In the last six weeks, our firm has had the opportunity to view purchasing data from a number of manufacturing firms cutting across multiple industry sectors including oil and gas, HVAC, storage, and safety seats, among others. And what we see should not surprise us yet when examined from the aggregate, once can pull out a few interesting trends.
The first trend involves volumes. As most manufacturers can attest to, volumes dropped off a cliff starting in Q4 ’08 and continuing through Q1 ’09. Business stabilized in Q2 and for many firms, demand has notched up slightly in Q3. We would say that on average, manufacturing purchase volumes appear to run about 20-30% below 2008 levels.
A second trend we see involves general sourcing effectiveness. We’d argue that of the half dozen companies whose data we have looked at, the proverbial “low hanging fruit has long ago dried. Instead, we see companies sourcing more effectively in terms of benchmarking prices, creating competitive bid processes and consolidating demand with fewer suppliers. We consider these laudable accomplishments.
Of course wearing a consulting hat, we’d argue some areas of improvement remain and the biggest one we see involves the timing of when companies “pull the trigger on sourcing decisions. One company we looked at, very proud of their recent negotiated agreement for steel coil and sheets, locked in the first half of 2010 pricing and volumes recently but could have shaved another 10-12% off their purchase prices had they waited until later this year as steel prices continue to fall. Now of course we remind our readers that playing the market may prove an inefficient strategy (you win some, you lose some) but a simple benchmarking exercise combined with a review of steel price forecasts could provide a reliable indicator of pricing trends. Most analysts have called for lower steel flat rolled product pricing throughout the end of the year.
Cost cutting remains the top theme of the quarter as evidenced by a number of earnings announcements across a range of industries. Consider Honda’s announcement that it continues to cut research costs, overhead and other expenses while BP attributes its better than expected third quarter results due to lower prices from suppliers, elimination of management layers and a simplification of its structure, according to the Wall Street Journal.
As they say, cash is king and our informal look at industrial products manufacturers suggests companies have and will continue to pay very close attention to cost reduction and cash management.