Procurement and Inflation

Economic turmoil has become a mainstay of the global economy. In just a few years we have gone from a booming economy with strong investment and low interest rates, to recessionary pressures and global downturns not seen since 2008. The full impact of the economic disruptions we have experienced in the last five years has yet to be seen. One factor has already begun to play a major role for procurement experts: inflation. 

Inflation

Inflationary pressures were precipitated by monetary policy activities throughout the Western world. For example, when the pandemic lockdowns were in full force and the majority of skilled labor was at home, the U.S. Federal Reserve printed and distributed over five trillion dollars in stimulus to breathe life back into the economy. Levels of spending per capita not seen in recorded history.

This influx of spending was mirrored in many other Western democracies including Canada. Many people needed the money to afford food, rent, and other necessities since their incomes were heavily affected by the lockdowns and economic downturns. In the months since the final U.S. stimulus check hit bank accounts, rising consumer demand, excess quantitative easing, chronically low interest rates, and an abundance of corporate price hikes have created an inflationary spiral. This process has only worsened as oil supplies have been disrupted by the war in Ukraine. 

 In December 2021, inflation rose to 7%. In the months since, inflation has reached over 9% in the U.S. and  over 8% year over year in Canada, resulting in the highest levels of inflation in four decades and significant disruption throughout global supply chains. As a result, consumers, retailers, manufacturers, transportation companies, distribution warehouses, shipping conglomerates, and other entities will feel the pricing pressures rise. Procurement will not only have tighter budgets, but will need to quote higher prices to clients. Below we discuss three ways the economic impacts of inflation have affected both the global economy and procurement teams. 

United States Inflation Rates

Canada Inflation Rates

source: tradingeconomics.com

1. Inflation has caused costs to skyrocket 

Market participants, from industry giants to individual consumers, know that inflation has resulted in higher costs for goods. And now, procurement teams are forced to bid and buy materials in one of the strongest inflationary periods in recent memory. Inflation is now moving so quickly that procurers are struggling to determine what fair market prices are. When suppliers bring price increases with greater frequency, it is difficult to determine whether it is a price point that reflects the realities of the market.

Everything, from end consumer products to critical project materials, are suffering from market inefficiencies that are becoming increasingly costly to downstream procurers. Inflationary and supply chain pressures are causing belts to tighten in the project market. Procurement teams around the world are now having to balance upward price trends from suppliers with attempts to effectively pass those costs to clients, all while remaining competitive.  

This high inflation also results in a loss of purchasing power. The amount of money in circulation rapidly surpassed economic growth in the US. As a result, the value of currency has depreciated in its relative ability to purchase goods. It is critical to consider your sourcing strategy to mitigate the effects of inflation. Modern procurement tools can review and revisit your current contracts to include cost-plus addendums, update purchasing workflows to streamline the buying process, and stay one step ahead of shortages with inventory and supplier status updating. 

2. Inflation has emphasized the need for better cost controls 

As a procurement professional, it cannot be understated how critical it is to provide value to clients. However, when dealing with year-over-year (now month-over-month) price increases and the highest inflation rates since the 1980s, it can feel impossible to do so while staying in the black. 

While you can’t always reduce costs, you can work to control them more effectively. Cost control tactics may vary between industries, but supply chain management tools make it simple to track costs, allocate resources, update contracts, and manage prices by: 

  1. Directly hedging your costs:
    Direct hedging enables you to control costs by increasing the number of vendor contracts you enter into, then varying the term lengths, purchase deadlines, and cost structures to “even out” your expenses. In doing so, you can navigate periods of high inflation while still procuring the inventory your clients need to complete their projects. 
  2. Physically hedging your inventory:
    Managing large inventories may seem like an extra hassle, especially when you consider the amount of work required to properly track inventory. However, purchasing and maintaining larger quantities of commonly used supplies can help minimize additional increases in price. With digital procurement’s virtual warehouse tools, you can accurately manage your inventory from your dashboard, even if you have supplies stored between multiple locations. 

3. Inflation has required procurement professionals to plan strategically. 

Working in procurement has always required a substantial amount of strategy and foresight. However, with inflation rates higher than even the previous quarter, it’s vital to plan for a future where your procurement team can still manage the purchasing process and fulfill client orders in spite of high costs and delays. 

cost reduction

With that in mind, you can plan to address the effects of inflation in two ways: 

  1. By building vendor inventory lists: 
    To mitigate higher inflation rates, rising transportation costs, and continued shortages of raw materials, companies should build strategic vendor lists for asset and procurement management. Building such a list gives you more sourcing options, substitutions of previously used materials, and helps to spread out supply chain risks. Rigorous inventory lists also open up opportunities for additional contracts and partnerships with new material providers. 
  2. By communicating with stakeholders and leveraging partnerships: 
    While challenging, it is best to avoid transferring all of the cost increases downstream during inflationary periods. By communicating with your stakeholders, and having defined pricing processes in place, it is possible to mitigate the inflationary effect on prices. Being honest with business partners can create opportunities for cost savings and can develop stronger business relationships that last beyond periods of economic turmoil. By leveraging technology to reduce internal cycle time to work with shorter expiry dates on quotes and bids. 

By incorporating these steps into your procurement, you will have two of the many strategies available to expand your inventory and strengthen your operational processes. At the same time, you and your team can work toward a shared goal of scaling your organization while managing higher costs, lower purchasing power, and potential supply chain bottlenecks. 

Today’s greatest challenge in procurement is to mitigate risks while maintaining the flexibility and profitability needed to succeed in the market. 

If your company is looking to mitigate inflationary pressures, or if you just want to improve your procurement processes, you may find that procurement software is the right tool for you. 
CurrentSCM helps procurement professionals navigate uncertainty by: 

  • Reducing time to bid, and time from bid to purchase to navigate shorter bid expiry. 
  • Manage inventory effectively. 
  • Handle changing prices and availability.

Related Reading: 5 Procurement KPI's You Can't Afford to Ignore

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