The global economic recession is continuing to present major challenges to corporate leaders. Managing liquidity, securing credit and adjusting cost and capacity to match collapsing demand are key agenda items for chief executives.  It is difficult to predict how long this recession will last, but we do believe that the economy will eventually self-correct itself via normal market mechanisms and monetary stimulus, rather than fiscal stimulus. No matter what ideological position one takes, any spending program of the magnitude contemplated by the Obama administration will take time to work its way through the economy.  On the monetary side, we do expect the US Federal Reserve to behave responsibly and mop up the liquidity injected in 2008 as aggregate demand picks up, thus averting any significant inflationary pressures in the short to medium term.

Forward thinking executives are now taking steps to position their companies for economic recovery and competitive advantage.  We believe that taking advantage of collapsing prices in key products and services that represent a big part of any company’s cost structure is a high impact and relatively painless way to improve economics in the short term.

Recent data by the Bureau of Labor statistics confirms what we see in our client work: Prices for corporate purchases are declining at a rate not seen before, at least not in the past 30 years.  A good indicator is the BLS’s Intermediate Goods Index (excluding Food and Energy), which in February 2009 was down over 5% compared to a year ago.  Clearly the averages are not telling the whole story. Companies that aggressively demand better terms from their suppliers and pursue structured strategic sourcing initiatives are obtaining price reductions in the 15-20% range, while companies not actively exploiting the market opportunity get little or nothing.

Because this situation is so unique, it is difficult to predict how long this window of opportunity will last, but we would be surprised to see suppliers regaining significant pricing power within the next 9 to 12 months. However, we do know from our consulting work with clients that it is possible to lock in attractive prices with suppliers that will have benefits well into an economic expansion.