Inflationary pressures and challenges will always be a part of our economy. It’s not a matter of “if”, but “when” inflation will happen. Today we are experiencing one of the highest inflation rates in the last 40 years. The focus should be on preventative and proactive measures to mitigate inflation problems efficiently. Naturally, this starts with procurement.
The secret lies in cross-collaboration. It involves breaking down operating silos, leveraging technology, and strategic planning that counteracts the negative impact of inflation.
Approaches to Mitigating Inflationary Pressure
Procurement should always have a strategy for inflation. Some approaches include:
Build a Tiger Team
Nothing is more agile than a tiger team, which is a cross-collaboration and formation of several business units. Procurement can build this team by reaching out across functions like finance, operations, sales, engineering, planning, and supply chain.
A tiger team leverages technology like machine learning, contract lifecycle management, and spend analytics to gain greater visibility into supply pain points, cost increases, and inflationary pressures.
The tiger team helps to triage supply availability issues for materials and labor as well get in front of inflationary pressures. Procurement can work with each department in unique ways, for example:
Procurement can help get in front of demand, determining what the market will bear and when to pass along price increases.
In this case, procurement can look at material alternatives and substitutes that are readily available or at a lower price point.
Procurement can help to optimize production run times to better manage cost pressures. They can look at material yield rates on current supply as well alternatives.
When working with finance, procurement can look at cost build-ups and other financial impacts to reduce working capital pressure. One example of this would be extending supplier payment terms.
Supply and Planning
Procurement can help supply and planning consider less expensive contract labor resources or delay the impacts associated with new product introduction and/or product obsolesces.
Procurement can help scale the team to do more with less by leveraging the right technology. Automation (like AI, ML, and RPA) can automate processes and reduce the dependency on high-cost labor. It also drives efficiencies with quality improvements and greater yield rates.
Implementing technology will provide actionable insights into:
- Pricing trends
- Demand fluctuations
- Supplier volatility
- Inventory turns/shortages
All of this enables a procurement team to leverage predictive analytics and get in front of inflation.
Procurement can strengthen supplier relationships to generate additional sources of value. They can partner with suppliers to revisit alternatives and identify innovative opportunities to drive down costs and improve availability.
Creative ways procurement can discover potential savings around:
- Packaging requirements
- Finished goods inventory management
- Delivery schedules
- Revisit service levels and response times
- Optimize distribution and logistics
- Working capital improvements
It’s all about opening up the contract and relationship to better understand the art of the possible with your suppliers. Suppliers when motivated will innovate with those customers that have historically partnered with them to drive mutually beneficial business outcomes.
The Price of Procurement Strategy
Procurement teams are obligated to have an informed opinion on price and market volatility. Procurement can drive value by providing actionable insights that help the business better understand prevailing market prices. Intelligent technology is the prime vehicle for success.
Inflation helps to strengthen procurement’s role and position them more strategically. This can be seen right now, as enterprises are employing procurement teams to help with budgetary impacts that result from economic shifts and shortages.
As their access and influence increase, procurement will become a more valued contributor to the organization’s fiscal health through proactive, timely engagement.