How Has a Supplier’s Cost Structure Changed Over the Past Decade?

supply

Spend Matters’ Pierre Mitchell and MetalMiner’s Lisa Reisman offer their perspectives on how a supplier’s cost structure has changed over the past decade. From regulatory impacts to labor productivity gains and volatile commodity environments, these shifts have dramatically impacted the notion of the “supplier’s cost structure.”

Pierre:

I believe that the supplier’s cost structure has generally improved, but it's a tale of 2 forces. The first involves increased energy and regulatory costs. Energy costs are generally up over the last 10 years, but there has been some respite more recently due to favorable supply of oil and gas. Commodity costs were a bigger deal, but again, we have seen a recent respite. Wage increases are not a huge deal, but they vary based on industry.

Lisa:

I’d concur with Pierre in the sense that regulatory costs have become a more complex factor on a supplier's cost structure. From Sarbanes-Oxley to Dodd-Frank to new rules from regulatory agencies such as the Environmental Protection Agency, manufacturing organizations have needed to add in a “compliance factor” to their cost structures. This may not matter to the typical procurement manager per se, but it has impacted the total cost of ownership (TCO) to the company as a whole.

The Second Factor

Pierre:

Without a doubt, we’ve seen huge labor productivity improvements from but not limited to: technology (business/supply chain apps; mobile; cloud), lean/sigma efforts, customer pressures to lean out operations, supply side benefits via strategic sourcing even for the upper mid market, contingent labor options and broader "as-a-service economy" that is competitive.

Lisa:

Here I’d also agree with Pierre – the impact of technology on the business has been huge. However, I’d argue that there is still much more the business can do to automate and reduce sourcing process cycle times. In particular, the time associated with researching, identifying, qualifying and awarding still strikes me as slow and inefficient, particularly because of the lack of process automation and the manual nature of most of these processes.

The Third Factor

Lisa:

I’d argue one of the main factors impacting a supplier’s cost structure involves commodity volatility. If we consider the 10-year period of 2005-2015, commodities have boomed and gone bust at least twice. The preceding 10-year period, on the other hand, for commodities such as steel, showed much less volatility. Volatility presents at least 2 challenges to the supplier’s cost structure. The first and obvious one involves buying organizations attempting to time purchases, and as we used to say in consulting, the results tend to look either lucky or lousy. In this respect, the buying organization either beat or missed the market. In the case of the boom-bust cycle of 2008, many organizations found themselves on the very wrong side of purchasing decisions and ended up carrying extremely costly inventory often for a very long period of time.

The second challenge to the cost structure around commodity volatility involves risk mitigation and the cost incurred by the organization to mitigate price risk. Though that cost appears nearly minimal in a rising market (e.g. the cost of a hedge), we’d argue the larger cost involves the “blind cost” that buying organizations pay to have their suppliers manage forward price risk. In other words, from our vantage point, buying organizations have very poor visibility into the risk premium placed on commodities from the supply base. It is here, we’d argue, where astute organizations will want to invest time in better understanding and managing price risk.

We’re curious to hear what the Spend Matters audience thinks – leave your questions for Pierre or Lisa in the comments section!

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