Companies Need to Get Smarter About Sourcing Strategies

April 29, 2011
Controlling spending is key to success in 2011, as raw material costs keep rising

Nearly three-quarters (72%) of manufacturing professionals at small and mid-sized companies expect their companies’ revenues to increase this year over last year, according to a recent study conducted by Prime Advantage, a buying consortium for mid-sized manufacturers. What’s more, 24% of the respondents anticipate an increase of 10% or more. The survey also shows optimistic expectations for hiring and capital spending despite growing concerns over rising costs.

The most important supply chain-related educational needs for mid-sized manufacturers over the next 12-18 months are sourcing and procurement education (45%), strategy and leadership (41%), risk management (41%) and demand management (34%).

“Our members, who represent a diverse cross-section of manufacturing industries, are experiencing stronger growth and plan to invest back in their businesses, whether through capital expenditures or hiring more employees,” says Louise O’Sullivan, founder and CEO of Prime Advantage. “What’s unique and challenging about this rebound is the rate at which firms must address pricing inflation in both raw materials and components.”

Only 3% of the respondents say they expect a decrease in revenues compared to 2010, a great decline from last year’s survey, when 18% predicted decreasing revenues for the last six months of 2010.

41% expect an increase in capital spending from 2010 levels, and 65% plan to invest in manufacturing equipment this year. More than 80% of these respondents also say that federal business investment tax credits are responsible for their planned capital improvement purchases.

Almost half of surveyed companies believe there will be an increase in hiring over the next six months, and 49% expect employment to remain at 2010 levels. Only 3% predict a reduction in current workforce levels.

When asked about the status of supply chain technology adoption in key areas such as sales & operation planning, business intelligence, inventory optimization, spend visibility, spend analysis and supply chain visibility, on average about half are fully deployed, partially deployed, or launching, with most falling in the later stages of deployment. Of those fully or partially deployed, most are ERP-based and very few to none are solely cloud-based. 23% are in the process of investigating solutions. Still, only 27% of manufacturers are not on any track to investigate or deploy such solutions.

While 40% of respondents who source products from offshore vendors are planning to bring sourcing back to North America in the near future (a trend generally known as near-shoring), the majority of respondents (60%) plan to add more offshore vendors. These results reflect a slight rebalancing or correction in sourcing strategy from the last decade’s massive offshore sourcing trend rather than a full pendulum swing back to buying domestic products.

The top three cost pressures that most concern mid-sized manufacturing companies over the next six months include the cost of raw materials with 96% including it in top three concerns and 76% citing as the top concern, followed by inflation (52% selected as the second strongest cost pressure) and healthcare (37% selected as the third strongest cost pressure). In every Prime Advantage survey conducted since June 2008, the cost of raw materials (such as metals and plastics) has appeared as the top cost pressure, but the number of respondents citing this as the top concern has grown steadily as the economy has improved (from 36% just a year ago to 51% six months ago).

When asked about potential obstacles that would prevent their companies from achieving their purchasing goals, survey respondents overwhelmingly cited the ability to maintain forecast accuracy and demand variability (76%), followed by the ability of suppliers to keep pace on predictable demand (41%) and to manage understaffed purchasing departments (39%).

The ability to offer products that are more sustainable or energy efficient has become a huge focus for small and midsized manufacturers, with 81% of respondents acknowledging this change in focus in product development processes. The biggest driving factors behind these changes are customer requirements (80%), followed by compliance regulations (53%) and shareholder directives (12%). In addition, 57% of respondents have also started buying more sustainable indirect products for internal consumption.

In February 2011, Prime Advantage surveyed executives and purchasing professionals that represent durable goods manufacturing firms, with annual revenues ranging between $10 million and $10 billion, of which the majority ranges between $20 million and $500 million. The survey received a 14% response rate from 528 top professionals representing U.S.-based manufacturers in more than 25 different industries, including commercial foodservice, packaging, truck and trailer, material handling, food processing and construction.