Tough Economic Climate

Table of Contents

List of Figures

1 Introduction

2 Characteristics and prospects of the economic climate

3 Global purchasing and its economic contribution
3.1 Display of different approaches applicable
3.2 Risk management
3.3 Saving of costs

4 Conclusion

List of references

List of Figures

Figure 1: Real GDP growth

Figure 2: Country debts and budget deficits compared

Figure 3: World commodity prices, 2000 – 2011

Figure 4: Inflation rates per region and year

1 Introduction

Businesses aim to maximise their profits since the beginning of economic thinking. Hence, maximum efficiency and minimum costs play a key role within this thinking (Mankiw, 2011). In this context, purchasing gained much attention in terms of increasingly tough competition as the costs for purchased goods and services add up to around 50 per cent of the total costs for goods sold (COGS) on average (van Weele, 2010). This high proportion illustrates that purchasing encompasses more than the operational buying process. In fact, it is a function that comprises various activities. Van Weele (2010, p.8) defines purchasing as ‘the management of the company’s external resources in such a way that the supply of all goods, services, capabilities and knowledge which are necessary for running, maintaining and managing the company’s primary and support activities is secured at the most favourable conditions’. Consequently, all activities to manage the company’s external resources are included in purchasing functions. In recent years it seems this management has become more difficult due to circumstances such as economic, financial and political crises. Even acts of God can lead to greater volatility and uncertainty that may impact the process of purchasing. Hence, in order to cope with the likely tough economic climate in 2012, businesses have to reflect possible strategies. Moreover, due to the increased importance of purchasing and supply management, risks as well as challenges related to these functions have to be pointed out in order to evaluate its contribution for managing the economic situation.

2 Characteristics and prospects of the economic climate

As already mentioned in the assignment’s title, businesses likely have to face a tough economic climate in the near future. However, what circumstances represent a tough economic climate? In order to make adequate appraisals regarding the economic activity, experts usually make use of diverse indicators. One of the most common and also most important indicators for the economic activity is the gross domestic product (GDP) (Baumohl, 2008). As it shows how fast or slow an economy grows or shrinks respectively, many economic decisions and forecasts are based on this indicator. With regard to the upcoming year, many different economic research institutes and others such as the International Monetary Fund (IMF) or the World Bank give their predictions concerning the future development of the economic activity. An overview of predicted economic growth is given by the following figure adapted from the data of the latest world economic outlook of the International Monetary Fund (2011 b):

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Figure 1: Real GDP growth; Source: International Monetary Fund (2011)

Figure 1 illustrates that the development of GDP growth in advanced economies and particularly in the Euro Area is fairly different from that of emerging or developing economies. According to the International Monetary Fund (2011 b) countries such as the United States, Japan, United Kingdom and also several states of the Euro Area such as Germany or France are counted among the advanced economies. In contrast, emerging or developing economies include the BRIC states (Brazil, Russia, India and China) and others. The IMF forecasts a growth rate of 1.9 % and 6.1 % for advanced economies and emerging economies respectively in 2012. Furthermore, in comparison to IMF’s previous world economic outlook (International Monetary Fund, 2011 a), the figures were invariably adjusted downwards. Hence, the economic activity in most of the mentioned economies is predicted to downgrade. According to this institution, this results from mainly two reasons. Firstly, the economic recovery in advanced economies is very slow. Secondly, these economies have to deal with financial problems due to very high debts partly resulting from the economic crisis.

According to the International Monetary Fund (2011 b), the reasons for slowing global activity are various. In Japan, for instance, the devastating tsunami was responsible for shrinkage of 0.5 percent of the GDP. Furthermore, the political unrests in countries of the Middle East and North Africa also had an impact on the global economy, due to sharply increased oil prices. In addition, the current debt and banking sector problems in the Euro Area are one further important aspect that needs to be added. Figure 2 illustrates the seriousness of the debt crisis going on in Europe:

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Figure 2: Country debts and budget deficits compared; Source: BBC (2011 a)

To illustrate this point one need only refer to the current situation in Greece. In order to prevent the state from bankruptcy rigorous fiscal consolidation is needed and other European partners are forced to support with financial guarantees regulated in the European Financial Stability Facility (EFSF, 2011). These financial problems that also occur in other European states are responsible for a predicted shrinkage of the GDP within the Euro Area in 2012. Besides the Euro Area, the United States still faces problems regarding its economic activity. According to the International Monetary Fund (2011 b) the shift from public to private demand takes more time than expected. A major reason for this is the high unemployment rate. To counter this development, a job creation initiative of $ 447 billion is planned (BBC, 2011 b). The last few days gave an idea of slight recovery, as the GDP growth rate of the last quarter doubled in comparison to the former one (U.S. Department of Commerce, 2011). Nevertheless, the International Monetary Fund (2011 b) considers future development to be fairly risky. This results mainly from uncertainty and fallen confidence. This fallen confidence in the markets is represented by the different stock indices which also fell sharply due to the news regarding debt crisis and other economic impacts (CNN Money, 2011; Kollewe and Treanor, 2011).

Not only slow economic growth but also other important aspects need to be mentioned with respect to a tough economic climate for businesses in 2012. Due to the financial problems, bank lending is fairly tight. Small and medium sized enterprises (SMEs), in particular, are forced to delay their investments as they have difficulties to get corresponding loans(Clifford, 2011). In addition to these difficulties, businesses are confronted with increasing commodity prices. Figure 3 illustrates the corresponding development:

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Figure 3: World commodity prices, 2000 – 2011; Source: The World Bank (2011)

Doubtless, an increase in the mentioned commodity prices gets observable when examining the graph. These high prices mainly result from strong economic growth in emerging and developing economies. According to the World Bank (2011) the high commodity prices are a driver for accelerated inflation. This can be proved by the following figure:

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Figure 4: Inflation rates per region and year; Source: The World Bank (2011)

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