Procurement Central

The Labor Department reported the Producer Price Index rose 1.1% in July, a +0.5% surprise from an estimated 0.6% rise. The news wires have been abuzz with economists’ reactions and anticipated market responses.

For those of you not familiar with PPI, it is an index that measures an “average change in selling prices” for domestic producers. It attempts to enlighten us on how costs may be impacting manufacturers and service providers. In the long-run, a sustained rise in PPI will flow through to consumer prices, tracked by a companion measure called the Consumer Price Index or CPI. And per my previous posts (and your own day-to-day experience) CPI is up big & consumers are already feeling the brunt of higher prices.

The early reaction is causing the US Dollar to strengthen against the Euro. This reading will also cause the U.S. Federal Reserve to weigh the nasty possibility of tightening monetary policy - nasty because such an action would prolong the current economic downturn.

The Wall Street Journal’s blog section has a nice run-down of economist reactions to the news.

It’s possible the freefall in oil prices the has continued since the speculative bubble burst there will make these inflationary reading ebb quickly. We’ll know in a few months.

I have the privilege of leading a workshop tomorrow for the Institute of Supply Management’s (ISM) Silicon Valley chapter. My topic is called “Effective Purchasing Automation and Control.”

I’ll be advocating a no-nonsense approach to improvement an organization’s procurement processes. I think it’s especially important in these uncertain times to focus on the fundamentals.

I’ll recount my experiences with the procurement function through being an applications vendor over the last dozen years (or so!). My memory seems especially sharp when it comes to GE, Ford, and Alcoa. As a vendor delivering tools to procurement organizations as they underwent dramatic changes, I had a unique, birds-eye view to their methods and their results.

I’ve come away with a philosophy of simplification, empowerment, and standardization for procurement. I’m also an incrementalist - no need for giant & risky leaps forward when a steady pace of improvement can work better and improve the bottom line quicker.

For me, the most interesting part of the session will be the interactive portion where invidividual procurement professionals discuss their challenges and their goals for the next 12 months. It’s a difficult time; prices are generally increasing across a wide swath of commodities. Normal measures of procurement success, such as a % decrease in prices paid, may be unrealistic. So I expect to hear more goals like these:

• I need to contain price increases to an average of under 2%
• I must improve cycle times for goods fulfillment by 25%
• I have to cut G&A personnel costs by 30%

I’ll report back, in aggregate, what I find.

Slow growth and inflation are combining to really put the pinch on businesses as they struggle to survive the downturn. Even though demand is very soft in many service sectors of our economy, prices are accelerating for all the inputs to their businesses.

At first, inflation appeared more isolated to energy and food. But rising energy and food costs are now impacting other areas. For example, clothing prices rose 1.2% in July, Airfares 1.3%.  

It’s hard to see any reason to believe jobless claims will fall anytime soon. So instead expect unemployment to continue its upward trend as businesses cut back to preserve profits.

Here’s a few articles for reference on the CPI report:

• US News and World Report: July CPI Report, What You Need to Know
• Marketwatch: Alternative ‘core’ CPI up at fastest pace in 17 years
• Forbes: U.S. Has Inflation on the Brain

The Labor Department reported the U.S. unemployment rate climbed to 5.7% in July, a four-year high. Employers reduced 51,000 jobs as they struggle to balance budgets amid rising costs and slack demand. NPR reported this as the 7th consecutive month of job declines.

While business cycles of growth and contraction are nothing new, this contraction seems to have some unique characteristics. Certainly energy costs have skyrocketed placing additional burdens on businesses, but now other low cost, commodity goods seem poised for inflationary times too.

Look no further than today’s New York Times article entitled “China’s Industrial Ambition Soars to High-Tech“. The Chinese Government is ending many of the favorable incentives it had in place for low-cost goods production and shifting gears towards an innovation-driven economic engine. It won’t happen overnight, but combined with tougher environmental and labor standards, these changes may significantly push up prices for goods produced in China.

The bottom line is that all signs point towards businesses having a lot of trouble meeting budgetary goals over the next few years.

