Could this week’s downturn in oil prices be a portent of things to come? Over on Spendmatters, Jason Busch certainly thinks so – and believes that oil may soon fall below the $125-a-barrel threshold needed to make “global sourcing decisions that much more palatable and profitable.”

This week’s fall in the price of oil has given every procurement organisation  some much-needed breathing space and, with oil dropping beneath that magic $125 figure during Friday trading (who would have thought we would be celebrating that this time last year), many CPO’s will have enjoyed this weekend just that little bit more.

“For all those who were talking about $200 per barrel oil, bite your tongue,” Busch says.

In this still uncertain climate, no-one is likely to be willing to predict how long they’ll stay silent for.

For those companies relying on China for their sourcing needs it’s crunch time. This week factories around Beijing are downing tools to help the Chinese capital hit its pollution targets as the countdown to the 2008 Olympics enters its final stage.
 
From July 20 the Chinese government will enforce construction sites, mines and chemical plants around Beijing to stop churning out CO2 until the self-styled greatest show on earth finally leaves town in mid-September.
 
Polluting factories around the capital will be put under pressure to cut emissions by as much as 30%, while more than 300 factories in the cities of Tianjin and Tangshan will also cease production for the next eight weeks.
 
The news may be welcome for the long-suffering residents of a city where pollution is a daily hazard but for already stretched supply chains the shut-down is about as desirable as a visit from the taxman.
 
China has invested $17bn is an attempt to clean up its environmental act before the world’s media descends on the country – although whether this short-term solution is any solution at all is a moot point. Fighting pollution is, after all, a marathon and not a sprint.

Interesting article in The Economist today focusing on what the newspaper calls "the high priest of 'peak oil'". If you haven't heard of the high priest, Matthew Simmons is an investment banker that put his head above the parapet and declared that oil production had peaked way back in 2003 when you could still get change from a quid for a litre of petrol.

Simmons' credibility comes from the fact that he's an oil man himself - he founded an investment bank which has so far handled more than 500 M&A deals in the sector. And he spent a huge amount of time researching his book Twilight in the Desert: the coming Saudi oil shock and the world economy which took a rather more cynical view of then-popular theories about Saudi production capabilities.

So, what's keeping Simmons busy now? Farming, apparently. He aims to establish a farm in case the supply chains that provide the US with its food break down due to a lack of oil. He also says that globalisation must stop and that as much trade as possible should be conducted by sea.

Nothing new there, you might think. But when the oil men start growing their own vegetables you know that something must be wrong...

The UK's Farnborough airshow has traditionally offered a platform for some of the aviation industry’s biggest hitters to flaunt their wares and generally show-off for a week in front of the world’s media. This year, however, there promises to be a slightly more downbeat feel to an event that has acted as a magnet for the great and the good since it was first held in 1948.
 
And from a procurement standpoint the biannual show promises to make for fascinating viewing over the next seven days. No industry has been hit harder by the "perfect storm" of global economic conditions, and the 140,000 or so aerospace and defence professionals descending on the South of England this week will have one word on the tip of their tongue.
 
The soaring cost of fuel is hitting every business hard, but airlines are feeling the pinch more than most, and on a day when Airbus said that rising fuel prices were actually boosting its order books – “we have the most energy efficient aeroplane in the world – the aeroplane of the future,” according to EDS CEO Louis Gallois – those involved in aviation procurement will undoubtedly be on the lookout for potential avenues for further cost savings from green innovations.
 
The potential of securing package deals that include both the servicing and repairing of aircraft is another area which companies will increasingly be looking towards procurement to secure, and is likely to be another key emerging trend as firms look to gain greater control of their spend.
 
One thing that does seem certain is that the news coverage this week is far more likely to centre on procurement issues rather than headline-grabbing orders – the perfect storm has already taken care of that.
 

Tim Minahan of Ariba

Compared to North American firms, European procurement organisations have been reluctant to embrace online sourcing approaches. Their long-time reticence has stemmed from resistance to e-sourcing methods both internally and from suppliers, as well as from a general misunderstanding that e-sourcing = e-auctions. (It doesn’t.)

