How Procurement Can De-Risk the Business Amid Inflationary Pressures and Other Disruptions
Procurement departments are having to adapt and evolve in an increasingly challenging business landscape. The traditional role of indirect procurement—managing the purchasing of non-core goods and services, from office supplies to IT equipment—has never been more critical.
Now, however, the function is expanding. Amidst a storm of inflationary pressures and other economic headwinds, procurement is becoming a key player in de-risking business processes. Its objective is not just to ensure the smooth procurement of goods and services, but to act as a safeguard against supply chain disruptions, ensuring business continuity in an era of uncertainty.
Inflation, in particular, is causing ripples across industries, sending procurement departments scrambling to strategize and address the rising cost of goods and services. Although current inflation stabilization appears to be "a trend rather than a blip," according to the Financial Times, inflation is still top of mind among CPOs and other procurement leaders.
This article delves into the ways procurement can effectively de-risk the business amid these turbulent times.
Understanding Inflationary Pressures
Inflationary pressures are dynamic and multifaceted, presenting procurement departments with a complex puzzle. One of the primary areas of concern is the escalating price of raw materials. Commodities such as metals, oil, and gas have seen significant cost spikes over the past year or so. Agricultural products, too, from grains to dairy, have been impacted. These price increases trickle down the supply chain, affecting the cost of goods and services across the board.
Another significant pressure is labor costs. As economies recover from the pandemic, labor markets have tightened across many sectors. Increased demand for workers, coupled with a shortage of available talent, has driven up wages. These higher labor costs are, in turn, passed onto consumers through pricing.
Yet another contributor to inflationary pressure is the overall state of the global economy. Economic instability, geopolitical tensions, and uncertainty can all lead to higher prices. For example, political unrest in a country that is a key supplier of a certain commodity can result in a sudden price increase.
To summarize, procurement departments need to be mindful of:
- Rising raw material costs
- Increasing labor costs
- Economic instability and geopolitical tensions
Understanding these inflationary pressures can inform strategies for mitigating risk and ensuring procurement efficiency amid adversity. But acknowledging them is just the beginning—procurement departments must also develop proactive, effective tactics to manage these pressures.
Strategies for Procurement Amid Inflation and Disruptions
Most aspects of inflation are directed by macroeconomic trends and are outside the control of any one company or department. However, there are some steps procurement can take to limit the impact of inflation on the bottom line.
Strategic Sourcing
Strategic sourcing is an invaluable tool in the battle against inflation. This process involves a more analytical approach to sourcing, moving beyond price to consider factors such as supplier capabilities, total cost of ownership, and market trends. With strategic sourcing, procurement departments can identify and engage suppliers that provide the best value, rather than simply the lowest price.
This approach may also uncover opportunities for consolidation, enabling economies of scale that can offset rising costs. In times of inflation, strategic sourcing becomes a potent weapon, enabling procurement to navigate price increases and find cost-effective solutions.
Supplier Relationship Management
In an environment of escalating costs, strong supplier relationships are crucial. Effective supplier relationship management (SRM) can lead to better pricing, improved service, and greater reliability—factors that can help mitigate the impact of inflation. SRM involves regular communication with suppliers, understanding their challenges, and working collaboratively to find solutions.
For example, in times of tight supply, a strong supplier relationship can ensure priority access to goods or services. At a time when price hikes may seem inevitable, effective SRM can help procurement departments negotiate better deals and reduce the risk of supply disruptions.
Contingency Planning
Contingency planning is another critical strategy for procurement departments navigating inflation and disruptions. This involves planning for various "what if" scenarios to ensure the organization can respond effectively to unexpected events. For example, if a key supplier is unable to deliver due to geopolitical unrest, does the procurement department have alternative sources lined up? If a particular commodity sees a dramatic price increase, is there a less expensive substitute that can be used without compromising quality?
Comprehensive contingency planning can help procurement departments react swiftly and effectively to changes, protecting the organization from the worst effects of inflation and other disruptions.
By adopting these tactics, procurement can not only navigate the current challenges but also strengthen its role as a value creator and business partner within its organization.
Procurement's Role in De-risking Amid Other Disruptions
Aside from inflation, there are other potential challenges that procurement needs to be aware of. Here are some of the most prevalent high-level trends affecting the economy today.
Climate Change and Procurement
Climate change poses a significant disruption to procurement and global supply chains. Rising temperatures, extreme weather events, and shifting agricultural patterns are impacting the availability and pricing of raw materials. For procurement departments, the challenge is to anticipate these changes and adapt sourcing strategies accordingly.
One potential solution is to diversify the supplier base, sourcing raw materials from a variety of geographic locations to mitigate the risk of extreme weather events or climate-driven crop failures in a particular region. Additionally, procurement can play a pivotal role in driving sustainability within organizations, sourcing from suppliers who demonstrate strong environmental responsibility and reducing the carbon footprint of the supply chain.
Technological Advancements and Procurement
Technological advancements, particularly in fields like artificial intelligence (AI) and robotics, are revolutionizing procurement. These technologies offer opportunities to automate and streamline procurement processes, achieve cost savings, and enhance decision-making. However, they also pose challenges as procurement departments must invest in new skills and capabilities to leverage these technologies effectively.
Procurement departments can address these challenges by investing in training and development, fostering a culture of continuous learning, and partnering with technology providers. Furthermore, procurement can use technologies like blockchain to enhance transparency in the supply chain and machine learning algorithms to predict and manage supply chain disruptions.
Geopolitical Conflicts and Procurement
Geopolitical conflicts, such as trade wars or civil unrest, can cause significant supply chain disruptions. These conflicts can lead to sudden changes in tariffs, trade restrictions, or supply chain bottlenecks, impacting the cost and availability of goods and services.
Procurement departments can address these challenges by staying informed about global geopolitical events, developing risk management strategies, and working closely with suppliers to navigate any potential disruptions. In an increasingly interconnected global economy, procurement departments may also need to explore alternative sourcing strategies, such as near-shoring or re-shoring, to minimize the risk of geopolitical conflicts.
Address Disruptions Head-On
By addressing these disruptions head-on, procurement departments can not only ensure the continuity of supply but also position their organizations for greater resilience and competitiveness in the face of ongoing change.
To learn more, don't miss ProcureCon Indirect West 2024. The event is happening from March 11th to 13th at the JW Marriott Las Vegas Resort & Spa in Las Vegas, Nevada.