Friday Rant: Get Ready for a Double-Dip Recession and Its Impact on Procurement (Part 1)

Our sister-site MetalMiner ran an article yesterday citing some pretty serious -- and historically accurate -- leading indicative consumer data that suggests the US will soon face the prospects of a double-dip recession as Q2 revisions and Q3 GDP data come up. You can read the full story here. Lisa Reisman, who authored the piece, questions "if much of Q1 growth, two thirds fully to be exact came from inventory swings (or just pain re-stocking etc), what will the next two GDP announcements look like?" Further she begs, "Will someone kindly explain to me how we expect GDP numbers to remain positive when the consumer trend line is clearly in contraction mode?" For that consumer trend line data, check out the detailed numbers from the Consumer Metrics Institute she considers in her analysis. It's scary, to say the least, especially adjusting for the prospects of what she suggests could be a sustained downturn as opposed to a severe, immediate contraction. Did I hear someone whisper Japan, by way of historical comparison, anyone?

If we're to believe this data and forecast -- as I do -- procurement organizations should get ready to significantly rethink their second half 2010 plans as well as their forecast going into 2011. If I were creating a checklist of items to consider, here's what would be at the top of it:

  • Working capital management strategies -- procurement organizations should begin to think through the importance of working capital in a sustained double-dip downturn, especially one with the potential for lesser liquidity (thank you, Europe) in the lending markets. This may impact investments and levers in A/P, invoice automation, electronic invoice presentment payment (EIPP), supply chain finance, etc.
  • Supply risk management -- once a supplier takes a hard punch to the chest, it's far more likely that they could face a KO in the next round in the ring. If you've de-prioritized supply risk because you think the threat of supplier bankruptcies and supplier cost cutting that impacts quality, performance, etc. has declined, it's best to think quite seriously again. That is, unless you want shareholders and customers blaming procurement for a failure to perform.
  • Rethinking contract duration -- in a falling market that will at least start from a buyer-driven perspective (unless suppliers fail or take capacity offline quickly), it often makes sense to consider buying more on a spot price basis rather than locking all of your spend into long-term-agreements.
  • Contract structuring and management -- per the above point, also consider the impact of floating commodity prices in areas that you believe could see potential decline rather than paying a premium for having suppliers or third parties assume risk (consider escalation / de-escalation clauses here as well as floating rather than hedging).

Check back next Friday for additional checklist items to consider and begin to ponder as we consider the prospects of a double-dip recession -- or a w-shaped recovery, as optimists might like to call it.

Jason Busch

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