Back in my Andersen days (yes, that Andersen), the firm hadÃ‚Â the motto “think straight, talk straight.” Not that we always did, but that certainly was the goal. My boss at Andersen, a wonderful guy named Jim Broering, had an even better motto: “Don’t make them yawn.” You laugh, but it had profound ramifications on what came out of people’s mouths or onto their powerpoint slides. Jim was the “so what” guy. What did the finding, the factoid, the news bit mean to the person receiving the information? That was the question he always pushed me to answer. And so I can’t help but feel that publishing New Year’s predictions, though perhaps helpful to some, may actually just be a yawn if there isn’t something more tangible for the reader.
So thinking of Jim’s words of wisdom, we thought we’d profer not predictions but our sense of different sourcing strategies companies have used in various markets (up, down, sideways etc). Of course there may be wildly different strategies for sourcing raw materials or semi-finished products (e.g. sheet, coil, plate, tube etc) vs. more finished products (fabricated parts, castings, forgings etc) which contain some of those metals we wrote about the other day.
Generally speaking, when prices are expected to increase or remain volatileÃ‚Â it can be an effective sourcing strategy to deploy hedging techniques or to bid out the category during the previous pricing trough. We realize this is easier said than done but by looking backwards 24 months and forward for at least 18 months, a sourcing manager or CFO for that matter can implement some risk management techniques and take some “spend” off the table by locking in known prices (or deploy a hedge to guarantee the purchase expense at a certain price). A Hold Em strategy is also effective in a rising market if you have a long term contract already in place not subject to underlyng metal price increases.
Purchasing on the spot market can be a more effective sourcing strategy in declining price markets. But this becomes more challenging on finished products unless the material component is pegged to an index. In these cases, re-bidding the category after a few months of price declines can also make for a good sourcing strategy. But all strategies of course are dependent on so many additional factors including substituteability of suppliers, substituteability of materials, lead time requirements, quality requirements, volumes, how customer contracts are written (e.g. are metals price increases/decreases passed on through to customers or not) etc. What has been so challenging in recent years is managing the strategy to categories with extreme price volatility. Boy how we would welcome a year of the “yawn” if prices just held steady or slowly declined…
–Stuart Burns and Lisa Reisman