Industrial Manufacturing Malaise Creates a Silver Lining in Procurement’s Cloud

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U.S. industrial manufacturers have become less optimistic about the world economy and few see potential of global growth, according to the recently released Q3 2015 Manufacturing Barometer from PricewaterhouseCoopers.

Among the industrial manufacturers surveyed in the PwC report who sell abroad, less than a quarter (23%) are optimistic about the global economy in the year ahead, representing a large drop from the 38% with an optimistic view in the second quarter of 2015. Twenty-three percent also have a pessimistic view of global economic prospects. This was a significant jump from the 8% who reported a pessimistic view in the previous quarter. Additionally, the report pointed out that 40% of manufacturers actually see the world economy as declining, and just 15% viewed global growth.

Optimism for the U.S. economy has taken a sharp dive as well since the start of the year. In the first quarter of 2015, 76% of industrial manufacturers said they were optimistic about the U.S. economy. Now, 60% are optimistic.

It shouldn't be a major surprise that industrial manufacturers are more pessimistic, given that exchange rates are making their goods more expensive in “growth regions” (e.g., China) where growth is also more tepid as part of the global slowdown — and due to region or country-specific issues that are slowing consumption. The monetary exchange rate was identified by 38% of participants in the PwC survey — it is now the “leading headwind to growth” for the year ahead, the report stated. A year ago, just 14% of industrial manufacturers cited it as a barrier to growth.

As such, the decrease in hiring is a natural consequence. According to the PwC survey, 37% of respondents said they plan to add talent to their teams, a drop from 52% at the beginning of 2015. However, a lack of qualified workers is no longer a main barrier to growth, according to the report. Just 10% reported a lack of talented workers as an expected challenge to their growth, down from the 35% who cited it at the start of the year and 24% during Q2.

Budget owners, too, often have to be creative in how they can fund top-line focused investments. These investments are not just focused on major new product lines or geographic expansion but also a slew of incremental activities to improve revenue uplift and also, of course, cost and cash performance.  

This challenging environment for the business stakeholders is a perfect entry point for procurement organizations to help those spend owners accomplish their objectives through better management of spend and supply.   

On the spend side, hiring freezes and capital expenditure reductions can often be mitigated through cost variabilization, outsourcing and smart application of savings between budget categories so that procurement can help free up funds from less important areas to more important ones.

On the supply side, while it might be tempting — and pragmatic — to use reduced commodity prices to further drive down purchase prices, more progressive firms realize that these are precisely the times when suppliers most appreciate collaborative efforts to create joint value. This is not just about supplier-enabled innovation for new product and service creation but a broad range of improvements where suppliers can help create “demand pull” while taking out unneeded waste and cost. In fact, our most recent research has shown a substantial shift in the procurement “value mix” of top line benefits relative to overall economic value-add, increasing from roughly 20% today to over one-third of total economic value in three years.

Procurement’s ability to broaden its internal services will be predicated on a slew of changes in procurement’s operating model — and this increasingly means becoming more digital (i.e., automated and intelligent) to provide deeper market insights and also supporting the broader “digital business strategy” efforts at the enterprise level. This trend is seen in the PwC study, where 90% of firms plan to invest in IT, including 26% investing any ERP and 34% investing in cloud technology. (Contact me if you want more details.)

These are not mutually exclusive, especially in procurement, where most companies will have some type of ERP “backbone” of non-differentiated business process automation that should be augmented by strategic procurement technology focused on truly strategic supply management processes that require deeper techniques and tools to create similarly differentiated value.

Picking the right techniques and tools from the right resources is merely practicing what we preach in letting the supply markets inform us where they can add the most value. Our job is merely to make that process more efficient and effective.

 

Please follow Pierre Mitchell on Twitter @SupplyMatters

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