Grim thoughts and prospects

 The weather is still quite nice, Europe (and teachers) are still on holiday for another week (I'm going away myself for a long weekend).

It all ok isnt it?

Well, the economic storm clouds are darkening day by day.  So, no.  Not really.

Sorry to be such a Buzzkill (as the Americans say).

It is quite possible that now is as good as it is going to be for a while. Yes, even allowing for strikes, inflation and supply chain disruption.  All could get worse before they get better.

I would love to say it could all be over in 6 months, but there is no realistic mechanism for that.

So, now is the time to prepare.

What does that mean?  Well if there are any goods or services that are really important to you, check when the contract ends.  If you don't have a contract, make one.  It is not going to be perfect protection but better than not having one.  But don't expect it to guarantee supply or prices - if it is a choice between fulfilling the contract or going out of business, most suppliers will break the contract and worry about it later. If there is a later.

Look at your supply chain.  Are there any alternative suppliers?  Now would be a  good time to cozy up to them and spread your bets.  Or to get even cozier with your existing single supplier if that is the better option.  But work out what you are going to do if it all goes to pieces.  Or when your supplier goes bust.

Reset your Procurement objectives.  Savings are basically not going to happen (for most businesses) so think about what is important.

Look at your stock position.  There is a balance to be made on working capital.  Interest rates are forecast to go up to 4% base in 2023, so maybe 8% retail.  Can you tie in your interest rates?  Can you refinance to get onto fixed rates?  Industrial inflation is running at 15% to 20%, so compared to 4% interest, stock is cheap.  Can you buy it now and stock?  Yes, I know that adds to the bullwhip effect but you can think about it.  Your FD may hate the impact on working capital but will hate the lost profit even more (well, they will if their bonuses are measured properly).

Space heaters are cheaper now than they will be in November.  So is energy efficient equipment.

Prepare a war chest for the fire sales (if you can).  Bargains could be had as businesses close.  Know what you want and see if you can get a bargain (but don't buy "bargains" for the sake of it).

The best time to do this was yesterday.  The next best is today.  The next, next best is tomorrow.

It is half a generation since the 2008 global financial crisis, and many established managers were too young or too junior to really remember it.  It is a full generation and a half since the 1987 Black Friday crisis (Black Friday was not about shopping).  You need to be at retirement age to remember the last bout of stagflation in the 1970s (3 day week, rolling blackouts and all).  What we are facing is likely unprecedented for today's managers.

I hope I am wrong

But prepare for the worst and hope for the best.  And do it quick.

Inflation and hard times

 Well, if you don't value your Procurement team now, when will you?

And of course your sales team, operational team and in fact everyone in your business.  But just at the moment your Procurement team are really key.

I'm not terribly good at noticing prices in shops (which tells you that I earn enough money to not be worried about every single penny, unlike too many other people).  But even I have noticed prices going up.  And not just by the nominal 10% or so that is the current inflation rate.

MacDonald's have increased the price of their cheeseburger.  But not by 10% but by 20% (from 99p to 119p).  And if you look around the supermarkets you will see they are far from alone.  Lots of products have broken past the psychological £1 barrier, and gone up to £1.20 or more.

Now this may well reflect real changes in supply conditions and the cost of materials.  I don't know.

But what I do know is that we complain more or less the same about a 20p rise as we do a 15p rise, or a 10p rise.

So sensible sales teams will take the approach that, having had prices held back for years by relatively low inflation, and with customers all expecting there will be inflationary increases, the thing to do is go large!

Why have lots of incremental, annoying price rises?  Go for one big one, and hope to get ahead of the game a bit and increase profits in the process.  If inflation is 10%, why not go for 20%.  Or 30%?  If you can't put up prices now, when can you?

And this is where your procurement team comes in.

We know that for manufactured goods the cost of materials is usually about half the overall cost.  So, if inflation is 10%, we should expect to see a 5% rise not 10%.  After all wages have not yet increased by much, so not all costs have gone up.

