We recently received an email from I dare say, a regular reader of MetalMiner. We’ll leave out the names to protect the innocent but our reader raises an interesting question as to how companies show cost savings (and or cost avoidance) due to their own efforts as opposed to those that come from a falling price market. Here was the email that we received:
I recently was reading a Supply Chain Daily.com article that referenced your 1960’s comparison of the steel mill actions of today. (Editor’s Note, here is the link to that post entitled Steel Industry Musings from the 1960 Recession) I loved it! I did a similar comparison although not as in depth as yours, mine was just a 5-year trend. The actions were not much different in what happened in both demand and pricing. In several discussions with my CFO we tossed around the notion of the mills playing with collusion during these desperate times. I then came across The Commodity Bulls are Back in TownA Return to Commodity Price Inflation this article by Jason Busch from Spend Matters. It even referenced a white paper on the events of possible collusion evidence from the late 19th Century Basque Iron and Steel Industry. I guess you could say the steel industry is both cyclical and predictable by their past actions during economic turmoil.
I have introduced my company to historical trend analysis in both our own sales data along with commodities that impact our business. They’re hooked! You might think that this would be the norm but this was not the case. They only tracked profit and sales backlog dollars. Through these efforts we have decreased cost of good sold by 9%, and decreased inventory which increased cash flow by 28%. We are almost at last year’s profit numbers with less top line sales.
To set the record straight, we by no means think or believe the steel industry is engaging in price collusion. What we find interesting is one of the conclusions of that study referenced by SpendMatters on 19th century steel collusion that suggests that price collusion, historically, occurs more during rising markets as opposed to falling markets.
We have seen metals buying organizations, throughout the years, struggle to demonstrate when and how they have achieved cost avoidance and/or cost savings outside of general market rises and falls. The practice of examining historical trends certainly helps (or can hurt) the purchasing organization when demonstrating to senior management what actions (if any) have been taken to beat the market as opposed to meet the market. But as our reader described, by tracking performance historically, companies of all sizes have the opportunity to increase cash flow, decrease inventory and perhaps now more than any other time, improve working capital.