2-A-1 Perform analysis and provide data on current and future and global/domestic market conditions, benchmarks and industry trends to management and/or user department

1 ) General issues in economics The world operates with a combination of economic markets in a free-market economy; price is determined primarily by supply and demand.

A) Industries, firms and markets - In a centralized economy, price is determined administratively. Even in a free. enterprise capitalistic economy, however, prices sometime bear little relationship to supply and demand. A price can be influenced by market structure or set by regulation. Industries and organizations have the freedom to determine what materials they will purchase and what products and services they will produce and sell based on current prices, and available supply and demand. Likewise, consumers can freely buy what they want based on price, supply and demand. In reality, no country operates with a pure market economy. In a pure market economy, all labor, goods, services and capital are free from any government restriction or trade barriers so they can move freely across national borders. Most market economies operate with some form of restriction.

Two other types of economies in the world today include the closed economy and the mixed economy. A closed economy is one in which a country severely limits trade with the outside world and relies on its own resources to support production and trade. While there are no completely closed economies in the world today, North Korea and Cuba exhibit many of the traits of a closed economy. Others operate with a mix of state-owned and private enterprises, otherwise known as a mixed economy. Most industrialized nations arguably operate within a mixed economy, including the United States, France and Mexico. (Stanley and Matthews, 2008.)

B) Global markets- Global trade is relatively open today. Organizations generally have the ability to market and sell products and services around the world with fewer forms of protectionism than ever. Protectionism according to the ISM Glossary is government interference with the free flow of goods and services that is considered harmful to the domestic economy. Global trade actually exceeded 30 percent of the world Gross Domestic Product (GDP) in 2006 and accounted for 42 percent of the cumulative growth in world output from 1998 to 2006 1 Organizations are forming international partnerships and alliances. While the United States once dominated the global marketplace, its share today is about 25 percent. Because of lower trade barriers, international competitors have equal access to the least expensive forms of raw materials, labor and technology. As a result, they benefit from similar economies of scale. (Stanley and Mathews, 2008.)

Many nations hold economic advantages in certain commodity areas. Saudi Arabia, for example, has much oil; Canada has timber; Zimbabwe has chrome. Others hold advantages in labor supply, location or climate. An absolute advantage in international trade is said to exist when one of the trading countries can produce a unit of the good involved with less resources than the other, or when only one country has the resources, such as South Africa with natural industrial diamonds.

The natural flow of world trade, reflecting whatever advantages exist, is modified by many factors. Embargoes and quotas can stop or slow the flow of goods, tariffs can wash out price differences, and government subsidies can create an artificial comparative advantage where one does not naturally exist. In some cases this leads to exporting goods at prices below their production costs. This practice is called "dumping". It is illegal in most importing countries, including the United States. (ISM Glossary, 2006.)

C)Business cycles and trends (e.g. lead time) -The swings in the economy are known as the business cycle. The business cycle has five phases: 1) The highest point of output before a downturn, 2) Recession, or shrinking of the economy, 3) Recession trough, or lowest point in economic activity, 4) Recovery, or resuming growth path, and 5) Expansion, beyond previous high point. (Stanley and Matthews, 2008.)

No two business cycles are the same in either intensity or duration. A "recession" leads to a "trough" and a "lower turning point." Expansion (recovery) leads to a "peak" and an ''upper turning point." Overlaid on this pattern are long-term , economic trends and seasonal variations.

Many things contribute to the cyclical pattern. Political disturbances, wars, population migrations, natural disasters, harvesting conditions and governmental actions in monetary and fiscal policy affect the economy.

Business cycle forecasting models rely upon leading indicators, such as average hours worked per week, stock prices, construction contract awards and new orders. Some models provide fair estimates of upcoming changes in the output of the domestic economy, usually measured by Gross Domestic Product (GDP). Purchasing and inventory management decisions can be made using this information. Supply management professionals can use this data and indicators to try to forecast the lead time needed in making their decisions.

