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