This is an exciting time for procurement and supply-chain professionals. Many companies are ramping up their activities and expanding operations.

PSA is contacted daily by companies seeking specialists in a variety of fields. This level of activity has not been seen in several years, so 2006 is shaping up to be a great time to be in the procurement and supply-chain fields.

The topics included in this issue of our quarterly newsletter:

Managing Outsourcing Projects
Pricing Forecasts for 2006 (Energy, Steel, Stainless Steel, Electronics, Plastics)
New Staff Member
PSA Job Listing

We hope you enjoy the articles. Please let us know if we can be of service in any way.

Sincerely,

Dan Plute, President

Managing Outsourcing Projects, by Jane Dillner

It’s a whole new world in procurement, and outsourcing is becoming a large part of it. Managing an outsourcing strategy can be a challenge. A function that your company is currently managing in-house can be performed domestically or offshore in a more productive and cost effective manner.

For whatever reason your company requires an outsourcing strategy, it must be managed carefully. I will outline five (5) aspects that should be considered during this process.

1. Define The Objectives
Outsourcing is a process and should be organized with strategic goals in mind. . Cost reduction, increased satisfaction, and efficiency improvements are usually the primary reasons for implementing this process. However, other reasons might include:
• Improving the company focus
• Accessing world capabilities and markets
• Freeing up internal resources for other purposes
• Accelerating the re-engineering benefits
• Sharing the risks with another company
• Making capital funds available
• Allowing for cash infusion
• Improving customer satisfaction

Services or products should be selectively chosen. For instance, your IT services or data center operations may be managed more efficiently and at a lesser cost by a company who is more familiar with it as a core process. Outsourcing procurement, materials inventory, or a manufacturing product line may allow for cost reduction due to cost leveraging in a fast turn or overseas environment. Be clear what objectives you want to achieve and outsource for the right reasons.

Outsourcing Project Approach
An organized approach is needed when beginning an outsource project in order to anticipate different functions.
• Planning and Analysis Phase. Objective consideration of how the overall strategy fits in your organization is critical. You need to be clear what would benefit from outsourcing and what should stay in-house.
• RFP/RFQ preparation for potential suppliers should have clearly stated requirements for outsourcing and how you expect them to interface with in-house requirements.
• Potential suppliers for outsourcing must be evaluated as other suppliers in financial stability, transportation, and ease of doing business as well as normal labor and product cost advantages. If you are considering sending the service or product offshore, environmental, cultural, import/export, and political issues need to be included in entire cost. Failure to consider these issues could lead to the demise of the project.
• After distribution of the RFP/RFQ to qualified potential suppliers, responses are collected and a qualified supplier is chosen.

• Design Phase: This phase allows for negotiations to proceed with the chosen supplier and to ensure that all requirements are clearly understood. It is essential that there is a good fit between the Company and the Outsourcing Supplier. Since this contract governs the business relationship of both the organization and outsourcing supplier, both parties must agree on all possible contingencies, dispute resolution, and relationship management structure. Performance incentives, penalties, and measurements should be specified, and specific responsibilities need to be assigned and spelled out in order to deflect any misunderstandings in the future. Anticipation of good and bad economic times and related adjustments of cycles of demand should be considered.

• Implementation Phase allows for the physical transition from in-house to the outsourcing supplier. Critical issues need to be addressed in this phase. People, equipment, and materials are all critical to your project. They need to be considered and mirrored at the supplier in order to be successful.

• Operations Phase encompasses the relationship between the Company and the Supplier and should be managed to ensure the best productivity between the two companies. Changes to the relationship can be allowed, but need to be documented. Performance measurements for critical issues such as delivery, quality, and price are put in place and monitored. Regular meetings should be conducted to ensure agreement of performance and, if necessary, discussion about how to improve.

• Termination Phase allows for review at the end of the contracting period and a decision whether to continue with the supplier under a new contract or begin with a new supplier. Another decision that can be made during this phase would be whether to bring the function back in-house.

