Procurement professionals are experiencing inflation for the first time in decades. So how can they mitigate the impacts? Our experts share their thoughts.
The current economic landscape marks the first time in decades that procurement professionals have witnessed genuine, sustained inflation. This means that for many, it’s an unknown enemy. There’s no muscle-memory response or established best practices when it comes to facing these circumstances.
Granted, some of the more experienced professionals will remember the inflation of the 70s and 80s, but the world has changed a lot since then. Business is more global and supply chains are far more complex.
Continuing from our previous webinar and blog post, we put together an expert panel to discuss how organisations can tackle soaring inflation in indirect procurement – which offers massive opportunities to optimise spends and create value for the organisation.
The panel included our very own Omer Abdullah, Graham Crawshaw of CASME, Carol Kozar and Daren Baughman of the SAS Institute, and Chris Sawchuk of The Hackett Group. You can watch the full webinar on-demand, here, or continue reading for some of the key takeaways – including what strategies people should be putting in place to mitigate the impact of inflation in indirect procurement, and how to prepare for the future.
The effect of inflation today
45% of our audience thinks inflation will be a top 3 issues for the next 12-24 months
Inflation presents a significant challenge to procurement professionals as prices rise across seemingly most commodities and regions. For the most part, though, the majority of industry professionals currently believe it will be short lived, with things returning to normal within the next 12-24 months.
What’s interesting is that we’re currently seeing a dispersion of inflation rates across the world. China, for instance, isn’t recording rates even close to what we’re expecting in the US and Europe. This raises an interesting point: Suppliers the world over claim to be impacted by inflation, but are they all as impacted, or have some spotted an opportunity to add to their margins?
Quite simply, not everything is being affected by inflation, so examining individual categories, challenging suppliers, asking questions, and having the information required to negotiate are incredibly important strategies for success in these trying circumstances.
Forward-thinking organisations are also examining and re-evaluating supplier contracts, often considering more short-term options and trying to establish more flexible arrangements.
There is of course the chance that inflation might outstay its welcome and last longer than the 24 months some predict. This is dependent on numerous macroeconomic, political, and social factors — not least of which is the war in Ukraine. Developments in this area, or lack thereof, will have a resounding impact on how long these circumstances prevail.
The strategies aimed at tackling inflation in indirect procurement
Whether this is a short-term blip or a longer period of inflation, understanding how to strategise for the current environment is key.
One of the biggest areas of focus should be cost avoidance, not to be confused with cost savings. When we look at total cost savings, we talk about avoidances and reductions. And in inflationary environments, avoidance always takes centre stage. Essentially, your ability to avoid incurring extra costs and keep the ship steady on turbulent seas is a good measure of success.
But cost avoidance is a controversial metric. Using it requires collaboration. You need to converse with technical partners and finance departments to come up with mutually agreeable strategies to define and measure it correctly. This will require insights into the current market, where it is headed, why and to what extent. Accurately determining the magnitude of the cost avoidance has to incorporate real (measurable) data about such market movements as the prime basis, along with actual prices and pricing trends agreed with suppliers and visible in the market.
Externally, you want to be data-driven in negotiating with suppliers. This means looking beyond reducing costs or managing price increases, but also using a range of negotiation tools and levers that still deliver value to the corporation, for example, extracting more services for the same fees, or changing the specifications. This requires a very specific set of skills for those doing the negotiating, which means providing training in negotiations (and related soft skills) becomes ever more important. All panel members acknowledged that procurement organisations do not spend enough on training.
You can’t always have strong relationships with all suppliers, unfortunately. So, sometimes these negotiations are about a balance of power. There are a lot of companies trying to gain an advantage from inflation by increasing their profit margins, so having granular insights into how prices are broken down – for example through should-cost modelling or inflation modelling – can go a long way to informing your strategies.
As the impact of inflation is not uniform across indirect procurement, it becomes important to have a granular view and see what components are being impacted by the inflation. Looking into various categories, subcategories and sub-subcategories within indirect procurement can help in putting the focus where it is most required.
The commonality across all of these factors is having the right intelligence, the right data and the right analytics. The more you know, the better the conversations you can have, and the more negotiating power you wield. Insights into markets and commodities will help you understand which price hikes are reasonable, model costs over the coming months, and even find alternative suppliers if need be.
What next?
64% of our audience have no formal plans in place to tackle inflation, and are responding to supplier requests individually
When it comes to mitigating the impacts of inflation in the months ahead, most of our webinar audience indicated they had no formal plans in place. This could indicate that procurement organisations are not being especially proactive in their approach, but it could also be related to the fact people expect this period of inflation to be short lived.
But what if it’s not? There’s no logic in preparing for the best-case scenario. To be on the safe side, organisations need to look at the flipside of the coin — what happens if we go into a recession, for example?
The best way to mitigate this possibility is to conduct scenario planning, road-testing different possibilities and developing strategies for the most probable outcomes.
This, once again, requires a granular level of insight and intelligence into what’s going on now and what’s likely to happen in the future. Again, the more you know, the more agile you can be and the better you can negotiate.
Want to learn more?
Inflation certainly poses a challenge to procurement professionals. But like all challenges, being prepared is a huge part of winning the battle. Armed with the right approaches and the right insights, procurement organisations can survive and even thrive during this period of inflation, no matter how long it lasts.
To hear our panel of experts explore these issues in more detail, you can watch the webinar on-demand, here.