Of course, industrial prices are rising even faster than domestic prices (15%+) and I am not suggesting that suppliers can hold down prices for ever.

But as a buyer we should be testing and checking.  Understanding our supplier's position, but also expecting that prices will fall equally quickly rather than being a new baseline.  That prices have increased an appropriate amount, rather than more than is necessary.  Making sure suppliers know we are happy to have monthly price negotiations rather than one big rise.  Maybe some kind of quarterly or annual rebalancing as prices vary.  This is the time when we show our value to organisations.

And of course your sales team should be putting up prices.  Yes, that is how inflation rises. But eroding profit margins are not a good idea either.

Yes this does mean that PAWA Consulting fees will be going up to.  Book now to avoid the rush (as they say).

Wow 2!

Further to yesterday's blog about Canadian oil, during the evening the price of WTI plummeted well into negative figures.  Most of this is actually a technical issue - yesterday was the day for completion of futures contracts and when people had to take actual possession of the oil (rather than just trading it).  The problem is that there is not sufficient oil storage, and so people with a contract where they had agreed to take oil had nowhere to put it - so they needed to dump it on people who could take it.  At any price.

Hence the collapse.  And why Brent crude did not collapse in the same manner - people have sufficient storage.  For now.

The market is still in Contago - where the price for future product is higher than the price for immediate delivery.  Normally this leads to people buying ahead of need and storing - which both drives up the price today, and lowers the price in future.  For now the future oil price still seems to be somewhere in the $20s.  Storage is getting very full.  We don't have any real clarity on when things will get back to "normal".

So, expect more fun and games in future.  Realistically, expect oil producers to start shuttering facilities that they think can be (more) easily shut down and then re-started.  I expect that to mean shale oil and fracking rather than offshore, but I'm not an expert.

Canadian oil price is negative!

Wow!
https://oilprice.com/Energy/Oil-Prices/0-Oil-Forces-Canada-To-Shut-Down-Crude-Production.html

Ok, so Brent Crude is still $26, WTI is $10.  Those are amazingly low prices as it is.
But negative?  Oil they will pay you to take away?  Wow.

The last time it was that low?  About 25 years ago, 1998.  But of course that doesn't take account of inflation, and $11 in 1998 is $19 now. (details here)  In real money it is the lowest since 1946 - maybe ever (here).

If you are a Brit of course, this matters because we are still an oil producing nation, and in fact it is our 5th biggest export (after equipment, cars, pharmaceuticals, electrical equipment - and we aren't exporting many cars at the moment either).  Not good for our economy in that sense - but obviously cheaper fuel has other benefits.  Fuel is our 3rd biggest import, so the imports will be cheaper.  And we import more than we export - so it is a net gain on our trade balance.  But the low price may make some fields less profitable, and indeed unstainable if the price stays low for long - which will hasten the end of the UK oil industry, leaving us with a gap in our exports.

Covid-19 and the economy - it could be worse

Ok, I admit I might just be trying to keep my own spirits up, but the OBR (Office of Budget Responsibility) scenario review that says that the UK economy will shrink by 35% in Q2 (compared to Q2 last year) could be worse.

Think about it - it means that nearly two thirds of the economy is still functioning.  Now, in economic terms a 2% change is seen as significant and 10% is huge, but let's try and be positive.  The impact is of course very different in different industry sectors.  There seems to be a 90% reduction in Education (which I suppose we should expect given schools and universities are closed).  Similarly for hotels.
But manufacturing is only down 55% (only!) and utilities by 20%.  There is still some activity going on during lockdown.

So, what will it mean for procurement when lockdown ends?  Well, obviously there will still be considerable disruption to supply chains - there will be shortages, and delays - but also temporary gluts.  There will be an opportunity for some suppliers to temporarily charge premium prices until the market normalises.  There will also be opportunities for some canny buyers to get some bargain prices - but we shall have to be careful that we do not force too many suppliers out of business by insisting on prices that allow them only to liquidate stock and not to rebuild.

