It’s a word that everyone from high-ranking executives to the average grocery-store shopper dreads hearing: inflation. As the world continues to experience supply chain disruptions caused by a number of factors—the ongoing COVID-19 pandemic, political crises, changes in production patterns and more—we’re seeing prices for goods and materials climb faster and higher.
According to the World Bank, many commodities are currently priced well above the past five-year average. The increase in oil prices over the last two years haven’t been this high since the 1973 oil crisis, and the increases in the price of food commodities are the highest they’ve been since 2008. Unfortunately, the same report indicates that we won’t see prices drop in many areas until 2023 or 2024.
While this is creating stress across various kinds of businesses, it is particularly troubling for procurement teams who have worked for decades to achieve higher cost savings. They are now faced with one of two options: maintaining profits using materials from current suppliers and increasing costs to consumers; or maintaining current consumer prices and spending more to produce the same products.
As CPOs work to battle the challenges of inflation, there is a path that offers a solution to problems across the board, giving organizations the opportunity to achieve lower costs, produce the same quality products or services, and avoid heavily raising costs on consumers. By focusing on supply chain resiliency, supplier diversity, pricing negotiation and innovation, you can combat the challenges of inflation and maintain a strong bottom line without sacrificing quality.
While the world is no stranger to inflation and the effects it has on the economy and consumers alike, this latest increase and the speed at which costs are rising requires a strong understanding of how we arrived at this point.
According to the United States Chambers of Commerce, we saw such a drastic increase in inflation for several reasons:
- Supply and Demand: In the last two years, spending on goods has increased by 30% while the spending on services has only increased by 5%.
- Supply Chain Problems: Many organizations and supply chains have not fully recovered from the constraints the global pandemic placed on their supply chains, pushing production costs higher.
- Worker Shortages: With more workers demanding higher and fair wages, companies are experiencing higher operating costs.
International factors have also placed further strain on supply chains. Commodity costs have risen in the energy and food sectors, as a large portion of these are produced in Russia and Ukraine, and the continued war has led many organizations to divest from these countries and seek goods elsewhere.
Additionally, stringent COVID policies globally have caused a number of issues in supply that have fueled the rise in inflation, as cited by a number of procurement professionals in a recent Fortune article. Shipping costs have sharply risen, there has been a reduction in the production of vital raw materials and with China accounting for 18% of all U.S. imports – 35% if we focus specifically on computers and electronics – there is great concern over the impact this will have on supply chains.
With all these factors affecting inflation costs, how will focusing on supplier diversity and supply chain resiliency help to combat the current state of affairs?
Strengthening Your Supply Chain to Combat Inflation
While there is no “quick fix” to handle inflation, there are steps you can take to make sure your supply chain is ready to handle any impact it may have on your day-to-day and long-term operations. By building resiliency through diversifying your supply chain and working with new, potentially smaller or underserved suppliers, you can leverage the benefits of a more diverse supply base.
Ensure Your Supplier Records are Accurate
To ensure resiliency within your supply chain, every decision needs to be made using strong, dynamic supplier data. Knowing the accurate price, location and diversity factors (among other things) of your current suppliers ensures that your organization can accurately track production, shipping, and distribution processes and pivot to account for inflation-induced challenges when necessary. What’s more, having this supplier data intelligence allows you to build a stronger contingency plan and maintain resiliency to avoid costly mistakes.
Create Competition and Allow for Price Negotiations
There are a number of factors that procurement teams take into consideration when choosing a supplier, such as a supplier’s cost, product quality, price, etc. By diversifying your supply chain and going past the initial pool of suppliers you typically work with, you can introduce competition into your sourcing event, giving your team the chance to better analyze these factors and decide what exactly is in your best interest to focus on.
It also gives existing and potential suppliers a greater incentive to better negotiate pricing and do what they can to earn your business, driving down costs on the buyer side. Additionally, by adding competition, you can better negotiate long-term spend forecasts and pursue non-pricing levers to keep costs lower for customers, which McKinsey cites should be a high priority for tackling inflation.
Drive Innovation and Reduce Operating Costs
Research conducted by The Hackett Group revealed that procurement organizations that work with a diverse supplier base also had lower overall operating costs and spent 20% less on their buying operations
While procurement teams constantly strive to lower general operating costs, this goal has become even more important as inflation continues to affect supply chains and organizational operations. By leveraging supplier diversity, you can achieve higher cost savings at the operational level. Building a wider supplier base also allows for new ideas to be implemented into procurement processes so teams can leverage innovation to reduce costs and find workable solutions to inflation-related problems.
For example, consider moving away from a larger, off-shore supplier who traditionally has supplied your firm with a certain product and onboarding a diverse supplier closer to home. You may be able to reduce shipping costs and get the product faster, reducing the risk of it getting stuck in a port and costing your company even more time and money, and find you’re greatly improving your bottom line.
Jump Off the Inflation Bandwagon
Inflation has impacted and will continue to impact procurement teams across the globe for years to come. By expanding your supplier base and leveraging the benefits of supplier diversity, organizations can combat additional challenges caused by inflation while still hitting goals and working to keep costs low both internally and externally.