As the supply chain crisis ends, it’s time to pivot to cost.
The global supply chain crisis is over.
It was a frenetic period from March 2020 when the Covid-19 pandemic hit, followed by a series of events from the Suez Canal blockage to Russia’s war on Ukraine, that scrambled supply chains and ratcheted up costs. It is now relatively safe to say this period has passed – for months now we have been seeing an increase in manufacturing and logistics capacities, as the strategies firms have deployed to counteract supply chain disruption begin to bear fruit.
Yet while this is true, it doesn’t much feel like it to the average consumer. While official figures from the Bureau of Labor Statistics do show inflation slowing, prices in many areas are still rising.
How is this possible and why is it happening?
For us to answer this, we must look back to the height of the pandemic. American consumers increased savings and saw their finances boosted by government stimulus measures. This, combined with the general resilience of US consumers, has meant that families have been able to keep spending and effectively absorb the price rises they’ve seen at the store.
So why are prices are still going up?
This is a story about profit margins in US businesses. The recent inflationary period created a unique environment favorable to increasing profit margins. Firms saw an opportunity to improve margins by increasing pricing in excess of underlying commodity inflation. Due to the widespread knowledge of COVID impacts and supply chain disruption, companies were able to achieve this without taking a hit on reputation, as the average consumer’s impression was that price increases were expected and fair under the circumstance. However, leading indicators suggest that US consumers have reached or will soon reach the end of the road in their ability and willingness to absorb price increases. If spending slows, then that will obviously create significantly tougher economic conditions for businesses to operate in.
In the world of procurement and supply chain, this is an important moment to pivot our approach.
Whereas in recent years, a CPO’s focus may have been on securing the supply of hard-to-get products at a reasonable price, there is now a need to take a broader look at the costs in the business. As the economic climate tightens and price increases become less of a viable tool to increase profits, business leaders will shift their focus to maintaining or improving margins through cost reduction.
In Big Tech we’ve already seen a focus go onto costs, with tens of thousands of layoffs. However, there are obvious trade-offs in market reputation, innovation, and ability to serve customers – layoffs come with both a financial cost (severance) and an emotional cost (no employee enjoys seeing their colleague lose their job). For most companies, their spend with suppliers is also usually far greater – indeed suppliers account for more than 75% of Fortune 500 companies’ total expenditures.
It’s also usually the case, especially following a period where attention has been elsewhere, that there is substantial room for cost reduction in the supplier space. Costs may have crept up beyond current market, or services may be being duplicated across the business. We saw one business recently who achieved a 50% reduction in their shipping costs, as their previous rates had been negotiated at a time where prices were far higher, and similar trends are occurring across the wide range of goods and services purchased by leading organizations.
This comes to the very heart of procurement’s strategic role in the success of a business.
At difficult times, such as the economic mood souring, procurement can both protect the organization and place it in a position to reap economic benefits upon a return to growth.
A good place to start is by digging deep into your procurement organization’s strategic plans around responding to recent market dynamics in key categories. Some firms will be well-equipped to understand how to best unlock the full potential cost opportunity; others will find themselves under-prepared, lacking the key resources, market intelligence, and category strategy to harness the value.
For everyone working in or with procurement, now is the time to be getting ready for the next big challenge and ensuring procurement is at the heart of strategic business solutions just as it has been during the period of volatile supply chains in recent years.
In many ways, the supply chain battle is over – the cost war is now to come.
If you’d like to speak about how Proxima can help align your goals for growth, save you money, and power your business for the future, please get in touch.