Yet, private conversations and public presentations at Ariba LIVE Brussels offered hope that e-sourcing (including online auctions) is fast becoming standard operating procedure on the Continent.

Over a dinner and bottle (or two) of fine French wine, a procurement executive from a European aerospace manufacturer, told me that he directs his team to use e-sourcing for every sourcing project. And he prefers that they run a reverse auction. “We are of the mindset that you can auction anything. We’ve auctioned everything from IT to legal services. I refuse to accept that something can’t be put out to bid.”

His gusto was matched by the head of sourcing for a European oil and gas company: “We now align [buyer’s] incentives with how much of their spending is sourced online. We view e-sourcing as the sourcing process, not a subset of it.”

Listening to Telefonica CPO Juan Carlos Montejano Dominguez deliver the Ariba LIVE Brussels keynote the following morning, it was easy to see why European procurement leaders have caught e-sourcing fever.

Over the past year, Telefonica ran more than 35,000 e-sourcing projects for nearly €17 billion in goods and services — a more than 1,500% volume increase since 2003, the first full year of the e-sourcing program. And the telecommunications giant is far from finished. Dominguez is pressing his team to hit a run rate of 70,000 e-sourcing projects per year — a third of which will involve e-auctions.

Why is Telefonica so bullish on e-sourcing? Simple: results. As the below chart clearly indicates, Telefonica has yielded far greater returns from its e-sourcing than offline sourcing projects. And returns from e-auctions are even better.

Dominguez reported that e-sourcing has yielded considerable benefits beyond negotiated savings. Since launching its e-sourcing program five years ago, Telefonica has:

• Cut sourcing cycle times in half.
• Reduced management cost per awarded amount by more than 27%
• Increased the amount of spend managed per FTE by more than 85%.

In addition to these benefits, Dominguez said e-sourcing has actually improved supplier relationships. “e-Sourcing has introduced a new level of integrity and transparency into the process,” said Dominguez. “It increases competition and objectivity in award decisions.”

To back up his assertion, Dominguez shared the results of a recent survey of Telefonica suppliers. Some key findings:

• 77.3% of suppliers felt e-sourcing “promotes competition and equality of opportunities”
• 80% said e-sourcing “increases transparency of the purchasing process”
• And, more than 70% of suppliers reported that “e-auctions are a transparent method of contraction and they guarantee equal opportunities.”

Feedback and results like these underlie why e-sourcing is finally being widely adopted across Europe.

If oil wasn’t topping procurement’s agenda at the turn of the year, it certainly is now. Over on his spendmatters blog Jason Busch tells readers how Friday’s price surge – which even in these turbulent times caught most people on the hop – saw the cost of crude rise near to a potentially ruinous $140-a-barrel.

Hardly music to procurement’s ears given that a recent CIBC World Markets Report claimed that once oil hit $120 a barrel, “Every 10% increase in trip distances translates to a 4.5% increase in transportation costs.”

Busch uses the example of the cost of shipping a container from Shanghai to the eastern seaboard of the US having risen 250 per cent since 2000 (when oil prices were a relatively benign $20-a-barrel).

Clearly the latest price hikes are going to put more pressure on those organisations that lean heavily on global sourcing. Any further rises and they may start to ask, if they haven’t already, if the strategy is really delivering the results it once did.

Everyone loves a good myth but, when it’s perpetuated by the media, it doesn’t take long for fact and fiction to become intertwined - which is why Darryl Conley’s recent presentation to delegates at Global Sourcing Live event offered a breath of fresh air.

Using evidence compiled by the Everest Group, Conley set about debunking some of the myths surrounding offshoring that had built up an almost unstoppable momentum over the past 12 months.

Firstly he reported that, despite recent headlines, labour arbitrage would still deliver significant cost benefits for at least the next ten years.

