Purchasing for a business of any size, and in most any industry, is equal amounts art and science. While the science, and as an extension of that, mathematics, will paint an accurate picture of what is selling, the demand of products by your customers, what needs to be ordered and what should be cast aside, the picture is much deeper for those who handle moderate to large volumes and especially for those who purchase overseas. I’ll be delving, in another article in the near future, into the nature of purchasing agents versus buyers, as these tend to be two completely different ways of going about the same process. Regardless of whether you are a purchasing agent, a buyer, an auditor of inventory or any other function of the supply chain, knowing what products you will need in having them in the right place at the right time to maximizing profitability.
One often ignored component I find very interesting about economics is that, when it comes to commodities especially, almost everything affects everything else. I have been a long type student of economic theory, and have been especially interested in the nature of developing countries and how these countries will play a role in the global economy. I have also been a longtime follower of the Chicago Mercantile Exchange and of commodities markets in general. Watching the stock ticker’s role by my screen as I am working on other things will often capture my attention. I find that trends will emerge between materials and their counterparts in ways that make sense when you consider either the manufacturing process or materials as base components of other materials. For instance, Something as simple as the recent drop in oil prices, due to the tightly held leash of OPEC and their strategy to drown out the smaller providers and flood the market with as much cheap oil as possible, has caused associated markets to go crazy. Have you noticed the cost of plastic goods going down in conjunction with the price of oil? Have you noticed that the trends in technology in the production of plastics that are much stronger and more resilient has, in conjunction with Moore’s law, driven many of the plastic products that we use day to day down in price in the last several months? Have you noticed that as plastics and oil prices drop, so do the byproducts of oil production such as kerosene and natural gas? This is all related as all of these products are made from crude oil.
To add another angle, when you consider production of corn plastics has become commonplace and the overabundance and overgrowth of corn due to stimuli by the government to farmers to produce larger yields, it becomes even more obvious that we are experiencing a glut in raw materials that ultimately go into many of the products we use every day. When you add in those new technologies, tipping my hat at Moore’s law once again, we see that 3-D printing and new composites and new polymers will use these cheaper materials more efficiently and will usher in new materials to create products even more economically and with additional benefits.
In addition to the materials themselves experiencing a glut, with this glut being controlled by both Big Oil and also by speculators and producers, you must consider the worldwide atmosphere of production from third world and now first world countries of these mature pills and their finished goods is also at an all-time high. As the nature of commerce changes, both in how business is done on the Internet and through other technologies, as well as large companies focusing on efficiency in logistics and buying, double down by countries like China and Taiwan and India becoming more economically balanced due to more workers producing these materials for the ever hungry consumers in the United States and all over the world, we have a perfect storm of inexpensive materials being purchased at all-time low costs, being produced at the greatest volumes yet and being distributed quickly and effectively through the newest marketing channels the public craves cheaper, faster, more and they have gotten it. The correlation I draw on plastics and oil is one I go back to because I’ve dealt plastics for a while and I look for these trends because it helps me to help my customers make smart buying decisions and to ask the right questions of their vendors to maximize profits.
One counterpoint to this, especially when it comes to corn plastics, is that more farmers growing more corn for the production of more oil and more plastics, attributes its weight to the glut of these products while adding to the shortfall of supply of other crops that farmers may have produced otherwise. Corn production, by its very nature, requires lots of fertile and viable land, lots of water, lots of fertilizer and even with mostly automated large equipment, a lot of working parts to harvest a commodity that has very little demand. Since corn production is a seasonal endeavor and often a multiyear endeavor when considering fields have to be transition from one crop to another with planning and at a large scale for these industrial farms, a sudden external demand change caused by either a change in retail market for a competing crop or a pestilence or water issue causing other crops to yield lower production numbers, the market may find that all of this corn is essentially useless while the crops they need cannot be produced in the quantities desired. From an ecological diversity standpoint, this is a disaster waiting to happen. Of course, like most things in economics, there are so many factors that play so many points of chaos and unpredictability that the markets will force a correction far quicker than producers of these materials may be able to refocus their production.
