THE ENTERPRISE
COMMON PROBLEMS--"FALLING PRICES AND RISING COSTS"
Nearly every company I talk to has the same problems. Price increases are finally starting to catch up with commodity cost increase...but not quite. And the impact of those increased costs were borne by suppliers for months while the customers strung out negotiations. Where even a single competitor decided to forgo the price increase in hopes of gaining share, companies across the entire industry sat and waited...or lost share....and profit margin both.
And there is no sign of reduced volatility in energy (oil & gas) or major commodity pricing. And beyond reducing the amount of materials and energy used (which is a very good idea), there is not much else that individual companies can do about this volatility. It is a global economic issue. This means that the pricing/buying/selling model used by most product suppliers and purchasers is obsolete, and as such, will continue to suffer under the lag factor with the inability to quickly pass on large, unpredictable increases.
Unlike the transportation and distribution industries, manufacturers have been largely unable to use rapidly adjustable surcharges. I'm not sure exactly why that is, other than the resistance of large, powerful purchasers. Surcharges pass on both the downside and upside--assuming they are designed correctly. It seems to me that this is an essential change that must be made, if suppliers' financial viability is to be sustained. The damage to many companies is severe, and in some cases, can be "terminal."
Retailers will hate it, because they will have to find a new way to alter pricing in thousands of stores more quickly. But this technology exists too. They can tell you what sold, who bought it, when, where, for how much, and how they paid for it. So, I don't believe they can't adjust prices quickly if they realize they must. Consumers won't like it, nor will anyone foolish enough to agree to a long-term fixed price contract. The illogical swings at the gas pump pricing signs are, in fact, a sign of the times and the world we live in.
Only if the very largest companies change policies/practices to recognize this tectonic shift in global business, can industries at large change from these outdated paradigms. Periodic pricing adjustments, usually annual, are a carryover from an older different era. (Remember when information could only travel at the speed of a horse?) In different time, global competition and geopolitical factors didn't drive massive commodity price swings and supply volatility. Older, batch processing information systems either didn't exist or weren't capable of tracking real time cost and price volatility. Now they are, and it is time to use them--and some common sense--to change the pricing/buying/selling policies before whole industries are crippled or irreparably damaged.
FROM KIPLINGER FORECASTS--"THE REVERSE PARETO EFFECT"
Federal budget red ink will get even worse in five years: Deficits will soar when the oldest baby boomers start drawing on Medicare and Social Security. That’s also when the full effect of Bush’s earlier tax cuts will hit, if lawmakers make them permanent rather than letting them expire in 2011. Neither side will address the real problem: Entitlement spending, which eats up between 1/2 and 2/3 of the budget. The most pressing issue is Medicare, where health care costs are climbing at twice the rate of Social Security payments. And that’s without the new drug benefit. Also climbing: Net interest on the debt...now 8% of the budget
This means that about 70% of the US Federal budget is in those few immutable items, that everyone is afraid to touch! arguing over changes in the remaining 30% can't make a big enough difference in future deficits. It is Pareto's 80/20 rule in reverse. Only major entitlement cuts or higher tax revenue--or both (best case)--can help. But don’t expect Washington to take on that kind of issue in an election year. They have neither the stomach--nor the guts--for that.
Meanwhile, business is muddling along pretty well. Expect to see a healthy rebound as spending by businesses and consumers regains strength in 1Q '06. Consumer spending is about 70% of economic activity and took a big plunge at the end of 2005 after hurricane damage on the Gulf Coast led to an energy price spike. Mild winter weather so far is giving folks some relief on energy costs. Consumers may take a breather, but won't stop buying as long as the overall economy is OK, and housing doesn't do an outright collapse.
Businesses have their new budgets in place, so it is "spending time" again. Many are catching up on postponed spending, and orders are already improving from the low levels of late fall. They want to do it while the economic situation is good, because at the first sign of a slowing or downturn, the spending budgets will get cut hard.
EMPLOYMENT
This is a topic that will take an entire edition and then some. Suffice it to say that volatility is not limited to commodities and global supply/demand. Jobs are coming and going--and the employees in them following suit--more than ever before. It is truly a "Brave New World" we are in. Future editions of THE ENTERPRISE will try to analyze it and discuss how we can adapt to succeed. Stay tuned.
Best, John.
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