Procurement GPS

The Euro-zone is in crisis: there are reports of bad loans to China and commodity prices still soaring. In a climate of unremitting unease, it is hard not to cut back on purchasing.

However, to do so may exacerbate the problem.

As a part of our research into Procurement in a Financial Crisis, we are looking at re-forecasting during a downturn.

The current evidence seems to suggest that, during the 2008 credit crunch, companies’ procurement functions slashed new orders massively, which in turn affected the orders of suppliers and indeed their suppliers further down the value chain.

However, these moves were only partially founded on shifts in consumer behaviour. This is the so-called ‘bullwhip effect’, where slight changes at the retail level are amplified at the distribution stage and then exaggerated again at the manufacturing point. Followers of the Purchasing Managers’ Index, for instance, will be only too familiar with the volatile peaks and troughs of industry output.

It is important, therefore, when re-examining the volumes required by internal demand, not to succumb to the temptation of over-caution. The best way to remove the emotional element is by removing the human input as much as possible.

My colleague David Rae at Procurement Leaders argued last year over the central role in installing the right analytic capability in order to produce the most accurate numbers. Indeed, in the PIU, we have long-advocated the use of real-time data in spend analysis.

Although most of 2011 was a year dogged by crisis, the New Year seems to be emerging with a more positive spirit. Indeed, most PMI indicators from key economies show growth.

Whereever possible, the supplier orders must be tied to the figures produced at the sales tills, not reports from wholesale or distribution hubs. Strangely, in a time of crisis and uncertainty, the most efficient policy that procurement can undertake may be to invest in new software.

Counter-intuitively, good demand management may involve spending more. Following from our previous blog on demand management, this may not be a bad idea.

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