2. Consider all Stakeholders and Implementing the Right People
It is important to understand that all of the Stakeholders might have issues with an outsourcing project and/or supplier. A functional team having a mix of stakeholder, technical, and management roles should be implemented in order to control separate phases. This team can have members that become active during different phases. For instance, during the initial Planning Phase, team members should be assigned for project leadership, analysis, and decisions. The Implementation Phase requires a team member should be responsible for ensuring the correct personnel, equipment, and material is in place at the supplier site. A Supplier Manager would function in the overall view of the project during the Operations Phase. Termination requires several team members to participate in the analysis decision on whether to continue, find another supplier, or pull the project back in-house.

3. Choose the Right Relationship
Depending on the project, some suppliers are more capable of specialized types of work. They may have a better understanding of fast turn, smaller product sizes, or may prefer large production runs. Some may specialize in indirect outsourcing (i.e., IT, HR, logistics, finance, or customer service). You may prefer a company where you could change to another supplier quickly at the end of a contract with little cost or inconvenience for future work, or you may prefer a supplier who enables long term partnerships. It is important to understand your objectives and assimilate them with the supplier’s expertise and preferred method of business.


4. Manage the People Issues
Finally, there will always be “people” issues. Whether working with a firm domestically or internationally, it is important to ensure good communications during all phases of an outsourcing project. This communication can be in the form of e-mails, telephone calls, video communications, or written documents and should be understood by all parties. People need to be informed of changes and processes in all phases in order to be successful in your project.

Summary:
Outsourcing a project can be very cost efficient and productive. However, it requires patience, a good process, and communication in order to defuse any issues and sidestep the challenges. Whether being done by an individual or team within the company or an objective outside manager, all functions must be considered in order to make the project a success.

Jane Dillner Biography

Jane Dillner, C.P.M., is the President of Supply Dynamix (www.SupplyDynamix.com), a Global Supply Chain and Outsourcing company with a portfolio of world class supply chain resources. She has 20 years of pragmatic operations experience and a proven track record in supplier management and outsourcing for technology companies. Since her view of outsourcing has encompassed both the O.E.M. and Contract Manufacturing sides of the business, she has successfully led functional outsourcing teams. One example resulted in an annual savings of $43.2 million in materials and labor. She has also been active in Institute of Supply Management (ISM) and has been President for two years of the local Silicon Valley affiliate. Jane has earned her Master’s degree in Business at the University of Phoenix.

Recommended Reading

Business without Boundaries: An Action Framework for Collaborating Across Time, Distance, Organization, and Culture.

The Authors: Don Mankin and Susan G. Cohen (published by Jossey-Bass)

www.SupplyDynamix.com

Pricing Forecasts for 2006

Commodity and electronics price forecasts for 2006.
By Tom Stundza and James Carbone
From: www.Purchasing.com

The doubling in prices of energy and some key raw materials and commodities since 2003 has done less damage to the manufacturing economy than was projected initially. According to economists, this result is mostly because manufacturing companies have continued to improve efficiency and cut costs. But Sophia Koropeckyj, managing director at Moody's Economy.com, warns 2006 will remain a minefield of high-cost raw materials and commodities. In effect, she says, the expected slippage in prices of many raw materials won't bring price tags back down to their recent historical averages.

"The price shocks of 2004 and 2005 appear to be over, so a calmer pricing year is expected in 2006," says a strategic sourcing manager in the Midwest who prefers anonymity. "I hope that pricing for commodities will react more to supply and demand fundamentals than hurricanes or Chinese demand surges or other outside influences. But you never know; that's why 2006 should be interesting."

ENERGY
WHAT'S AHEAD: While 22% of the buyers polled in the fourth quarter of 2005 were paying more for energy than in the first quarter, more than 80% of these buyers expect to be paying even higher prices in 2006.
BACKGROUND: Government energy watchdogs see improved supply but higher demand in 2006. That's why they forecast West Texas Intermediate (WTI) crude oil averaging $64-65 per barrel in 2006, up from the $57/bbl average in 2005. Other economists see crude oil dropping by the end of this year, down from $63 in December 2005. A forecast by analyst John Normand at J.P. Morgan Securities is less bullish, predicting an annual average of $55-57 for this year. However, there are some mavens who think crude prices could be headed north toward $70/bbl again.