Secondly, Conley attacked exaggerated media coverage of decisions by the likes of Lloyds TSB, Philips and Aviva to bring offshore operations back home, claiming that it offered a “distorted” version of offshoring’s true picture.

He then set about dismantling the claim that only low value work was being offshored. “There is a fair degree of activity right across the value added stack,” he said, before using the example of knowledge process outsourcing as an area of potentially huge growth to further hammer home his point.

All well and good, but what about the bottom line? Everest’s research showed that 70 per cent of buyers were achieving savings of between 30 and 50 per cent. A further two-thirds of respondents also reported improvements in productivity (although on the flip side just 50 per cent noted any enhancement in quality).

Finally, tackling the myth that offshoring is only about India, he told delegates that the growth of areas such as Canada, the Philippines and Mexico (helped by their proximity to the US) meant that these countries were now posing a genuine threat to South Asia’s traditional dominance.

As a piece of myth-busting it was hard to beat.

Over on his Spend Matters blog Jason Busch has reported on a fascinating story that could have a significant impact not just on the ever-increasing price of raw materials, but also on those sourcing operations leaning heavily on Chinese suppliers.

According to both the International Herald Tribune and the New York Post, China is to drastically reduce both its manufacturing and construction levels in the run-up to the Olympics, as the Chinese authorities look to alleviate the chronic pollution problems that are threatening (amongst an ever-increasing list of other factors) to derail the games.

The city of Tianjin; the provinces of Hebei, Shanxi and Shandong; and the Inner Mongolia region, are also expected to be effected, in a move that may do much to help marathon runners around Beijing’s smog-ridden streets, but is unlikely to do much for the thousands of companies relying on China for their supply-base.

On his All Roads blog, Richard Brubaker, founder and managing director of China Strategic Development Partners, also warns that if this principle measure is unsuccessful the Chinese government could introduce more sweeping measures.

“…if pollution levels do not improve, a wider net will be cast than is currently being announced.”

Of course, as Spend Matters quite rightly points out, the closures from the most raw material hungry nation on earth may have a positive impact on pricing, but this will be scant consolation for those companies looking to ensure supply continuity.

Like the Olympic torch relay, this story looks set to run and run.

Attention may have been focused on China’s rather tortuous transporting of the Olympic flame in recent weeks but, away from the glare of the world’s press, another race involving the Asian superpower is well underway.

This week in Delhi, an India-Africa summit kicks-off, an event which boasts a cast list as impressive as those chosen to brave the pro-Tibet protesters in London this weekend.

As is becoming increasing clear China has made massive strides in Africa in recent years, as they look to the continent’s vast untapped reservoir of resources to fuel their growth. India, it seems, now wants a piece of the action.

“India and Africa have always shared a long history,” Anand Sharma, India’s minister of state, said in the run-up to the opening of the summit.

However, no-one is kidding themselves that this latest bridge-building exercise is down to any deep-seated desire to renew old ties, more than a need to be involved when Africa begins exploiting its estimated $30 billion worth of oil and gas assets.

India is behind in the race, but the country clearly hopes that this is marathon and not a sprint.

Chinese state media yesterday took the unusual step of telling the world that protests in the Tibetan capital of Lhasa had spread to surrounding provinces.

Just how significant this latest upsurge in violence will be remains to be seen but, after speaking to a well-placed source, there appears to be a genuine feeling in China that the unrest in the annexed mountain kingdom could soon spread well beyond Tibetan borders – which could result in potentially serious consequences for those companies sourcing and operating within the country.

Part of China’s attraction over the past decade has been its stability. Despite the relative lack of freedom afforded the Chinese population in everyday life, the country’s government has poured investment into an economy that has, and still is, growing exponentially. A wealthy population is, from the Chinese government’s point of view, a satisfied one. .

Now, however, as unemployment levels in the country rise in line with inflation, that could soon change. Trouble in Tibet and ongoing talk of an Olympic boycott are doubtless giving the Chinese government a headache, but if the unrest spreads to the wider population that could spell serious trouble - not just for those in Beijing, but for an already fragile global economy.