Analyst Q&A – 2012 Outlook (3)

Posted by Andrew Bartolini on September 28th, 2011
Stored in Articles, General, People

Where are we headed in 2012? It may be too soon to predict but I gave it my best shot during a recent media session. What follows is a rough transcript in part three of the series, which is also the finale. Part one is here. Part two is here.

Where are the jobs going? 

Jobs are and will continue to move east and south. But where exactly in those regions has become a moving target with companies now playing this “whack-a-mole” game to find the lowest cost of labor. It was China, now Vietnam, soon Kenya and then deeper into Africa. What should not be missed in the rush to find the newest, lowest cost country is the development of a deep understanding of the infrastructure, capabilities, and an associated risks (i.e. political, trade, cultural, weather, etc.). The total cost of a move to any region (including transportation to the destination countries) should be calculated and different scenarios should be run to ensure that the move will still make sense if the market experiences dramatic shocks (we are seeing more and more of these with each passing quarter).

Speaking candidly, what’s going on? Is all the uncertainty really something to worry about or just a sign of the times?   

I believe that the US is due for a second recession and that it will be more severe than what was experienced in 2008. Most of the underlying problems that created the last recession have not been solved, they’ve been delayed. Surgery was needed, band-aid solutions have been deployed.

With that said, we’re on the eve of an election year with a sitting president who’s running for reelection. Despite the perpetual “gridlock” in Washington DC, I expect to see some activity that will more than likely keep the “second shoe” from dropping until 2013.

Beyond that, there has been uncertainty and it has been increasing since the recent Debt Ceiling debacle. At the same time, the uncertainty is not pervasive. There are many industries and many regions in the country that have been largely unaffected by the recession or in any case are feeling no real pain today.  Look at the high-tech corridors: stocks while down for the year have bounced back from their 2008 and 2009 lows;, housing has stabilized in many areas. If you live and work in Boston and didn’t buy your house and all of your stocks at the top of the market, you’re probably doing all right. And then there’s Detroit and other regions that have been really hit hard and see no light at the end of the tunnel. The gap between the “haves” and the “have-nots” is growing globally – consider the economic differences between Germany and Spain – and that can very quickly become a problem for all.

One thing we’re all going to have to get used to is much greater volatility. Volatility is one major reason why companies are sitting on so much cash right now – they’re hedging against another downturn. As I noted in part one, I believe companies should be investing in human capital, but they are not, as evidenced by the current unemployment and under-employed rates. As a result, temporary labor percentages are at an all-time high. Some analysts believe that the average percentage of temporary employees onsite at any given time in the US will soon reach 25% of the total workforce.

Even if that number stays below 20%, enterprises need to get their hands around this huge spend and invest in Vendor Management Systems (“VMS”), like those offered by Fieldglass and IQ Navigator and consider centralizing its management via third party service providers (called “MSPs” or Managed Service Providers) – IQ Navigator also does this. This is a market I have tracked (or have overseen and supported the coverage by an analyst on my team) for years and one that we will take aim on in 2012.

With talk of a double dip recession, should companies be concerned about supplier insolvency?

Of course, you need to track the financial stability of your strategic and key suppliers. The reality is that we really didn’t see that many lines close down due to supplier bankruptcy; the slow-downs were demand driven. One big blind spot regarding the financial viability of suppliers is the lack of visibility that exists across some global supply chains. Given our recent Honey Laundering article, understanding the sources of supply that your suppliers are using can be a very difficult proposition, made more extraordinarily more difficult when suppliers have something to hide.

What do you see happening with commodities in 2012?

Ardent does not track specific commodity pricing but it is a sure thing that we will see continued volatility across many major commodity groups.

If the recent commodity pricing volatility becomes a long-term constant, I believe that companies will need to begin to develop more fluid pricing models – mechanisms like the airline “fuel surcharge”  that travelers pay when oil prices spike. Companies either need to find a way to either hedge against this volatility as a way to stabilize their costs and margins or they need to develop more dynamic pricing models.

We’ve seen huge inflation in food prices. When you look back at any big market demand shocks for specific commodities like coffee and orange juice in the 1970s, they were accompanied by big price increases. When the markets settled down and reverted back to normal, the prices stayed where they were. Increasing prices to match volatile spikes is not a sustainable strategy.

I think Chief Procurement Officers can play a big role in helping to develop these models, but that is still some time away. Until that time, companies need to decide on an inflation strategy. While some companies have been actively managing pricing trends, the companies that are not doing anything, are, in fact, unknowingly making bets on commodity pricing trends and have been doing so for years. They would be wise to start thinking about the implications of their actions or inaction, as the case may be, and at a minimum, begin tracking trends and performing scenario analyses.


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