Companies are raising prices at some of the fastest rates on record, and the services sector is shrinking quicker than at any time since October 2001 – just two of the findings of the latest PMI survey and a couple of very good reasons to believe that the UK, like the US, is slipping into recession.

Most interestingly, the Chartered Institute of Purchasing and Supply(CIPS)/Markit survey suggests that input prices are soaring at breakneck speed – with June’s reading of 71.7 up markedly on the 67.7 figure recorded in May.

In response companies are aggressively raising their prices – leaving the prices charged index standing at 56.0 in June, up from 55.8 in May. But already the third highest reading in the survey’s 12 year history looks set to go up, rather than down, as economic conditions worsen.

These findings are likely to place already over-stretched procurement organisations in an even more awkward position in the second half of the year, as companies look to remain competitive by keeping costs down - despite almost unprecedented external price pressures.

Activity in the service sector offers little respite, with the survey showing activity falling faster than even the most downbeat of analysts had expected. Activity hit a low of 47.1 in June, down from 49.8 in May, and with the magic 50 figure (which provides the cut-off point between expansion and contraction) looking ever further away it’s little wonder that the ‘r’ word is starting to cast an increasingly long shadow across the City of London and beyond.

"The services report confirms the broad-based deterioration in UK economic activity, with the composite PMI heading towards unprecedented (for the UK PMI surveys) recession territory," said Paul Smith, senior economist at Markit Economics.

"The issues facing the service sector are rooted in the dual shocks of both the financial crisis and -- of rapidly increasing concern to service providers -- surging global oil prices."

With neither showing any sign of letting-up it appears that things could get worse (perhaps a lot worse) before they get better.

It’s not just executives at the world’s major airlines who have been left shaking their heads in collective disbelief at the astronomical price rise of fuel in recent months – those charged with managing companies’ travel spend aren’t having things too easy either.

The soaring cost of fuel has sent flights prices through the stratosphere in recent months – even the seemingly recession-proof Ryanair has said that it may only break even in 2009 – meaning that procurement travel costs have gone the same way.

However, some companies, and countries too, are taking an innovative approach to cost cutting. Over on BusinessGreen.com, a report claims that Cisco has saved 16,000 journeys at a cost of $141million by replacing expensive business travel with teleconferencing.

"We are beginning to see some really interesting case studies which highlight the scale of the savings that can be realised," said Tim Stone, the company’s senior marketing manager for unified communications. "Internally we have had 214 TelePresence units deployed.”

It’s an impressive figure, which seems to suggest that on-screen communication and virtual handshakes could soon replace the real thing. And whereas nothing will ever replace the face-to-face interaction that is so crucial in forming lasting relationships with both suppliers and vendors, teleconferencing could soon represent the kind of cost savings that are hard to ignore.

Those who work in procurement are accustomed to dealing with inflationary pressures, but a quick glance through the daily headlines suggest that after a period of relatively benign price increases we are about to enter a far tougher period.

Even the daily cup of tea (complete with chocolate bar) and, of course, the soothing evening glass of wine are hitting companies, and individuals, in the pocket.

The soaring price of sugar, coupled with ongoing concerns over tea supply from Kenya, not to mention a drought in Australia which is reeking havoc with the country’s vineyards, is having a worldwide impact.

However, of greatest concern, will be the potential effect of the decision from South Korean and Japanese steel mills to pay the Brazilian miner Vale 65 per cent more over the next 12 months (read here) – a decision that will undoubtedly place those sourcing from Asia under even greater pressure as the year unfolds.

Something that already stretched procurement operations could well do without.

As both sides of the Atlantic continue to be bombarded with depressing statement after depressing statement AMR’s report on supply management technology spend brightened the mood somewhat yesterday.

After worrying reports from some of the world’s largest companies sent stocks plummeting for the third day in succession – much to the chagrin of the Federal Reserve, who have barely had time to give themselves a celebratory pat on the back after their huge interest rate cut – the news that companies are preparing to up their supply management spend by as much as 14 percent over the next 12 months suggests that things aren’t as bleak as many would have us believe.

Of course, given recent events this figure could decrease significantly in the not-too-distant future, but as Jason Busch quite rightly states in his spendmatters blog on the subject - “sometimes you've got to spend a little to save a lot.” Lets hope that sentiment still resonates when times get tough.

The soaring price of raw materials is having repercussions that may surprise some of those working in procurement.

And whilst the high cost of oil is nothing new – the rising cost of crude drove up input prices by 3.2 percent in September, more than double the expected figure – global metal prices have also surged since the turn of the year, attributed, in main, to China’s insatiable appetite for metals such as copper.