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Crude oil prices, still sky-high, may now be undergoing a downward correction. The world’s insatiable appetite for oil, it seems, is price-dependent. Americans are changing their ways; demand is down vs. last year. And even though I’m CEO of Coupa, I’m no exception. I have a shiny new 2008 Prius, which I love, and my 4-door Ford F-150 Supercrew is no more. Of course, I didn’t go all the way to a Smart Car, like this Palo Alto resident mentioned in a recent New York Times article entitled: “Energy Prices Are Bright Sliver in Grim Economy“.

It remains to be seen whether oil will settle back to below $100 a barrel within the next year. Everyone knows the long-term trend is up, but with the US economy challenged on many fronts, it’s possible a pullback in oil prices will continue and be sustained for quite some time.

For businesses it’s time to review how to take advantage of this short-term pullback. Highly energy-dependent firms should redo future pricing projections and adjust the amount of oil they can acquire via long-term contract pricing. The rest of us may can hope to see a continuing marginal reduction in our energy expenses bringing us one step closer to profit or budgetary goals.

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The San Mateo Daily News headline story this July 9th was about a $20 million dollar mistake made by manual error due to an antiquated, paper-based process. Though the mistake had to do with real estate taxes and scheduling, it just as easily could have been a problem in HR, facilities, or purchasing.

Time and again, organizations fail to improve their obviously-awful systems and procedures until disaster strikes. And, in hindsight, making an investment in going paperless sooner would have saved money, time, and heartache.

So take some time out in your busy day to analyze how your organization does business. What processes are manual, error-prone, and introducing risk into your business? And whether it’s payroll, expense reporting, HR, or even purchasing, take the logical next step and automate.

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Skyrocketing gas prices have caused government agencies to do the unthinkable: change!

Those high gas prices have blown carefully planned budgets to bits. Governments need gas to provide all manner of basic citizen services - from road maintenance and construction to health and safety enforcement programs, not to mention police, fire safety, and other programs.

A few have moved to modify employee work weeks to 4 10-hour days, counting on a reduction in the “G&A” of checkin- and checkout- of government vehicles to worksites. Birmingham is one high-profile example, highlighted by an NPR story on Morning Edition run this past July 1, 2008.

One of the Wall Street Journal’s blogs, Environmental Capital, ran a post by Jeffrey Ball entitled “Burned Out: States Shorten Work Week To Save Gas” which covered additional changes being made by the state of Utah.

These stories muse about whether productivity will be positively impacted by the shift to longer days but fewer days. It’s a great hope - but one that deserves some skepticism. After all, consider the recent report by the UN that concluded that workers in the US are already working fewer hours than their counterparts in some areas of Europe and Asia (who now work an average of 48-hours a week).

There’s a common belief here in the US that we work harder. I wonder if it reflects current reality?

In any event, I suspect governments will continue to look long and hard to find savings to fill their current budget woes. Effective purchasing is a great area to explore!

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Today the Department of Labor released initial numbers for jobless claims for the week of June 21, 2008 - a higher than expected 384,000 people. The trend since last July has been steadily upward, causing unemployment rates to creep up from historically low levels. Here is a chart courtest of RTTNews:

This report is further evidence of a weak economy. Bloomberg reports Ryan Sweet (an economist at Moody’s) as follows:

“Businesses are very cautious in their hiring plans because of the uncertainty in the U.S. economy and the global economy as well.”

Combined with inflationary pressure from oil and other commodities, it’s easy to see why many businesses are uneasy - they are really struggling to preserve profits. Their costs are rising and at the same time demand is softening.

It’s a good time to examine your business and look for ways to tighten your belt to get through this cyclical downturn. Here at Coupa we’ve begun working on a few ideas to help. More to come later.

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We’ve brought back the Blog for Coupa.com. The reason? We’ve got a lot of news to share and trends to cover.

We hope to provide our community some informal insight into Coupa and our on demand purchasing software through our posts.

As for the name Procurement Central? It reflects our desire to provide useful information about the cause of effective purchasing to all interested parties. The name has some history to it - but I’ll leave that for another time.

Welcome!

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