This October, inflation has hit 11.1% – up from 10.1% the month prior.
It’s no secret that the market has seen widespread volatility over the past few years. Conflicts like the war in Ukraine, the pandemic, and other unforeseen variables have added to this.
As businesses try to navigate this uncertain market, it’s clearer than ever that they must take the necessary measures to reinforce cost and supplier management until inflation rates subside.
In this article, we’ll explain how procurement can be used to reinforce the supply chain so that your business can weather the storm.
Keep reading to learn more.
How Inflation Impacts Businesses
Periods of heavy inflation can be felt by ordinary citizens across the world daily. Prices for basic necessities like gasoline, rent, food, clothing, health, and travel begin to rise drastically.
In the simplest terms — people are getting poorer as their purchasing power diminishes.
But a big part of the reason why prices rise for citizens is that inflation hurts businesses higher up the chain as well.
Inflation affects the supply chain because of the price increase in gasoline. As business owners try to find materials at the lowest cost, it leads to delays in production and lowered revenue. Likewise, this inadvertently causes a shortage in raw materials as well.
Inflation also leads to an increase in the Consumer Price Index. This can lead to higher costs and lower buying power for businesses and consumers. This makes it less likely that consumers will spend their money, further lowering revenue for businesses.
Another issue that inflation causes are a higher cost for inventory as well as overhead.
As businesses are battered from one side by these consequences of inflation, they are also expected to raise wages for employees to maintain their standard of living.
How Procurement Can Fight Inflation
As inflation erodes the purchasing power of businesses, it’s crucial that they take any necessary steps to protect themselves.
Procurement and supply-chain functions will play a critical role in protecting your business during uncertain market conditions. Several steps can be taken to ensure success now, in the medium term, and the future.
Right now, procurement can help stabilize prices while ensuring supply. In the long term, it can minimize costs and prepare a cross-functional approach for the future.
The keys to executing these strategies are both internal and external communication and alignment.
Let’s look at a few ways that companies can ensure their financial health.
Promote Internal Alignment and Supplier Transparency
As mentioned earlier, one of the glaring problems in business operations during inflationary periods is the disruption in their supply chain. Now more than ever, it’s key to align every part of the business, including Finance, Engineering, Operations, and Procurement.
Make sure that each division is transparent and is communicating regularly. This needs to happen both internally and externally.
There needs to be one central strategy that they are all aligned on to balance supply and demand. A critical key to anticipating any further price increases is a proactive market intelligence and internal assessments.
Externally, your business needs to be crystal clear to all suppliers: cost management is your top priority.
Depending on your situation, you can also use deconstructed pricing. Break down every single cost with your supplier and try to push back on price increases based on facts.
You can also use should-cost modelling. Analyse the cost structure of every category that your business procures and the drivers behind them. If the supplier is proposing for a 15% increase in price, but the cost base has only risen by 5%, you have room for pushback.
Conduct Sourcing Events and Quick Bids
A core idea to use in an inflationary market is to keep as many options open as possible. This will leave the door open to negotiations. This will lead your incumbent suppliers will feel the pressure to lower their prices — or will open the door to better ones.
Use RFPs (request for proposal) to your advantage. You can create a bidding war among your suppliers to find the best prices. If you need to, you can use a lower-cost substitute for your procurement. Although it’s not ideal, it can protect you financially in the short term.
You can also source categories that are not under inflationary pressure strategically. This might be able to get you quick financial wins. This is a great way to fight against increases in other higher-cost categories.
Negotiate Favourable Contract Terms
Another great way to save on procurement costs is to revisit your terms and conditions. Decide what terms you can concede in an exchange for lower prices. To execute this, remember that internal communication and alignment are crucial.
Revisit longer-term contracts you have or agreements that have higher purchase volumes. Some terms you can consider changing include:
- Insurance
- Payment terms
- Intellectual property (IP)
Also, look at implementing index-based pricing terms. This agreement between your company and supplier will allow prices to rise or fall if the index that is agreed upon moves more than 3% in either direction.
This can be based on the producer price index (PPI), consumer price index (CPI), or cost-of-living adjustment (COLA).
Protect Your Business from Uncertain Market Conditions with Supplier Management
Although times may be tough for cost and supplier management, know that businesses have several strategies that they can utilize to stay resilient.
By staying ahead of the curve, preparing for the future, and communicating with transparency, businesses will not only survive but come out the other side stronger than ever.
Make sure your company has the tools it needs to do it. Delta eSourcing is an end-to-end service that centralises everything you need for purchasing and procurement. They make sourcing as easy as ABC by providing top-tier training and support.
Get your free demo with Delta eSourcing today!