In the US, the price of copper has leapt by 60 percent since February and is currently trading at around $4 - a four-fold leap in just five years. Now, the increase is leading to a worldwide crime waves as unscrupulous thieves look to cash in.

Last week in Detroit, six people were left dead after being electrocuted whilst trying to steal copper wires for a couple of hundred dollars. Meanwhile, police forces in the UK have also said that the country is experiencing a massive increase in incidences of metal theft, with nothing too big (or too small) for a new generation of scrap metal “dealers”.

In one case an entire bus shelter was seized, an audacious heist that has left police baffled. Some estimates claim that a select band of thieves specialising in the metal’s market are now making as much as £200,000 a week, all of which would seem to suggest that this new trading place is unlikely to close down any time soon.

For any company looking to implement a spend analysis solution then this afternoon’s webinar on the subject, “Spend Analysis: A European Perspective”, would have made interesting listening.

According to Andrew Bartels of Forrester, the use of automated spend solutions has increased hugely over the past 12 months, and as more and more companies search for a solution that gives them clear, simple and manageable data, it’s easy to see why.

Although Bartels was keen to stress there is no ‘quick fix’ to spend analysis issues, he did outline the main ways in which many multi-national companies would benefit from implementing an automated spend analysis solution.

He believes for companies with a high volume of complex spending the benefits can be seen in several ways. Firstly, it makes the consolidation of spending easier – or as Bartels put it: “you know what you’re buying and you know who you’re buying it from”. Secondly, he believes categorising spend means you can concentrate valuable time on sourcing. Finally it assisted those companies that have to comply with SarBox, by making the identification of rogue spending a simpler task.

Add to these increased supplier compliance and improved procurement satisfaction and you’ve got a number of very good reasons why automated spend analysis is one subject most procurement professionals just can’t get enough of right now.

Bartels’ insight was swiftly followed by a great example of what spend analysis can do for a large multi-national company. Edgar Heitmann, a senior project manager at Orkla ASA detailed how a spend analysis solution has helped Norway’s largest public listed company achieve both huge savings and increased transparency.

If your company thought it had a big job on its hands, the tale of how Orkla managed to consolidate data from fragments of 50 companies into a system that now offers the company up-to-date spend analysis data on a monthly basis, should offer everyone hope.

The blogsphere has been ablaze lately with debate over the best approaches and solutions for spend visibility and analysis. (Indeed, ELP's own Editor-in-Chief Mark Perera recent chimed into the debate on these pages.) Solution providers and consultants have been beating their respective soap boxes, each trying to focus the debate on the portion of the challenge for which they have a solution. And the resulting crescendo is a confusing cacophony of advice.

I liken the arguments to the age-old monkey conudrum: hear, see, and speak no evil. (If this analogy doesn’t work for you, feel free to pick your own — possibly three card monte or the shell game.) I’ve even pulled together a simple-to-understand graphic to illustrate this point:

As the above graphic indicates, spend visibility and analysis vendors typically fall into one of three camps:

• Data-wrangling experts argue that you can’t truly analyze spending without capturing all spend data and classifying it to a common classification schema (e.g., UNSPSC) at a level of detail that’s meaningful for analysis. They are right! Alliant Techsystems Director of Spend Management Greg Shifflett gives a perfect example of the power of detailed classification: “[Prior to using an automated spend analysis solution] we knew what we spend on adhesives and with which suppliers, but we don’t know the detail on what types of adhesives we have bought from whom.” However, data-classification only solves just one-part of the larger challenge — albeit the most challenging and burdensome part.
• ERP, business intelligence (BI), and even some supply management solution providers promote their reporting and analysis capabilities as the solution to the spend analysis dilemma. Their argument: “We can provide all the reports you need and even let you drill into your spend…Just give us your spend data in a structured format.” And, for those of you thinking “but my ERP captures all my spend data in a structured format,” think again. Important spend data (e.g., ACH, P-card, outsourced spend, etc.) exists outside your ERP system. Even worse, as cited here earlier by Pricewaterhouse Cooper (PwC) consultant Jason Josko: “ERP systems were built for high-level financial analysis. The attribute and classified data procurement managers require to develop informed sourcing strategies is often missing from standard ERP reporting.”
• Supplier intelligence service vendors focus on the importance of data enrichment, enabling parent-child matching, diversity tracking, and financial, performance, and balance of trade information. And project management solution providers note that data is useless unless you have the ability to take action on it by establishing and monitoring category management plans. Both are right about the importance of these capabilities. (This point is reinforced in Aberdeen Group’s latest Spend Intelligence Benchmark report.) But the value of such features are limited (and can even be dangerous) if built upon incomplete or misclassified spend data (i.e., efficiently getting to the wrong decision can be worse than making no decision at all.)