STEEL
WHAT'S AHEAD: Best estimates suggest supply will expand by 7% while demand growth will slow to 5% in 2006, resulting in a 10% decline in average prices.
BACKGROUND: The carbon steel marketplace is going through a boom-bust-boom cycle that has winter 2005-2006 pricing somewhat higher than last autumn but equal to March 2004, just when pricing was coming out of a lengthy low-priced period. Supply of sheet and plate is back near balance, as excess inventory has been worked off. Recent higher prices should fade by the second quarter of 2006, though. Buyers suggest an imminent price-slide will continue until the seasonal purchasing pickup in late autumn. Transaction prices for steel have been dropping because foreign offerings have been attractive, says Mike Gentile, purchasing manager for the CSN plant in Terre Haute, Ind., an independent steel processing facility. He says indicators show possible increased domestic supply, usage decreasing and scrap cost values dropping. That's why he foresees demand volumes dropping and prices starting to slip in the first quarter of 2006—"especially later in the quarter when import material should begin to arrive."

STAINLESS STEEL
WHAT'S AHEAD: The marketplace agrees with analysts that North American transaction prices should fall between 10% and 15% sometime in 2006 because of stronger supply as well as reduced nickel and cobalt ore and stainless scrap prices.
BACKGROUND: North American stainless-steel use grew by a robust 13% in 2004 and demand began 2005 very strong. However, end use wilted in late summer and early autumn so that purchasing will decline by about 6% for the year. Buyers report that leadtimes shrunk from 12 weeks in January 2005 to four weeks in December for mill deliveries. "Stainless steel needs are down among our customers," says William Laidlaw, purchasing manager at service center TCT Stainless Steel in Sterling Heights, Mich. "At the same time, we're reducing our inventories and, with expanded production, there's a lot more supply." Prices doubled in 2003, remained high in 2004, and increased again in 2005 until September—when monthly average prices began dropping. "And now, everybody is buying on the spot market because nobody wants to sign a 2006 contract and get caught paying too much in coming months," Laidlaw says.

ELECTRONICS
Growth in the electronics industry in 2006 will be similar to 2005, but the difference will be that prices will flatten even as a new up-cycle for the industry will begin.

Most analysts say the electronics industry experienced a "soft landing" in 2005 after strong growth in 2004. Overall, end equipment and component demand was healthy in 2005, although excess inventory in the first half of the year and overcapacity for many parts resulted in less revenue growth than in 2004.

For example, the semiconductor industry grew about 7% in 2005, after growing 28% in 2004, according to the Semiconductor Industry Association. The chip industry will grow 8% in 2006 to $245 billion. However, analysts say most of the growth will come in the second half of the year as a new up-cycle begins.

With high inventory levels being worked off in 2005 and semiconductor companies cutting back on capital expenditures, supply will be more in balance with demand in 2006. That will result in less price erosion for most components. Overall prices for semiconductors for the year should be flat. However, there will still be price declines for some types of products, including DRAMs, flash and digital signal processors, although price erosion in 2006 for those components too will be less than in 2005.

Buyers can also expect connector prices to drop by about 3%. Tags had fallen about 7-8% in recent years. Price erosion will also weaken for passives, with prices falling about 3-4%. In previous years tags fell about 6-9%, according to suppliers.

Component demand in 2006 will be healthy, although not stellar, driven by computers, third-generation (3G) cell phones and consumer electronics equipment.

Most analysts say business will be weak in the first half of 2006, but the industry will turn later in the year. "We believe the up-cycle is coming," says Gary Grandbois, principal analyst for analog ICs/semiconductor forecast for researcher iSuppli. "The difficulty is determining how long we are going to bounce along the bottom. We believe the upturn will start in the second half of 2006 and will reveal itself more strongly in 2007. There won't be strong growth in 2006."

PCs Drive Growth
Growth will continue to be driven by the computer industry.

Despite stronger growth rates in communications systems, computer equipment will account for half of the integrated circuits sold in 2005, or about $96.5 billion, according to researcher IC Insights. In fact, computer systems have accounted for half of IC revenues since the early 1990s. The computer IC market grew about 7.3% in 2005 from $89.9 billion in 2004, and is twice as big as the communications IC market.

