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Thursday, July 31, 2014

What’s Economics Got to Do with It?

marilyn gettingerOne of the most important objectives of a supply professional is ensuring the availability of goods and services at the lowest ultimate cost while also ensuring minimal inventory investment and meeting all ethical, legal, and organizational requirements.

In order to meet these objectives, the purchaser must develop a wide array of skills and gain knowledge in many disciplines. One of the most important areas of understanding is economics. The ability to identify, evaluate, and apply various economic factors on the supply decisions of when, how much, and where brings significant benefits to the organization.

The term economics applies to the way resources are allocated among alternative uses to satisfy wants. Human wants are the things — services, goods, and circumstances — that people desire; resources are the things or services used to produce goods that will satisfy those wants.

The supply professional impacts many purchasing decisions with the understanding of economic factors:

  1. A knowledge of the marketplace supply and demand relationship and the current capacity utilization at producers signals warnings or opportunities for the alert purchaser. When demand exceeds supply, the purchaser needs to be prepared in averting potential price increases. When supply exceeds demand, the aware purchaser has many opportunities to negotiate favorable new supply arrangements.
  2. Interest rates, which are variable, can impact supply decisions. If an organization borrows money to purchase inventory, it will incur interest charges as an added cost. A smart buyer will work closely with production, distribution, inventory management, and finance to manage the timing and receipt of materials to minimize those interest costs.

    Credit: ddpavumba at FreeDigitalPhotos.net

    Credit: ddpavumba at FreeDigitalPhotos.net

  3. Supply professionals are often involved in the purchase of equipment and machinery.  When interest rates are high, the cost to borrow funds for such purchases will also be higher. This is an opportunity to compare leasing versus buying.
  4. The supply manager also should understand that labor availability is also an economic factor that impacts material prices. A tight labor market means that employers are competing for the same workers and are forced to pay higher wages to hire and maintain sufficient staff. The purchaser may select a supplier in a part of the country (or world) where labor is readily available and supply far exceeds demand.
  5. Offshoring, nearshoring, onshoring, and insourcing are all potential, important decisions that may have a significant impact on the organization’s bottom line based on the value of the dollar and its relation to other currencies. When the dollar is weak, then onshoring or insourcing is a good choice. When the dollar is very strong, then offshoring or nearshoring may have the greatest impact.
  6. The supply professional who is aware of current and forecasted economic conditions is invaluable in helping departments develop their purchasing budgets and material forecasts.
  7. This forecast information is also critical to future negotiations as well as identifying new opportunities for price reductions.
  8. Many indices are available that signal upward and downward shifts in demand. An increase in demand may impact lead times, and the informed purchaser needs to consider placing orders earlier. In a continuing downward-shift situation, the buyer may want to consider reducing quantities or postponing new orders to prevent inventory buildup.
  9. When the economy is in an inflationary situation, the value of money goes down. The supply professional may suggest buying only what is needed or lot-to-lot purchases.

 

There are many sources available for learning more about economics and economic situations. These sources are readily available on the Internet:

 

  • ISM’s Report on Business for Manufacturing and Non-Manufacturing – www.ism.ws
  • Government publications
  • Survey of Current Business – www.bea.gov/scb/index/htm
  • Bureau of Economic Analysis – International Transactions
  • The Federal Reserve Bulletin
  • U.S. Bureau of Economics – a number of industry-related reports
  • U.S. Department of Agriculture – various commodity global trading conditions
  • U.S. Department of Labor – www.dol.gov
  • Securities and Exchange Commission’s EDGAR (Electronics Data Gathering, Analysis, and Retrieval ) database – www.sec.gov/edgarhp.htm
  • U.S. Department of Energy’s Annual Energy Outlook – www.eia.doe.gov
  • U.S. Census Bureau – www.census.go
  • American Metals Market
  • London Metal Exchange
  • Industry-specific publications
  • Chambers of commerce
  • Wall Street Journal – currency exchange rates
  • Baltic Dry Index
  • Cass Freight Index
  • Producer Price Index
  • Consumer Price Index
  • United Nations
  • The Organization for Economic Co-Operation and Development
  • The International Monetary Fund

 

Marilyn Gettinger is owner and principal of New Directions Consulting Group, which works with organizations on improving their supply chains through process streamlining and reengineering. New Directions Consulting Group offers workshops and consulting to companies from 30 employees to multinational corporations to upgrade purchasing, inventory, and supply chain processes. Gettinger, who earned her MBA from Fairleigh Dickinson University, teaches total quality management, supply chain management, and international trade at several post-secondary schools. She holds a C.P.M. and is a member of the Institute for Supply Management and the American Production and Inventory Control Society.

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