Paul Martyn: “From a supply chain perspective, I have capacity, time and inventory as my buffers for uncertainty. With inventory and time increasing, it’s an indicator that demand is more bullish among manufacturers in the U.S.”
The dip that U.S. GDP took in the fourth quarter (0.1%) rattled nerves briefly, but after accounting for the 22% decline in defense spending, observers like Paul Martyn, vice president of supply strategy for BravoSolution, a supply management software and services provider, see encouraging signs in the U.S. economy.
Martyn was following the drop in inventories in the fourth quarter carefully, as it signals how companies are looking at their prospects for the coming months. But he says it’s likely the drop was due to the impending fiscal cliff and fears among businesses that a downturn could leave them with too much invested in inventory. The January PMI numbers from the Institute for Supply Management showed that inventories were again growing (up from 43.0 in December to 51.0 in January).
“The other encouraging note is that in addition to inventories rising, the delivery times have actually slowed down. It’s taking longer for suppliers to get their deliveries and make deliveries,” observes Martyn. “From a supply chain perspective, I have capacity, time and inventory as my buffers for uncertainty. With inventory and time increasing, it’s an indicator that demand is more bullish among manufacturers in the U.S.”
Uncertainty breeds concerns about risk and one way manufacturers are trying to protect against volatility is through more sophisticated hedging strategies for the commodities they depend on, says Martyn. Rather than simply hedge against grain prices, for example, food manufacturers are bundling several commodities together in a hedge that looks at other elements affecting prices, such as the fuel used to transport it.
To deal with complex hedging calculations, says Martyn, corporate America is splitting into the “haves and have nots,” with the haves employing sophisticated analytics programs to examine their options.
An elevation of concern about the supply chain and purchasing is one outcome of the Great Recession, says Martyn. As a result, more companies are creating chief purchasing or procurement officer positions, with this person frequently serving as the chief financial officer’s right-hand, and shifting to more strategic procurement practices.
“Coming out of the downturn, companies that did well were able to adjust quickly and be quite nimble in the way they managed their supplies to reduce costs at time when revenue was coming down,” Martyn says. “Now going forward, it is not just about the cost savings and negotiating better rates but companies looking at cycles to be able to respond to adversity."
That quest for flexibility is affecting the way supplier contracts are being drawn up. There is more formula-based pricing that uses indices of the market rather than just a flat rate, says Martyn. He also sees companies going to shorter contracts in some cases, such as from 3 years to one year, even when it results in higher administrative costs.
