The Global Economy – Four Points for Procurement to Consider

Yesterday, we reported on the fairly depressing economic situation around the world, with stock markets crashing, economies going into decline, plagues of locusts and frogs ... well, maybe we’re not quite there yet but the situation looks a lot less healthy than it did a few months ago. How should procurement people respond to this? There are many, many different aspects we could cover here but let’s focus on four areas for today.

The first obvious point is that practitioners need to stay aware of what is going on. You might think that your organisation, or your category, or country is immune to what is happening elsewhere, but if we move into the downward phase of the next economic cycle, and maybe even a recession, then whatever you buy and whoever you work for, it will have an effect, as we will see. So keep up with the news and the key economic indicators and events. If a colleague says “how will the issues in the Brazilian economy affect our supply from that country”, then it is good to at least be able to demonstrate that you know what the problems are!

The next point is around currency. Major movements can bring both opportunities and threats, and the recent devaluation of the Chinese currency is a major issue for many firms, whether they buy from China, sell to that country or have Chinese competitors.  There is an excellent article by Lisa Reisman from Spend Matters US on our subscription service here. She highlights that much depends on the nature of the contract, and what currency is used for payment, but depreciation can bring opportunities for price reductions in some cases. You need to understand the issues here too.

Next, take a look at how you are managing supplier risk issues. In any economic downturn, the number of company bankruptcies and similar problems increases, which inevitably affects their customers. Contingency plans should be in place, particularly where the supply is critical to the buying organisation, and where there are few easy alternative sources of supply for the goods or services. It is not enough to have run a Dun & Bradstreet report once, ten years ago, when you first started using a supplier – some sort of continuous monitoring is essential, never more so if the economic situation is worsening.

The final point is quite possibly the most important to bear in mind if we are moving into a different part of the economic cycle. Procurement functions and practitioners must be able to adjust approach and strategy quickly when required to do so. Over many years, our observation is that the primary reason that CPOs get fired is their lack of adjustment to changing strategic imperatives in their organisation.

So in the past few years, as we have moved out of global recession, we have seen more focus on procurement supporting innovation and revenue growth, corporate social responsibility and reputational management issues, and developing strategic supplier relationships. Now we’re not saying this sort of activity will disappear overnight in every organisation. But just be ready for that call, email or chat with the CEO or CFO who says “we need to save some serious money quickly. How can procurement help us to do that”? You will need an answer to that question - fast.

First Voice

  1. Ian R:

    Hello Peter.

    In addition to currency there are also opportunities to be had within global commodity prices, particularly in this instance where the long term demand from China for commodities is uncertain or likely to be weaker, generally markets for those commodities weaken as well, so procurements’ approach needs to adapt – and also try to predict just when the market is going to be at its most advantageous. Whether this is a reactive of proactive approach I’m not sure.

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