D) Transportation trends - Growth of international trade continues, with global exports increasing 164 percent between 1990 and 2004. As a result, multimodal transportation requirements continue to increase. Logistics service providers and transportation carriers, particularly the airlines, have been growing in size through expansion and acquisition. At the same time, there is a need for better logistical planning for the deployment of multimodal transportation systems and services that effectively move freight because the physical and informational connections between intermodal carriers often is weak

E) Economic indicators (e.g., ISM Report On Business®) - Understanding economic indicators helps supply management professionals identify those market forces that will affect the supply and demand for a particular commodity, product or service. Leading, lagging, and coincident indicators are used to understand the marketplace. (See 2-A-2 for a further description of common economic indicators.) ISM's Report On Business® is a key economic indicator. There are two reports: Manufacturing and Non-Manufacturing. The indicators measured include: New Orders; Production/Business Activity; Employment; Supplier Deliveries; Inventories; Customers' Inventories (manufacturing report only); Prices; Backlog of Orders; New Export Orders; Imports; and Inventory Sentiment (non-manufacturing report only). The manufacturing report contains the PMI, which is a composite index based on five of the indexes.

F) Governmental policies - Governments are in a unique position to influence economic activity through various means solely at its disposal such as fiscal and monetary policies that, in turn, influence the economic behavior of individuals and organizations. Laws and regulations governing international organization can change-frequently depending on the country. This will add an element of risk to any forecast. It -is important for the supply management professional to understand the restrictions and regulations of the governments in which they are doing business in order to plan for the future.

G) Political stability/instability -A country or region of the world can be affected economically because of its political stability or instability. The political situation in another country is often a major consideration in doing business with that country. Political factors, either locally or abroad, can affect demand. New administrations, shifts in the political climate, and government takeovers are just a few of the changes that may alter an organization's original demand projections.

There is the potential risk of interruptions in supply due-to political problems, such as a change in the government leadership or shifts in political sentiment. While the risk is _generally higher in lesser developed countries, disruptions can occur anywhere. (Stanley and Matthews, 2008.) An unstable political situation might lead to plant, transportation or port closings, all of which may influence the availability or price of a product or the delivery of a service.

H) World industrial migration - Differences in country labor, inflation, interest and currency rates have caused shifts in manufacturing throughout the world. Increasingly, organizations are moving to international sites to tap local markets for low production costs and to establish sales outlets to emerging economies.

I) Import/ export issues - Free trade vs. protectionism: The term "free trade" refers to the uninhibited flow of goods and services across national boundaries. There are no tariffs, no quotas, and no embargoes on trade. The tern1 "fair trade" usually implies protectionism, meaning selective and graduated tariffs and carefully negotiated quotas on selected products (for example, quotas on the number of canvas shoes imported into the United States from Korea).

While protectionism is on a downward trend, tariffs and surcharges are used in certain circumstances to protect local industries. There are also a number of other costs that are not normally incurred in domestic ,buying, such as international taxes, payment costs (letters of credit fees, exchange rate differentials and translation costs), commissions to customs brokers, inspection costs and customs documentation fees. Transportation costs and the additional costs to buy and hold additional inventory to avoid stock-outs will be higher for international Shipments. Additionally, the higher cost of expedited delivery may be necessary at times to maintain production schedules or support service delivery. The risk of obsolescence; spoilage, or theft also is greater as more forms of transportation are used and because delivery times usually are longer. (Stanley and Matthews, 2008.).

J) Environmental - In recent years, environmental concerns have been legislated into controls and standards for industrial and consumer environmental emissions, and into disposal of industrial and household wastes, particularly hazardous wastes. Some groups believe that economic growth is to blame for increasing amounts of emissions and wastes, and that economic growth should be limited or stopped. Others believe that, for economic well being, growth must continue and that controls and incentives should be used to control the generation of emissions and wastes, and to ensure safe disposal of those that are generated. Thus far, growth has proceeded with controls, although there are continuing debates over what amounts of emissions and wastes are safe, and debates over safe means of disposal. Other environmental concerns include land use, particularly of wetlands, and control of commercial operations on public lands, such as national forests. Laws, regulations and other decisions made to address environmental matters can affect productivity, the availability of natural and other resources and the cost to produce products.

2) Market analysis A) Porter's Five Forces - Porter's Five Forces was created by Michael E. Porter in 1980 to describe competition. The five forces are:

• The extent and intensity of direct competition.

• The threat of entrants.

• The threat of substitute products and services.

• The power of buyers.

• The power of suppliers. (ISM Glossary, 2006.)

