Supply Excellence — Spend Management Town Hall: Hedging Against the Gloomy Economy

Spend Management Town Hall: Hedging Against the Gloomy Economy

April 21st, 2008 · by Tim Minahan · No Comments · best practices, events, sourcing, spend analysis, supply management, supply market dynamics, supply risk

Oh what a year it’s been for supply managers. Oil prices are up 79%. The value of the US dollar has dropped 8% against the Euro. And the price of milk (and other key food stocks) frothed up 20-60%.

It’s enough to make a guy want to swap from cream to soymilk in his morning coffee. (That is, if soy prices weren’t off the charts themselves.) It’s also enough to make the global economic situation issue #1 at the inaugural Spend Management Town Hall Forum earlier this month.

The panel of experts assembled for the Michigan State University hosted forum could not have been more representative of the global economic engine. MSU Professor Joe Sandor was joined by CPOs from Kellogg’s and Whirlpool, both of whom are consumer price index (CPI) bellwethers.

Unfortunately, the weather they were reporting was dismal. The panelists freely used the ‘R-word’ when describing the current market dynamics and suggested that the downturn started earlier and may last longer than what is being reported in the ISM index.

“This is a unique recession,” said Professor Sandor. “We feel the downturn, but simultaneously, we see rapidly rising commodity prices.”

Audience members looking for evidence of this conundrum did not have to look much further than Whirlpool. With appliance purchases closely linked to the ailing housing and credit markets, Whirlpool is feeling the pinch of waning consumer demand in the US and rising costs, particularly for commodities like steel and plastic.

“I wouldn’t call it stagflation yet, but we have two big pressures going on in our business,” said Mark Brown, Senior Vice President of Global Strategic Sourcing at Whirlpool. “We’ve seen kind of a perfect storm with the credit markets, tax calls, gas and raw material prices. The cost structure of our machines has radically been impacted by it.”

Alistair Hirst, Vice President of Global Procurement at the Kellogg Company, agreed, noting that inflationary pressures have caused the cereal giant to rethink both its supply chain and business strategies. “[The current economy] puts a lot of pressure on the inputs side, but it has also impacted the pricing side of our business model. Consumers have less disposable income” and that is changing their buying choices.

This lack of pricing power is particularly concerning because, historically, food companies have had more flexibility to pass along price increases to consumers. If consumers won’t swallow food price increases, they won’t accept price increases from other industry segments. That will put added pressure on business to further reduce costs. Yet, the panelists argued that rising fuel and commodity prices leave little room to negotiate savings.

“Nothing beats the market regularly.” said Professor Sandor. “So, the management of costs and the degree of sophistication with which you attack it is ever more important.”

One strategy Kellogg’s is using is hedging on the grain markets. “We’ll hedge out various risks of time depending upon the risk profile.” (This echoes comments from the head of supply chain at a major food service company I met with last month who said they locked into the price of wheat for a full year: “It’s the first time we ever locked into such a long-term contract.”)

Whirlpool is also taking this approach, but in a more limited fashion. “There are no missing links in the supply chain that can’t have predictability driven into it,” said Brown. Although he quickly followed up with a joke, asking if there were anyone in the crowd with any great ideas on hedging steel.

Hedging is just one of the strategies the panel recommended as an antidote to the down economy. Professor Sandor suggested that companies begin to attack new spend on categories that are not directly linked to commodities like oil, gas, metals, or plastic. “Spend management in the indirect space is becoming more critical and a differentiator.”

Later this week, we’ll examine how Kellogg’s and Whirlpool are controlling indirect spending, including business services purchases. In the meantime, listen to the podcast of the Spend Management Town Hall here. Or download the Spend Management for the Economy platform for additional best practices you can use today.

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