Author: Alun Rafique – CEO & Co-founder, Market Dojo | Read time: 5 minutes
The current economic situation sees businesses facing high inflation and recession in the US and Europe as a result of the Covid fallout, high energy prices, supply chain disruptions, and geopolitical instability.
Given this challenging economic climate, procurement professionals are on the frontline and those who proactively manage their processes will be more successful.
Read on to discover five ways that procurement can help combat inflation.
The Perfect Storm
Economists say that strong consumer demand, supply chain disruptions following the extended Covid restrictions in China, and the War in Ukraine have created the perfect storm.
As a result, inflation is at a near 40-year high in Europe and the US increasing fuel prices, groceries prices, and general cost of living.
In Britain, a recession is on the horizon with inflation running at ≈10%, partly because of skyrocketing energy prices in the wake of Russia’s invasion of Ukraine, but also because Brexit has not produced the promised economic bonanza.
McKinsey Research’s Economic Conditions Outlook survey found that “inflation continues to be the second-most-cited global threat and the top concern domestically” among survey respondents.
Breaking the Inflationary Spiral (or Tornado!)
The general applied solution for inflation is raising interest rates but the problem with this strategy is that it does little to solve supply chain disruptions, and it could trigger a global recession.
To help you navigate the storm, here are our five ways that procurement can help combat inflation:
1. Understand the size of the issue
- How much will inflation impact my business and over what time period?
Example: what categories are still experiencing price spikes due to supply and demand issues?
- What competing priorities does my business face and where does inflation fit in among this list of challenges?
Example: where can we save costs without compromising safety, security or quality?
- Communicate these findings to stakeholders to help them understand the complexities facing procurement in the coming year
2. Build strong supplier relationships
- Symbiotic partnerships with strategic and/or critical suppliers will help to foster supply chain resilience
Consider longer term commitments to encourage supplier loyalty
- Explore alternatives and third parties, for example energy brokers may help you find better energy prices
- Establish leaner supply chains, for example help suppliers leverage more buying power by sourcing from lower-tier vendors
- Be flexible with suppliers as, just like you, they will have some fixed costs, but other costs that can be reviewed and negotiated – look for the win-wins
3. Tackle demand management
- Use data to track and monitor consumption of goods for example using LEDs and motion sensors on lighting to reduce energy costs
- Where possible, look for opportunities for bulk-sourcing in high demand categories
4. Take control of total cost management
- Consolidate and rationalise your number of suppliers or spend categories
- Consider bringing forward capital investments that will deliver greater efficiencies or cost savings for example newer, more energy efficient machinery
- Track your suppliers’ compliance on contractual agreements through rigorous contract management
- Perform resource planning and allocation to make the best use of your workforce
- Crowdsource with other local businesses to get a better price from suppliers
5. Drive specification management
- Look for savings by revisiting your sourcing requirements and specifications for example, could a change to biomass deliver significant benefits?
- Work with your design and manufacturing teams early in the product development process to identify potential supply chain issues and look for better alternatives in your direct costs (without compromising on quality and function)
The need for companies to be on top of their procurement game has never been more important than now. But with every crisis comes opportunity and those procurement professionals who proactively manage their processes will emerge as winners.
For more ways on how to strategically navigate through the increasing pressures within procurement in 2023 download our Procurement Pathfinder eGuide