Being selfish, I hope that the crisis does lead to people having greater awareness and consideration of their supply chains.  Beyond that, I just want to try and keep my spirits up.  Hope you can too.

Return from the USA

I've just returned from a couple of weeks in Florida, catching the sun, going to Disney and boring the kids at Kennedy Space Center.  You might expect that I would come back with some interesting tales of procurement, or at least shopping - but you will be mostly disappointed.  I will say that HockeyMonkey are very good for (ice) hockey kit, which we got delivered to our hotel (a little reward for the kids for winning the EIHA U14 National Championship - sorry to be a proud parent on your time), and that the Memorial Day sales are really quite good.

The more interesting thing for me, as a once frequent visitor to the USA who has been absent for 17 years, was the reminder of the strength of the US economy.  Ok, Orlando is a rather special case - particularly on Memorial Day weekend.  But the sheer number and energy of businesses and shops is quite remarkable for a Brit.  I am sure that Americans will tell me that things could be better, but it was a reminder that this is the number one economy in the world for good reason.

I do hope to be back rather quicker.  In the meantime, here is my favourite purchase from the trip.

In the meantime, there have been some changes to the training plan (as always) and I shall give the details of those later in the week once I have reconfirmed arrangements.

 

The West Coast Mainline Debacle

The shambles over the awarding of the West Coast Mainline contract is the big public sector procurement story of the moment.

The story is being covered in a number of places - Peter Smith at Spend Matters has covered it a number of times, including providing links to the original tender (if you are interested enough).  Robert Peston over at the BBC has of course also commented.

Rather than rehash entirely, I will just make a few points.  Peter Smith has pointed out that there are 3 possibilities - first that the process was flawed, secondly that the correct process was not followed correctly, and finally that something changed somewhere through the process.  The current line is that it is the first problem, and that the fault lies with the civil servants who set up process.  Some of them are disputing that.

I think the first thing to say is that the problem in many people's eyes was the result, regardless of the process.  If the process had been flawed but awarded it to Virgin there would not have been this fuss.  People I know who use the service are happy with Virgin and concerned about changin - even if First are promising a better service.  We all know that people are very reluctant about change - even for the better (see Machiavelli).  This allowed Richard Branson to create the fuss which lead to the review which got us to the current situation.  I do not believe First group would have been able to achieve that.

If it is the wrong process, then we have to understand why.  There are suggestions that it was wrong assumptions about Risk - which is part of the process, not how it was applied.  It is a very long contract (15 years) and all assumptions about what will happen over the length of the contract are speculation ("It's difficult to make predictions - especially about the future" - Yogi Berra).  What will the oil price be in 2027? Which party will be in power?  Will we have superconducting electricity distribution?  Will we have self driving cars?  All of these could have impacts on both demand and delivery of train services.  So, it is tricky.

As to why we should compensate bidders for the cock up in the process - we want them to bid again in future, and the fault was ours (the public sector) not theirs.  EU procurement law allows them the potential recovery of the damage to their company resulting from the mistake, so they are due compensation.  The costs will in any case in some way be charged to the public purse - through higher fees if not a direct payment.

This one is going to rumble on and on.  Sadly there is a great risk it will be a political football rather than a learning opportunity. 

The one lesson I would like the government to take from this is that procurement is important, and needs to be supported to ensure value for money and efficiency.  It is not just a cost.

Robert Peston's blog at the BBC is here.
Spend Matters latest post on the matter is here

BTW the illustration is not a Virgin train but an old Russian train iirc.

Masters of Money

There is a great series being shown on BBC Two on Monday nights - Masters of Money, presented by BBC Economics editor Stephanie Flanders.  See here for a link to the programme on iplayer.

These days it is useful for all of us to know a little bit about economic theory, to help us to decide which approach is most likely to be followed by politicians, and which appoach is most likely to work.  Sadly these are not always the same (whichever party is in power).