"PCs have a lifespan and energy that we keep thinking is going to weaken, but it doesn't," says Grandbois. "We are still looking at double-digit growth in PCs." In fact, PC unit shipments will grow 10% to 232 million unit shipments, according to iSuppli.

One reason for continued PC growth is "desktops have started to take off in developing countries," says Brian Matas, an analyst with IC Insights.

"The PC segment in developing countries, coupled with some of the changeover to notebooks and laptops in U.S., Japan and Europe where there already is an established market, is something that we will see in 2006," he says. "That is good for microprocessors, memory and other ICs as well," says Matas.

Cell phones will also continue to be a driver of semiconductor and passives component demand, although the growth rate of cell phones is expected to weaken in 2006. Shipments are expected to rise from 780 million to 810 million, says iSuppli.

A somewhat slower growth rate may not matter much because semiconductor content in cell phones will rise as more 3G phones ship. Such phones have high chip content to provide more video capability. The average cell phone has about $42 of semiconductors, but new 3G phones have about $55 of chips, according to chipmaker STMicroelectronics.

While the form factor of a cell phone is small, the devices are crammed with electronics, including flash memory, digital signal processors, graphics drivers, capacitors and connectors.

Consumer electronics (CE) equipment will also drive the electronics component market in 2006 although there will be a softening of the market in 2006, says Grandbois.

The CE equipment market is expected to grow from $287 billion to $301.4 billion. "There is some nervousness on the part of consumer and it is not going to be a red-hot market in 2006," says Grandbois.

Because end equipment markets will weaken a bit and there is no inventory overhang, price erosion will stop later in 2006.

Jean-Philippe Dauvin, chief economist for STMicroelectronics, in Geneva, Switzerland, says 2006 semiconductor prices should be flat, although there will be some price erosion in the first quarter.

"I expect price erosion in the first half of 2006 and none in the second half. However, DRAM and NOR flash memory prices will be under attack," he says.
For passives it will be a different story. More price erosion is likely, although some passive makers are at or near 100% factory utilization. The reason is stiff competition from Asian suppliers.

For the outlook on specific electronic components, including DRAMs, flash memory, connectors, capacitors and others visit www.purchasing.com

PLASTICS
Plastics prices continue to frustrate buyers in a growing swath of industries, as seen both in Purchasing’s monthly business survey and the latest plastics index from Purchasingdata.com, which closed January at the second-highest level ever.

Production disruptions in the U.S. after Hurricanes Katrina and Rita have driven up sales prices throughout the Americas and opened up the market for Asian suppliers, who have shifted big volumes west since last October but not enough to drop pricing. This has been borne out by anecdotal reports from buyers.

A supply chain manager from an air flow systems maker says he’s seen plastics prices increase 4% to 7% in the past couple of months. Andrew Ly, president and CEO of bakery Ly Brothers Corp. in San Francisco, reports an 8% increase in plastics prices in the past month. Ly says producers continue to cite crude oil and natural gas prices in their increases. As a result, Ly is looking more to overseas supplies for plastics products and reports good luck early in that search. And a buyer at U.S. automaker says plastic components have been his biggest headache in recent months. The purchasing manager at a New York consumer products maker adds: "All plastic products are high right now due to short supply and increased raw materials costs." That’s why higher prices of bottle-grade plastics are expected to boost packaging costs this year.

Companies such as Anheuser-Busch and Pepsi are citing high polyethylene terephthalate (PET) plastics cost in raising prices for their products. "We will be raising prices or reducing discounts on the majority of our volume in early 2006," Anheuser-Busch told analysts in late 2005. Pepsi Bottling Group of Somers, N.Y., plans to raise prices by as much as 3% to cover higher plastic and aluminum costs.

Source: Purchasing.com (Reed Business Information)

New PSA Staff Member

PSA is pleased to welcome Jennifer Chinn on board as our newest staff member. Jennifer has a background in purchasing and represented PSA on several temporary assignments. She is now based in our southern California office and assists with business development and recruiting. Welcome, Jennifer!

Job Listing

PSA has numerous job openings in various states. If you are currently in the job market, you can search our open jobs and apply for any that interest you.

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