My point (in case you missed it): effectively managing spend requires all of the above capabilities.

You must have the ability to repeatedly access and classify all your spend data at detailed level. Each  supply management team member and business stakeholder must be able to quickly report on and analyze spend, compliance, and category information that’s most relevant to them. And you need to have the ability to define, share, and track category management plans based on this new-found intelligence. Settling for anything less is an incomplete solution to your spend management challenge.

By now, what I once coined “Corporate America’s dirty little secret” is a secret no more. Poor visibility is as pervasive as Janet Jackson; and it’s wreaking havoc on supply management performance everywhere from L.A. to Tokyo.

Lack of visibility into timely, detailed, and accurate spend data limit spend leverage, hinder compliance, and cause supply managers to develop sourcing and supplier strategies in the dark. Throw in tightening supply market dynamics and tougher scrutiny from CFOs and regulators, and the spend deficiency syndrome is now more exposed than Miss Jackson at halftime.

Considering these factors, it’s no surprise that the nearly 300 supply management and business executives participating in a recent global survey listed improving visibility into timely and accurate spend data as their top initiative for the next two years.

I’d like to share a true story of one company’s journey to spend intelligence. For the purposes of this story, the company, whose name will be protected to avoid divulging their competitive edge, will be referred to as Global Tech Co.

Once upon a time back in the last century, Global Tech Co.'s IT leadership assured the supply management group that the spend analysis challenges would be resolved when the company standardized on a common ERP system.

After the fact, the supply team quickly realized that ERP systems are built for high-level financial analysis and lacked the detailed, line-item attribute data needed for meaningful spend analysis. For example, ERP standardization reaffirmed what the supply team already knew – Global Tech Co. spent a lot on hardware. But the ERP data didn’t help commodity managers determine how much was being spent on high-end SPARC stations versus laptops. Nor could it shed insight into whether these items were being bought for development engineers or office administrators.

Global Tech’s next strategy was to assign standard part numbers to the items it purchased. This led to a proliferation of part numbers as well as differences within the part numbers. To continue our example in the area of hardware, part numbers were difficult to assign due to different models and configurations.

Global Tech’s next move was to dump spend data into a data warehouse with a snazzy reporting tool on top. This allowed the supply team to slice and dice spend data and create reports to impress their boss and friends. However, this approach still didn’t solve the core symptom: Global Tech lacked spend data detail that could support accurate classification and meaningful analysis. (Garbage in, garbage out, anyone?)

As a result, the supply team spent their time pulling spend data from the warehouse into spreadsheet pivot tables so they could sort it by attributes. But with key detail – like processor speed or memory – buried in the description, this information was hard to dig up. This lengthy and labor-intensive process forced Global Tech to continue to conduct spend analyses on a project basis. Worse yet, time and resource constraints limited analyses to Global Tech’s big-ticket spend categories.

Finally, Global Tech Co. adopted a solution that automated spend data extraction, classification, and analysis. Through the use of a business-rules engine the tool rapidly accessed and evaluated the line-item spend attributes and classify these to a common schema.

This automated attribute-based classification gave Global Tech the detail required for meaningful analysis, enabling the supply management team to improve spend leverage and develop informed sourcing and supplier management strategies. For example, the company has been able to change its hardware buying policies and practices, assigning approved hardware types and configurations for each role in the organization. (No more SPARC stations for the receptionist!) It also uncovered more spending power, such as hardware purchases that had been misclassified under office products.

Such insight and detail enabled Global Tech Co. to achieve additional 5% - 15% cost savings – depending on the spend category – through improved spend leverage, supplier rationalization, and new buying rules.

This automated spend intelligence approach enabled Global Tech Co. to be more systematic about spending analysis. The company auto-refreshes 100% of its spend data pool on a monthly basis, arming its supply team with the intelligence required to make and execute informed sourcing and supplier strategies across a much broader portion of Global Tech’s spend.

The moral of this story (in case you missed it) is that even if most of your spend data is captured within your ERP system (for it won't all be there), unlocking the secrets of that data requires you to access and make sense of more detailed attributes of your spend. This requires having the proper, knowledge-based tools to extract, cleanse, classify, and enrich spend data at a detailed level – all on a repeatable basis.

To hear first hand how one multi-national company -- Alliant Tech Systems -- has tackled the spend analysis challenge, tune into a live webinar, Wednesday, December 6th at 11:30 a.m. EST. Click here to register.

Check back here for ongoing commentary on the Top 5 Supply Strategies identified by supply management executives.