ISM 2018: Why procurement matters

ISM 2018 got underway in Nashville yesterday, May 6. My personal theme for this year’s conference is Why procurement matters! It was the headline on our annual procurement issue, which we published in March, and I hope by the exclamation point, rather than a question mark, you get the sense that I really believe procurement matters, and more than ever.

For starts, sourcing is the first step in the journey of a product through the supply chain. Now, getting the right product in the right place at the right price and in the right quantity has always been fraught with peril. But I also think that, ironically, a great economy and an evolving supply chain are presenting new challenges for supply chain managers, especially as supply management seeks to raise its profile as a strategic entity that adds value within the organization. That was driven home yesterday by Dan Bartel, the Swtizerland-based chief procurement officer of ABB. Asked about the challenges he’s facing as CPO of a global company, he cited external environmental factors such as inflation – specifically the rising price of commodities such as copper – and threats to global trade such as tariffs and the potential of the U.S. pulling out of long-established trade pacts. He added that the organizations – and their CPO’s – that figure out how to best navigate those choppy waters “will be the winners.” Any way you look at it, those are supply chain management puzzles.

I tossed that out to Tom Derry, ISM’s CEO this afternoon. On the one hand, Derry noted, the economy is doing very well, which may be reflected in the strong attendance at this year’s conference. But that strong economy is producing some unintended consequences, all of which will fall into the laps of supply management professionals. How they deal with them will matter. They include:

The irony of demand: Strong consumer demand, following a time when business was reluctant to make investments in capacity, has resulted in longer lead times or short supply for some raw materials, components and supplies and buyers being put on allocation. Sure, you need 100 widgets to meet your demand, but we’ll only give you 50. “You’re seeing unexpected demand for some materials that go into connected devices and even products like corrugated are in short supply, probably because we’re all getting 10 packages a day from Amazon,” says Derry. That means strategies like supplier relationship management and customer of choice are important to nurture.

Supply disruptions: The avian flu resulted in a highly-publicized shortage of eggs. But, did you know that the decimation of the infrastructure in Puerto Rico has resulted in a shortage of some medical supplies? That means alternative sources of supply and risk management are important.

Trade and tariffs: There’s no question the uncertainty around U.S. policy is having an impact on business decision-making. “In some cases, the perception of what might happen has more of an impact than the actual policy,” Derry said. An example: In the short term, the tariff on aluminum resulted in lower prices, not higher prices, because we’re no longer shipping aluminum to China. “No one saw that coming,” Derry said, adding however, that over time, the price of commodities will rise to the market price.

$80 as barrel oil: This past weekend, the Wall Street Journal reported that the Saudis want to push the price of a barrel of oil to $80. “American consumers are sensitive to oil prices,” Derry said. “That’s likely to dampen consumer demand. It will also increase the cost of goods sold, which may be absorbed for a time.” It’s happening at a time when previously massive oil reserves have been tapped out. The potential off-set could be bringing more shale online or Russia increasing its output. Either way, like the price of aluminum, the cost of a barrel of oil will rise to the market price. For supply managers, an energy strategy to off-set the rising price of oil could be important.

Rising interest rates: This might not specifically be a supply management issue, but it ironically comes at an odd time in the business cycle. Companies now have both tax and depreciation incentives to invest in their businesses, including their supply chains, but they’re coming at a time when the cost of those investments is going up. “Ultimately, it leads to an environment that makes investment difficult and I don’t see we’re going to see the strong GDP growth that the administration is hoping for,” Derry says.

Now, there are always challenges for business and supply management, but the above issues just underscore why procurement matters now more than ever. Or, as ABB’s Bartel noted, the procurement organizations that figure out how to meet those challenges are the ones that will win in this environment.