Inflation: The More Things Change, the More They Stay the Same
After enjoying decades of modest inflation, it’s no wonder the recent rapid acceleration of inflation is a hot topic of conversation at dinner tables and water coolers around the world. Unsurprisingly, it’s at the center of attention of supply chain and procurement blogs and news sources as well. While inflation seems to have been discussed ad nauseum, I feel compelled to point out that – for procurement professionals – not much has changed.
You are probably wondering how I can suggest that things have stayed the same with skyrocketing prices, lost purchasing power, and scarce supply for many needs. The reason is because following procurement best practices leaves you well-poised to handle these shifts. In fact, by following best practices you were already planning for them, anticipating them even. I am not going to suggest that we’re not experiencing some disruption amongst a 2+ years long global pandemic, rising inflation, and a breadth of supply chain challenges we have not experienced in modern times. Yes, there are many situations that are certainly not status quo, but much of the distraction coming from these disruptions would be mitigated by following the right procurement practices.
Organizations that analyze their spend to create and maintain visibility, employ a strategic category management approach, and proactively manage their supplier relationships will find themselves with the flexibility to focus on the relatively fewer disruptions that crop up in their environment versus their peers and competitors. Granted, one of the true challenges today is having the right number of qualified resources in place to sustain this operation, but that is another topic for another blog! In the meantime, let’s take a closer look at the fundamentals that procurement organizations should be practicing to bring as much certainty as possible to such uncertain times.
Many procurement organizations struggle to access high quality and timely spend data. They rely on accounting reports and categorization that’s useful to accounting but is impractical for developing sourcing strategies. They may conduct a spend analysis infrequently, once a year, sometimes less and by the time they execute on what they’ve learned from that analysis the data is stale and they’re behind the curve to sustain the results they’ve produced, much less build upon their successes. In the current environment, if you do not know who your top suppliers are and you haven’t reigned in segmented, decentralized and tail spend, you’re going to get caught in a cycle of reacting and trying to catch up, which will inevitably lead to overpaying, scrambling for supply, or quite likely both. Leading organizations leverage spend analytics technology to gain the visibility the need to inform and refine their sourcing, category management, and supplier management strategies over time. This allows them to identify and manage their top suppliers and proactively mitigate disruptions and price changes. Similarly, it facilitates consolidation to those top suppliers and a more proactive approach to managing second tier and tail spend suppliers who would otherwise be placing them last in line for supply and paying top dollar for whatever might be available.
Employing strategic category management allows leading procurement organizations to stay ahead of or readily address and mitigate risk and disruption. With well-managed spend analysis, you have the insight required to prioritize your category management efforts, which would include, supplier management, demand management, and supplier development with full supply chain input being taken into consideration. This means you’re actively and continuously collaborating with your suppliers, putting you in a better position to understand what is driving cost and what challenges your suppliers are facing so you can plan accordingly with them and come up with alternatives in case you’re unable to accomplish what you need to. Through collaboration with your suppliers, you can provide them with more information that they can use to navigate their costs and supply chain. In the end you will be in a better position than your competitors as you will be in the front of line and viewed with greater favor when supply is short, or costs become a concern. This is the case when it comes to your next order, but also your contracts, where suppliers with whom you’ve taken a partnering approach are more likely to agree to price change mechanics that protect you from unpredictable price spikes.
In recent weeks, the tired discussion of “weathering the storm” or adjusting to “the new normal” has been amplified, but in reality the last few years -moreover the last few months- should be serving as reminders that these fundamentals need to become an organic way of how the procurement organization operates. We have all known this all along, but too many procurement organizations have found themselves in difficult positions when these practices were not adhered to as a basis for serving and delivering value to the organization. In some cases, this was due to taking the eye off the ball, but in many cases procurement organizations were dismantled, downsized, or suffered from unprecedented turnover. Again, these different challenges for a different blog! No matter what the case may be, consider that before you start reacting to what’s going on, make sure you’ve got your fundamentals firmly in place and then tailor your priorities and efforts based on that foundation. For more insight and guidance on how to ensure your procurement organization is performing optimally, contact Velocity Procurement at firstname.lastname@example.org.