Recession, Stagflation, Cost Savings & Corporate Purchasing

It appears that we are in an interesting economic period. Most signs point to the fact that the US economy is in a recession - a period where the sum of all business is declining.

In a recession, many companies and consumers reign in their spending. This affects the demand part of the classic economic supply and demand graph.

In typical cases, when demand slows, pricing drops because supply outpaces demand. Pricing will reach a floor when supply contracts to balance with demand.

Today, the US economy is seeing slowing demand yet rising prices. This is referred to as "stagflation" - an odd combination of stagnant growth and rising prices.

Many economists attribute this, in part, to the effect on global demand from China's growing economy that is putting upward pressure on commodity prices. Because many companies' cost structure is affected by commodity prices for their inputs - even if the raw materials are further down the supply chain - they need to pass along the cost increases to the consumer in order to stay viable.

In typical recessionary times, Purchasing can often achieve cost savings by securing declining prices and working with eager suppliers struggling to not lose too much business. To today's CPO, however, the inflationary environment in this recession can make it seem like there is no opportunity for cost savings - the traditional metric through which Purchasing can communicate its value.

But I personally believe that today's recession does indeed have its opportunities for cost savings. Just not in the volatile commodity markets, though.

Domestic service providers are seeing weakening demand. Demand for local services is not being offset by China's growing economy.

There are many services categories where pricing is not as dependent on commodity inputs (such as fuel). These industries have many suppliers who want to fight against the threat of declining sales. In these categories, there is tremendous opportunity for typical recession-era cost savings.

There will be the inevitable meetings with top management for many purchasing executives this year. Many of them will have the purchasing exec saying "We struggled to contain costs as commodity markets saw across-the-board inflation." But, hopefully, this statement will be followed with "But we were able to (partially) offset rising commodity costs by saving $x in our services spend."

So, the moral of the story is: don't ignore your services spend. It represents a great opportunity to save face in tough times for cost savings.

To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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