Time for procurement to lead
Inflation is a word that has been on the lips of every procurement team in 2021. We are seeing a sustained period of supply shortages and price volatility of the kind that most commercial professionals will not have experienced before in their working lives. In one way or another, it is having an impact on virtually every business.
The causes of and the severity of inflation are complex. Much of the root cause comes back to either COVID or Climate impacting the availability of raw materials, people, and infrastructure. Thereafter we can layer in compounding events like the Suez blockage or Chinese port closures, as well as sudden and rapid shifts in demand for glass, plastics, and corrugated, for example. And then there are semiconductors, of course, reflecting where a fast-growing global trend and just in time supply chain meets constrained demand.
While the causes are complex, the outcomes are common – availability drops, and prices increase. Often service levels are affected too. For example, in the US, major players in the logistics market are scaling back service levels and increasing prices; why? Because they have to, and they can. The same is true of shipping channels where prices are in some cases 10x higher than in 2019, for an on-time delivery metric (at 38%) that is half as good as 2019. And then there are semiconductors, of course, where some lead times have reached a year.
For a professional whose focus is buying, a sellers’ market is not where procurement wants to be, and for many procurement professionals, it’s not a place that they have been to before.
So is the only option being a slave to price? Well, you may need to accept that your year-on-year savings target may suffer, and so it’s time to think differently about how to create value.
Ok, so first of all, face facts. Inflation is here, shortages are here, as are price rises. If you do what you’ve always done, you won’t get the same outcome. If you procrastinate or hold off hoping for improvement right now, you won’t get the same outcome.
Buying in inflationary markets is different. But it also enables you to focus on new ways of creating value; it needs you to be on your game, it needs the best of you as a supply market expert and as a commercial architect. You will be faced with some of the following:
- Higher prices
- Worse quality or service levels
- Slow lead times
- No supply
- Force majeure
So what do you do? Here are three tips for how to think about getting the best out of the current markets by looking at your organization, your supply markets, and of course, yourself.
How good is your data? How connected are you to your customers? Are you connected into product and commercial teams? These are all going to be areas of focus when tackling inflation to stabilize, reduce or eliminate demand and or embed the effects into manufacturing and commercial strategy.
A good place to start is undertaking a risk assessment mapping what you buy and the contracts you have to current market volatility and forecasts. You can’t do everything, so focus on critical goods and services and supply chains. Armed with this, identify the key business owners and form a crisis team to figure out how to bake the reality into the business.
The tactics you are able to use will depend upon the specific market dynamics. But consider:
Understanding your internal position gives you options; there are likely things that can be done to reduce exposure. Further, where price and availability do occur, other operational and commercial contingencies can be enacted to reduce waste, risk, and cost exposure.
Your business will thank you for it.
Suppliers may look like the largest part of the problem, but they will also be a large part of the solution. First and foremost, if you have to become a price taker, become an informed price taker. And that means navigating market data.
Do you know if you’re absorbing market-wide inflationary costs or if you’re paying more because you’re working with a certain supplier? Banging the table and asking for a discount probably isn’t going to work.
But, getting ahead on data is going to make you more informed when striking deals. What is the market rate, and how is it trending? If you can’t answer this, then you are uninformed and at the mercy of a sellers’ market.
Getting ahead of the game is going to mean understanding the market and your position in it, as well as tirelessly searching for the best deal or alternate ways of creating value. It won’t be easy, but it will be worth it. Consider:
As a procurement professional, you are the expert on markets. By deploying some of the tactics above and others that you will think of, you will identify yourself as a problem solver, someone who understands business needs and uses creative supply solutions to solve them. Now that’s better than being known as the process and price person, isn’t it?
We all want to move up the value chain, after all.
Focus on you
Unless what happened above is your regular day-to-day, and, or you are used to buying in inflationary markets, the chances are that you are going to try and learn some new things in the coming weeks and months. So what are the most important things for you personally to remember when thinking about mindset, business, and market focus?
Shortages and inflation are big business problems. Even if you cannot solve them completely, there is value to be made, success to be had, and an opportunity to reposition your impact.
Let’s not pretend that you are going to outperform the market. Still, you might be able to get the best that the market can offer and minimize further operational or commercial waste in your business. That might be what success looks like.
But you will only be successful if you proactively make the changes that will allow you to do so.
Inflation and shortages are not going anywhere fast. In a normal market, we might be seeing a way through it by now. Still, the compounding factors keep coming, and the mitigating factors like on-shoring and automation, which may spark deflation in 2023/24, are themselves either mid-term plays or suffering from delays, skill shortages, and inflation!
So go forth and make the best of it, and polish up your skillset at the same time. You might just come out the other side stronger, better, and a little further up the value chain.
How Proxima can help
If you’re looking for more information on implementing these actions, simply get in touch.
We regularly help our clients reduce spend, increase cost savings, and avoid risk from inflation – all through procurement. And as leading procurement consultants, the specialist experience we bring through years in the field is unlike any other.