Harnessing supplier insight to spot crises and opportunities
Aug 28, 2015 5:21:00 AM
If like the rest of the world, you’ve been keeping a close eye on the movement in the market over the past week or so, from the sudden slump, to the rapid recovery, you may have found yourself asking the same questions being asked by nervous boards the world over. Why did no-one see it coming?
Where were the warnings? Where were the indicators? And how could executives be expected to pre-empt a dip that even the “experts” failed to spot? Well, and perhaps worryingly, you’re not alone. This is not the first time economists have failed to spot an upsetting development in the market. Tim Harford, economist and journalist, in his recent FT article discusses that leading economists have an astonishing record of complete failure when it comes to predicting even the biggest movements in the market, such as recessions. He goes on to highlight how even professional organisations were unable to spot the signs of trouble before the last recession. “Predictions from multinational organisations such as the IMF and the Organisation for Economic Co-operation and Development have remained very similar to the private sector consensus – similarly bad, that is.”
However, as always the tell-tale signs were there – a seemingly out-of-character Purchasing Managers Index (PMI) score being just one of many. A quick glance at the PMI, released just a few days prior to what has now been dubbed “Black Monday”, yields a headline warning that “U.S. manufacturers signal the slowest improvement in business conditions for 22 months”.
And while the PMI, now seen as the leading economic indicator for manufacturing and non-manufacturing businesses, serves as a broad stroke indicator to measure market sentiment – recent events raise two questions. Firstly, are businesses even monitoring this indicator at all? And secondly, is the PMI on its own enough to gauge market sentiment? My opinion, and the answer to both of these questions is, no.
So what else is needed in the executive's toolkit to prevent being caught off-guard again?
You might be surprised to hear that the solution to this complex task of monitoring, and even predicting turbulence in the market, is already at your disposal. Did you know that there is a network of market agents,that wrap around your business, willing to share information, trends and warnings around sales, growth, commodity prices, demand, currency volatility, research and development, and many other factors that could indicate trouble on the horizon? Did you know that there are companies with a vested interest in your specific market, which could provide insight into the world outside of your business, and feed it back. The truth is, all businesses have access to this network, it’s called their suppliers; they just need to better understand it and connect it into their day-to-day operations.
Harnessing insight from the supply base to monitor market sentiment
Many of you have already seen our Corporate Virtualisation research indicating that the average company now spends up to 70% of revenues with third parties. Further, it also highlights just how fundamental suppliers are to modern businesses – in terms of revenue growth, innovation, and competitive advantage.
As externalisation continues, and businesses increasingly rely on, and invest in their supplier network, it stands to reason that this area of increasing expenditure should be one where businesses look to extract maximum value. Contrary to popular belief, it’s building collaborative and productive supplier relationships that drives value, not savings. And, while many procurement teams are already focussed on creating collaborative supplier relationships allowing them to tap into innovations in the supply base; for these relationships to be truly lucrative, there needs to be a further effort to share knowledge, insight and warnings around the wider market. Collaborating with suppliers to monitor market sentiment could be as easy as sharing information on fluctuating commodity prices, demand, sales, growth, or any other factors that could indicate ripples on the horizon.
Finally, it seems as though a new approach to monitoring market sentiment is one that has been a long-time coming. After all if the events of the past week or so have taught us anything, it’s that what Tim Harford highlighted back in 2014 still rings true; that the old approach has been consistently unreliable up to now. “There is not a lot of point asking an economist to tell you what will happen to the economy next year – nobody knows”.
With this in mind, we recently undertook a study to understand how effective procurement and supplier management functions are in monitoring market sentiment using the knowledge and insight from their supplier base; and if fluctuations in the supply market are being collated and used as a tool by both procurement and the wider business to spot potential risks, and opportunities in the market. We will be posting the results in the coming weeks.
As always, if you have any thoughts or comments, please add them to the box below.