B) SWOT analysis -A form of risk assessment, a SWOT analysis is a macro-level evaluation of an organization's internal and external forces (its strengths, weaknesses, opportunities and threats) to help senior management evaluate the organization's. current environment that triggers the need for a new organizational direction, strategy or project. (Stanley and Matthews, 2008.)

C) Establish benchmarks through industry database -A benchmark is a standard or point of reference used in measuring or judging an organization's performance, according to selected criteria (ISM Glossary, 2006). An organization may choose to evaluate itself against the marketplace by accessing industry-collected benchmarks. For example, CAPS Research prepares supply management-specific benchmarks for a variety of industries.

D)RFI -An RFI, or Request for Information, is used generally before a specific requisition of an item is issued. Most organizations will issue an RFI if they have determined that there are several potential suppliers. The RFI is a solicitation document that is used by organizations to obtain general information about services, products and/ or suppliers. This document does not constitute a binding agreement by either party, i.e. the supplier or the purchaser. (ISM Glossary, 2006.) The information gathered from an RFI can be disseminated throughout the organization or to specific departments.

This procedure is generally used when a large or complicated purchase is being considered and the potential pool of suppliers must be pre-qualified. In this case an RFI is a questionnaire or inquiry into the suppliers' background. This is used to determine if the supplier meets the minimum standards needed to successfully bid on the project and, if awarded, successfully complete the project.

E) Supplier research- Suppliers can be a valuable source regarding market conditions and trends. They may be willing to disclose new developments in their processes, products and technologies. One of the responsibilities of supply management is to gather information from suppliers.

3) Supply market complexity versus impact on business A) Opportunity assessment- Each supply market will vary in its complexity. Supply management professionals should evaluate each market in terms of the degree of 1) competition, 2) geographical dispersion, and 3) cooperation from suppliers. As a result, opportunities for collaboration and pricing concessions should be evident.

B)Prioritization - Purchased items or services will vary in their impact on the business. Peter Kraljic developed a two-by-two portfolio matrix to help supply management professionals develop an appropriate sourcing strategy for items or services purchased, based on profit impact (low to high) and supply risk (low to high). Items are categorized as strategic, routine, bottleneck and leverage.

1.0 Type of purchase -The supply management professional needs to first determine what type of purchase is needed for the particular situation. There are many things to consider such as purchase globally or locally determining any new technologies.

2.0 Strategic- Strategic components have a high risk of- supply and high importance-to-competitiveness items. There are only a few suppliers, or perhaps only one, that have the technical capability and capacity to meet the buying organization's needs, so it is difficult to switch suppliers. Expenditures for strategic items also generally are high, and require supply strategies that reduce costs and ensure continuity of supply. These items are generally managed through closer win/win partnership-type relationships.

3.0 Routine/non-critical components -These items have little effect on the organization's competitiveness and profitability. They can be easily standardized, are highly substitutable, and thus are purchased using simple contracts or p-cards. P-cards are multipurpose bank cards with predetermined organization-set policies and procedures that eliminate the traditional requisition/ purchase order process. The primary goal is to minimize the procurement costs of these items.

4.0 Bottleneck- Bottleneck items are low-value, high risk products with customized specifications and technologies. Items in this category are generally purchased in larger quantities. Inventory levels are monitored more closely to avoid interruptions to supply. The relationship with the supplier is important to the buying organization but supply professionals will search for alternative suppliers to avoid the risk of supply interruptions. (Stanley and Matthews, 2008.)

5.0 Leverage buy - Leverage components: Leveraged items are those that have "a large number of suppliers who are all capable of supplying the same product, and the dollars spent are significant." (Stanley and Matthews, 2008.) These items are relatively low risk to obtain, yet have a major effect on the organization's competitiveness. The dominant strategy is to leverage the organization's volume to get lower prices.

4) Analytical/financial skills An analysis of the marketplace will require a high level of analytical and financial skills. Understanding and applying price indices, economic indicators and forecasting models are just a few of the knowledge areas needed. Utilizing these skills can minimize risks, maximize opportunities, and/ or evaluate innovation technologies. See Tasks in 1-B in Exam 1 Study Guide, Foundation of Supply Management and Task 2-A-2 for more information.