Now that the ball has dropped and you’ve bid adieu to 2007, you are probably being bombarded with news reports and e-mails telling you what to expect in 2008. Supply Excellence is also throwing its hat in the prognostication ring, except with a twist.

I’ve spent the past few months speaking with supply management executives about their goals and challenges. Top of mind for supply chiefs: the economy.

The declining U.S. dollar, tightening supply markets, and inflated fuel costs have been a persistent triple whammy to most corporations. And none of the supply execs I spoke with are banking on any relief in 2008. The Vice President of Procurement at one large process manufacturer summed it up best: “Prices, driven higher by energy costs, are once again our major concern.”

And, as with other economic downturns, such market dynamics will prove a a blessing and a curse for supply managers. History has shown that when the economic going gets tough, CEOs and CFOs turn to the procurement and supply management organization for help. The current crisis provides an opportunity for supply managers to elevate your strategic position within your company.

The bad news? Tighter supply markets and a weaker dollar will require you to throw out the rule book for negotiating and managing spend and suppliers. For many commodities, traditional negotiation tactics — such as reverse auctions — won’t deliver the savings you have come to expect. Your CFO will likely give tougher scrutiny to your spend savings claims. And you’ll once again be asked to drive additional savings without additional resources.

To succeed in this environment, supply managers will need to adopt alternative negotiation and spend management approaches. Here’s some recommended tactics to achieve and sustain your spend and supply management goals in 2008:

• Adopt alternative negotiation approaches: With the prices of certain commodities continuing their skyward rise, buyers are no longer in the driver’s seat in many markets. Wringing the best value from negotiations with suppliers requires the use of alternative negotiation methods, such as flexible bidding or optimization-based sourcing, which allows suppliers to differentiate their solutions on multiple parameters beyond price and enables them to suggest alternative bundles or offers. Companies like Sun Microsystems and ITT Industries have actively embraced such alternative negotiation tactics. Several buyers noted that they were engaging in longer-term commitments with suppliers competing in tighter supply markets.
• Rethink your low-cost country sourcing strategy: With rising labor costs, tighter monetary policies, and tougher environmental scrutiny, China is losing some of its luster. Throw in rising fuel and transportation costs and sourcing from China and other faraway emerging markets are not as fiscally attractive as it once was. Such factors have prompted many supply management organizations will begin retooling their global sourcing approaches to better reflect total costs — especially landed costs — and to better align with their company’s global manufacturing, sales, and customer support strategies. As stated here before, General Motors has reassessed its global supply base and sourcing decisions based on total landed cost and global business objectives. And other companies are viewing low-cost sources closer to home. Others firms, such as Procter & Gamble, American Express, and Unilever, are shifting to supply sources and service centers closer to Latin America. And top business process outsourcing (BPO) vendors, such as TCS, Infosys, and IBM, are setting up shop in the region.
• Optimize your spend position: Tighter supply markets and a weaker U.S. dollar will require supply managers to devise new ways to improve their spend leverage. This will require improved visibility and analysis of existing spending . Improved visibility will not only provide greater insight into where you are spending your dollars, but it can also help you identify new negotiation advantages. For example, improved spend visibility offers new understanding of parent-child relationships (i.e., determining which suppliers in your roster are part of a larger, common parent company), allowing you to improve your spend leverage to negotiate more favored terms with a given supplier. Likewise, improved visibility can help you uncover purchase price variances with given suppliers to ensure that you are maximizing the prices and volume breaks you spent so much time negotiating.
• Manage demand: One of the best ways to save money is to not spend it. Or, more precisely, not spend it unnecessarily. Several supply management execs noted plans to improve their ability to identify and aggregate purchasing demand for specific goods and services — such as new hardware — across business functions or divisions and use this leverage to negotiate favored terms using a quick RFQ. Similarly, other companies have begun standardizing purchasing requirements — such as defining common configurations for new laptops or standardizing similar parts into a single, standard specification — to improve negotiation leverage and turnaround with suppliers.
• Improve cash management: Faced with a tighter economy, supply managers (and other functions) need to take a more active role in improving working capital. Buyers are quickly learning that automating the invoice reconciliation and payment process can yield some dramatic improvements in costs and cash flow. Celent Research finds that automating can reduce invoice processing costs by as much as 92%, while electronic settlement can slash payment costs by up to 86%. And working capital improvements will improve exponentially when the improved visibility and efficiency enabled by EIPP are used to make rapid, fact-based decisions that dynamically balance cash and rebate management. As noted here in previous posts, such dynamic or aggressive rebate management approaches can yield 2% to 20% discount offers off the originally negotiated price from suppliers that are eager to get paid early.
• Embrace sustainable supply strategies: Last year I predicted that 2007 would be the year that environmentally and socially responsible supply strategies go mainstream. And many of you didn’t believe me. Well, moves by Hewlett-Packard, Wal-Mart, Sun Microsystems, and others clearly indicates that the sustainability movement has already begun. This year, tighter environmental regulations from China and the U.S. (coupled with the need to offset supply price increases and risks) will drive most of you to employ sustainable supply strategies. The smarter in the bunch will find ways to leverage these approaches to lower supply costs, secure supply, and drive greater sales and profits.

Tough times require tough (or, in this case, alternative) measures. Now’s the time for supply management organizations to shine. The above strategies can help ensure your success.

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