Cost Reduction Headwinds: Gathering Velocity?

Over on Supply Chain Matters, Bob Ferrari recently penned a useful column looking at a number of the elements contributing to an increasing cost reduction headwind. Even though he captures the usual rising commodity markets challenge which we continue to cover at length on Spend Matters -- he cites, for example, P&G's recent acknowledgement that "higher costs for paper, pulp and plastic resins are affecting margins" -- Bob also brings into play how inventory buildups earlier in the year might be playing a role in emerging cost containment challenges. To wit, "the spike in inventory buildup that occurred earlier this year emboldened commodity providers ... to initiate waves of price increases to fatten-up their own margins and profitability. One can ponder whether such increases were actually pegged to overall global demand needs."

On the commodity issue, Bob writes that in certain cases, "legitimate supply shortages brought about by natural or political events" have impacted pricing, in such markets as wheat, sugar cane, cocoa, etc. Incidentally, I ran into an old friend the other day that is a sugar broker. He told me that business is so good that they're now entirely focused on the 2012 and 2013 crops (the 2011 harvest sold out long before anticipated). But what's good for him is not necessarily good for food and CPG companies, not to mention consumers. To Bob's points on commodity challenges, "many supply chains currently operate in a fragile and lean state ... [and] the open question is whether this new challenge of inbound supply cost increases without offsetting revenue increases [will place] supply chains into a more fragile state than they already are.

Personally, I think when it comes to inventory challenges, lead time issues and commodity price increases and fluctuation, we're at a similar point in broader supplier management issues as we were originally before the rise of strategic sourcing processes from a negotiation and pricing standpoint. As anyone who has been part of a successful and continuing program knows, strategic sourcing works not because of the negotiation process itself, but because of all the work that goes into gathering information and communicating it to key participants involved (and then going around -- and around, and around and around, if necessary) to further explain and answer questions. In a similar manner, we must now think about how we can gain the upper hand on these broader issues by tackling the information challenge first, rather than simply jumping to implement new strategies for dealing with changes in the environment.

Jason Busch

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