So what does this say of other unrelated markets? It seems that almost no market is immune to this base material glut and flow. If you look at the emergence of technology, you will see that industrial diamonds are becoming cheaper to make and faster to make out of materials that are far less expensive than mining conventional diamonds. Since this is a product that does not rely on clarity in the way that he jewelry class diamond would, the focus is on the material that is very hard and can be applied to large industries for the purpose of digging, cutting, honing and milling. When you have the hardest substance on earth readily available and now less expensive to produce ever, at speeds and not for, this allows tools to be made faster and utilized in the field faster and thus access to materials that are produced by these to be made faster. As the cost of these processes decreases, the cost of their operations decreasing as a result of less-expensive consumables, and — in industrial settings — I consider diamond tipped and diamond coated implements to be consumables, margins will be widened for these companies and they can choose to use this additional capital to either grow their operation through new equipment acquisition or to use this purchasing power to drive the prices down in their industry by example as this happens, others in the industry take notice, also utilizing these materials and processes, and this causes other markets to follow suit.
While this all seems like very good news for the companies using these technologies and materials, and thus for us consumers as the prices drop, it is not always the case that the price will drop. Many companies use these strategies to keep the prices the same or even increase them because their competitors do the same. This causes the cost of goods sold to lower while the sales price to level off or increase and thus increasing the margins through the utilization of these processes and their purchasing power of materials affected by these market reactions.
When you throw in other factors such as the various trade agreements, borrows, sanctions, customs fees, logistics costs, that the various governing bodies have put on materials for variety of reasons to limit and control the market, associations between materials and their countries of origin, for instance, are not always black and white. For instance the cost of glass production, something I’m familiar with because of industry I used to work in, is driven as much by political factors and taxation as it is by the quality of the silica used in the process and by the demand of these fast goods. While the cost of a single glass in China may be less per unit, owing this to the low wages of workers and perhaps the less than ideal production techniques when considering environmental factors, the cost to land these products at your door for wholesale or retail may actually be higher than a similarly produced or even higher quality finished good coming out of a South American country coming to us in the United States. When taxes are levied and logistics costs and travel distance are considered, spread out over tens of thousands of units, the cost from South American and Latin countries may actually be less overall. While this is a bit of a digression from my original stated purpose of how materials affect one another, I used the glass example because it does inherently affect other processes down the line. Glass is obviously used in drinkware, but it is also used in home production, automobile production, small electronic production and a host of other applications where it may not even be the primary material used. If we use the car example, a production car made today is a symphony of automated and manual component production and assembly relying on materials from metals to glass rubber and dozens of other products. If any of these markets were to suddenly be nudged by a glut or shortage of a base material, hundreds of potential production points in more industries than you can count will experience sharp rises and falls in costs and in prices.
I admit that I’m being rather flippant about the nature of economics and there is no way that an economics lesson that addresses all of the factors involved could ever be done in a single post, probably not even on a single website. I mention these factors specifically because I want to get you thinking about how one material affects another. While speculators and overreaching control organizations may be rocking the cradle of supply and demand, no one can dictate all factors ahead of us.So what do all of you purchasing agents and material planners and business owners do as you find yourself a life raft in an ocean of ever-changing material demand and evolution of material handling? You plan for it. How do you plan for predictable chaos? By looking at trends, looking at your industry, looking at where the supplies are coming from and what factors determine those supplies and their availability and then making plans for long-term acquisition. If I see that the corn and oil and plastics markets are at a low but rumblings in the markets or from the talking heads of the media say that OPEC is about to make the change to their supply limit output, forcing a correction, I would immediately place purchase orders with anyone who produces plastic goods for you at the lowest price you can get with as much supply as is reasonable for your industry.
Always consider that supply, and the products that you stock and hold in inventory, are only as valuable as the sales they are able to generate. While I am especially fond of Just-in-Time inventory control, I am also a realist in knowing that overseas acquisition and these kind of supply issues are a fact of life. Like all things that I preach in my efficiency management techniques, knowing your market and knowing your inventory costs and turnover are just as important as knowing when to buy because of material costs and opportunities. If you are getting a great deal on plastics, so is the next guy in your industry. Just don’t be the one holding the bag with too much inventory or miss out on the boat of lower prices because you are not considering the forces in the market it is a fine balance, and one that no one ever gets perfect. Consider this one more arrow in the quiver of your inventory management strategy.