At ISM 2015, innovation and sustainability are front and center

Last weekend, I bought a new sports jacket at Miller Brothers, a local men’s store that’s been in the same family for years. My wife and I have also owned a women’s and children’s clothing store for 30 years. So, when I’m shopping for me, the owners and I tend to talk shop. We are both experiencing the same phenomenon following a terrible winter: One day, we post huge numbers that give us optimism that it’s all turning around and the next day, no one walks through the doors. Average out the two days and sales are, well, average. “Business isn’t bad,” he said. “It’s just not predictable anymore.”

That last line about predictability was on my mind as ISM 2015, the annual conference for procurement professionals and supply chain managers, got underway in Phoenix this week. An estimated 3,000 attendees are expected to attend this year, with over 140 exhibitors.

We don’t often write about procurement and purchasing at Modern Materials Handling. But, if you think about it, what we do inside the DC is inexorably intertwined with procurement. After all, inventory starts with a PO. So, it’s helpful to see what our colleagues on the other side of the office are thinking.

What’s the outlook for the economy attendees will be operating in – procurement budgets, after all are driven by demand – and what are the broader trends driving today’s supply chains? Those are questions I had a chance to discuss yesterday morning with Tom Derry, ISM’s CEO.

First, the economy appears to be a lot like me as a 50-something athlete – it’s plodding along at a modest clip, sometimes up a little, sometimes down a little but mostly flat. Derry’s take: “I think business leaders see the economy as stable, and have modest expansion plans,” he said. “But it’s not predictable and I don’t think anyone has confidence looking three years out. It’s not an environment where you’re going to make big bets.”

Derry identified several broad trends keeping us all on the edge of our seats, trying to predict what’s next.

First, there’s the strength of the dollar, making our products more expensive overseas. Given that overseas sales represent about 50% of the revenue for the S&P 500 – and as much as 20% for many small-to-mid-sized businesses – this has a real impact on business given that demand at home is still flat.

Second, business is still trying to figure out the impact of lower oil prices, which haven’t driven down the cost of transportation as much as you might expect.

“Only 40 percent of the cost of diesel is petroleum,” Derry said. “The rest is taxes, which aren’t going down.

There are still uncertainties around the cost of labor, including the impact of the Affordable Care Act, and the availability of the right labor in the right places.

Finally, there’s uncertainty – or unpredictability – around the cost of money. “Everyone anticipates that interest rates will go up, but we don’t know when or what impact that will have,” Derry said.

His bottom line, he sees a continuation of a modest but uneven economic recovery.

What then is driving procurement and supply chain management? Derry summed it up in two words: Innovation and sustainability.

Innovation, he contended, is driving a mindshift within organizations and creating opportunity for procurement. When companies were focused on outsourcing, procurement’s main function was to drive out cost. Now, the labor arbitrage is disappearing – it can cost as much to hire an engineer in China as in the U.S. – and we’re running out of new low-cost geographies with the skill sets and infrastructure to set up shop. That means that innovative new products and technologies are driving top-line growth.

“If you think of the auto industry, driving down the cost of components by 5 percent is no longer the thing that unlocks value,” Derry said. “It’s innovation and technology that consumers want and will pay for. Who brings that in? It’s procurement through supplier relationship management with their supply base.”

The challenge? Changing the mindset of organizations that still see procurement as a cost cutting department and of suppliers who don’t trust their customers. Driving top line growth through innovation will represent a sea change.

The second broad trend for procurement professionals is the comeback of sustainability. It’s not just a matter of making do with a shrinking pool of raw materials. It’s the fact that by 2025, three quarters of the workforce will be millennials and they have very different criteria for what they purchase. Derry used the example of the car he bought for his daughter – he liked it because it was built like a tank and would keep her safe; she liked it because it was built in a waste-free, emissions-free plant. “The consumer of the future wants to know that the values of the companies they do business with are aligned with their values,” Derry said. “There is a real opportunity for companies that realize that.”

And, of course, it will be procurement’s role to find the suppliers that also are aligned with their company’s values.