based on costs, performance, and risks.

I was fortunate enough to spend last week crisscrossing Europe, meeting with procurement executives about their supply management challenges and initiatives for the coming year. It quickly became clear from my discussions that, while Supply Excellence has focused (possibly myopically) on the impact of the declining U.S. dollar and economy have had on American companies, European firms have not been insulated from these effects. Far from it.

In fact, during my visit, news broke that gross domestic product (GDP) in the European Union slowed dramatically to less than half a percent last quarter. (Bleak growth indeed. Yet, still a notch above the anemic 0.2% GDP growth in the U.S. during the same period.) Pundits said growth in the EU was hit by a comparatively strong euro, higher interest rates, and aftershocks from declines in the financial sector.

Yet, European procurement execs were most troubled by continued upticks in supply prices. Inflation in the region hit a 14-year high, reaching 3.2%.

In fact, rising commodity prices and tightening supply markets were top of mind for several of the CPOs and supply execs I met. (Other issues focused on program adoption, skills augmentation, and spend visibility – all issues I will grapple with in later posts.) And for good reason.

According to a Daily Mail article last week, prices U.K. manufacturers paid for raw materials were at record highs, with overall commodities index prices up more than 19%. Key culprits include a 70.3% hike in crude oil prices and a record 36% increase in food prices.

The pinch of inflation stretched across the continent too. One Nordic-based food and beverage company exec I spoke with stated plainly that “rising grain costs are killing us.” He said his team is actively rethinking its sourcing strategy for these commodities, augmenting local supply with new – albeit possibly more unreliable and cycle time challenged – supplies from Asia. “We’ve got to constantly reevaluate our sourcing approach” to counter rising costs.

Another sourcing manager from a European transportation firm indicated that the climb in fuel prices has magnified pressures for his team to reduce costs in other areas.

Overall, European procurement execs view the economic crunch as a mixed blessing. On the one hand, it elevates the visibility and strategic clout of their groups within the enterprise. Yet, this greater attention begets greater expectations for quick and sustained returns. These dynamics reaffirm the old saw: supply managers hoping for greater visibility and support within their organizations should be careful what you wish for.