Crisis Is a Boon for Purchasing Managers

Economic crises mark strong discontinuities for all agents. Consumption declines, markets shrink, so managing demand and investing in marketing become increasingly difficult. But it's a good market for commodities buyers. In fact, during a crisis purchasers have stronger bargaining power vis-à-vis suppliers. Crises are good times to stock on supplies and raw materials, unlike "normal" times. Looking at the situation through the eyes of purchasing managers, the effects of the crisis are highly positive, since the prices of commodities and components drop and there is unused production capacity among suppliers. In such a context, purchasing managers privilege short-term contracts and adopt opportunistic behavior to seize upon advantageous market conditions, hoping not to run into the risk of default on delivery, since suppliers can go bust to due exceptional financial stress. Financial pressure can also diminish quality performance among partner suppliers. The economic recovery, leading to a renewed propensity to consume and an increase in production, endangers such rosy prospects for purchasers. The balance of power shifts and conditions of purchase will be altered by the structural realignment. How should then firms prepare for the recovery? First of all, companies must brace themselves for a generalized increase in supply prices. Many companies are experimenting with commodity derivatives to hedge against increases in the prices of raw materials, to avoid increasing the prices at which their finished products are sold. In particular, sourcing policies are being reconsidered, in order to diminish dependence from too few suppliers. This means that it's advisable for a company not to account for too high a percentage of the supplier's sales. Avoiding lock-in effects is often wiser than squeezing suppliers to the hilt. During the recovery, company planners and suppliers will have to co-determine production volumes, so as to allocate orders efficiently. Recent economic turbulence has caused the breaching of many contracts of purchase, leaving business distrust in its wake. Many companies are thus formalizing their conditions of purchase with framework agreements aimed at protecting their business interests. Lastly, the crisis has highlighted how careful and continuous monitoring of the supplier's economic and financial performance can make companies predict and avoid critical situations in outsourcing. However, comparatively few purchasing managers are able and willing to look at their suppliers' balance-sheets. Careful companies and entrepreneurs are investing in these areas, in order to seize on the recovery and better their competitive position with respect to the pre-crisis period.