This is the sort of stuff that the BBC can point at when justifying the license fee - bringing knowledge to the masses.

The Death of the Euro

I am at heart pro-Europe and pro-Euro.  Both positions that require some defending in the UK.  At least if you read the Daily Mail, Telegraph, or Express.  However I believe that European countries have more in common than we realise, and more than our differences.  (I am writing this in Kuala Lumpur, a wonderful westernised city that is more different to, say, London that any city in Europe)  I also have a historic view that says that the main purpose of the European Union is to prevent a further major European war - in which it has so far been very successful.

The principle of the Euro is easy to see - a single currency for a trading bloc larger than the USA, providing a potential counterweight to the US Dollar, making it easier to trade across borders and promoting a single European identity. 
Through the travails of the Eurozone, as first Portugal, Ireland, Greece and Spain, and now Greece, Italy, Spain and even Belgium, struggled to escape the current crisis I was hopeful that the Euro would survive.

As I now talk to my delegates from the Gulf on my course in KL, I find that my beliefs have changed and I no longer think that it is going to survive.  The problems appear to be both economic and political.  The politics rather over rides the economic, because in some ways they are the cause of the economic problems.  In setting up the Euro the EU governments allowed countries into the Eurozone for political reasons that had no purpose in being there (Italy, Greece) and then ignored its own rules to allow the big countries (France and Germany) to flout the rules with no consequence.  These were political decisions.  Meanwhile across Europe politicians played narrow, local political games without attempting to persuade a sceptical European public of the benefits of the EU.  Countries that were beneficiaries of EU largesse (such as Eire) were in favour - the funders were more sceptical (particularly GB).  Robert Peston of the BBC, the usual harbinger of doom, has a lot of information about how the cost of borrowing in the Eurozone is going to pull it apart (in fairly short order).  Michael Lewis's new book "Boomerang" is also very informative about how the economic markets are now likely to bet against Eurozone countries and the Euro.  Link here


Gordon Brown's 5 economic tests now seem wise in ensuring we did not join.  They were;

1. Are business cycles and economic structures compatible so that we and others could live comfortably with euro interest rates on a permanent basis?
2. If problems emerge is there sufficient flexibility to deal with them?
3. Would joining EMU create better conditions for firms making long-term decisions to invest in Britain?
4. What impact would entry into EMU have on the competitive position of the UK's financial services industry, particularly the City's wholesale markets?
5. In summary, will joining EMU promote higher growth, stability and a lasting increase in jobs?

The Eurozone countries did not have equivalents, and now are living with the consequences.  However for all the potential benefits of saving the Euro, the European public has not been convinced to do so.  Politicians have failed to prepare the ground for such an eventuality, and so there is no support for any action.  And the inaction is pulling down the Euro in an irresistible slow train wreck.  In order to protect the Euro, it seems necessary to move strongly towards a United States of Europe - which is unpalatable to voters.  Acting in ways that might allow the Euro to survive is pretty much electoral suicide in any Eurozone country (and indeed in GB).  So the inevitable outcome now seems to be the death of the Euro.

The resulting chaos will not be pretty (and not for the UK either - we don't seem to realise how dependent we are on the EU for our own economic well being).  At the end of it the Euro as a single currency will be unthinkable for a couple of generations (at least).  It is possible that it may even lead to a break up of the EU itself (the only way for Greece to leave the Euro at the moment is to leave the EU as well), at least of peripheral countries which will fundamentally change the nature and role of the EU.

The fantasy of some is that this breakup will be easy and simple and lead to the reinstatement of a simple European free trading zone, with very little in the way of legislation slowing down public sector procurement.  My feeling is that this is far off the mark - we are likely to retain much of the restrictive legislation for years as a hangover (at least), whilst restrictions on free trade will be quickly imposed by any country leaving the EU.   But I could be wrong - after all, I was on the Euro.  (I think).