OECD sees a "mild" slowdown - what do buyers think about?

Today's FT is reporting that the OECD is forecasting a mild economic slowdown next year driven by the cooling off of the US housing market. Economic uncertainty, whether unexpected growth or unexpected declines, offer great opportunities on the corporate buy-side. As in all cases understanding your supplier and their industry is key. In a slowing economy your supplier may be facing underutilized production and other assets leading to a desire to lock a longer-term sales agreement. The procurement team may decide that makes sense, but they should also consider that declining markets can also offer great opportunity for opportunistic spot-buying. The decision should reflect the degree to which the good or service is of strategic value to your business.

During the last housing slow-down I helped a client, one of the largest residential housing REITs in the US, to recognize that construction material costs were relatively insignificant in relation to the companies financial performance and market value. Their business is building and operating high-end residential rental communities. Their financial returns and their share values were influenced mostly by the market's assessment of their ability to construct, generate rental income, and manage operating costs at their projected levels. The market did not react nearly as much to their ablility to construct their communities at a cost per unit that was competitive to their industry. This understanding led to a strategic decision, they used the housing start slow-down to negotiate preferential access to construction labour and materials. While price was negotiated (generally using an indexed price to the spot-market) the firm chose to value preferential supply ahead of lowest cost. That strategy really paid off over the last three years as they were able to maintain an enviable record of delivering their communities on-time during a period where many of their competitors would routinely suffer construction delays due to the booming construction sector in the US.