Inflation is on the rise. In 2020, inflation rates in the US were at their highest levels since 2008. In 2022, prices rose more than 9% over the course of a calendar year, the largest increase in 40 years. This is due mainly to significant fluctuations in supply and demand since the start of the COVID-19 pandemic.
The impact of rapid inflation has been felt across all industries, with essentials such as gas, electricity, and food becoming much more expensive. These escalations erode your procurement organization’s buying power, making it challenging to stay within budget and obtain quality goods and services at favorable prices.
The Effects of Inflation on Your Procurement Organization
With rising prices and eroded purchasing power, inflation can significantly impact your procurement organization. Understanding these effects is crucial for devising an effective procurement strategy to protect your source-to-pay organization.
- Increased costs: Inflation leads to higher prices for goods and services, directly affecting your procurement costs. As suppliers pass on increased expenses to customers, your organization may face higher prices for raw materials, components, transportation, and other inputs. This can strain your budget and make it challenging to maintain profitability and competitive pricing.
- Limited buying power: As mentioned above, inflation erodes your purchasing power. The same budget that previously allowed you to purchase a certain quantity of goods or services may no longer stretch as far. As a result, you may need to make difficult choices, potentially compromising on quality or quantity to align with budget constraints.
- Supply chain disruptions: Inflationary pressures can also disrupt your supply chain, impacting your procurement processes. Suppliers may face difficulties procuring raw materials, managing production costs, or meeting increased demand. These disruptions can lead to delays, shortages, and increased lead ties, affecting your ability to fulfill orders and meet demands.
- Supplier relationships and performance: Inflation can strain your relationships with suppliers and impact their performance. Your suppliers may struggle to manage their own rising costs, leading to challenges in meeting delivery schedules, maintaining quality standards, or offering competitive pricing. Maintaining strong supplier relationships becomes even more crucial during high inflationary periods, as it allows you to ensure a reliable supply of goods and services.
Explore Sourcing Strategies
5 Procurement Strategies to Protect You From Inflation
Foster Internal Alignment and Transparent Supplier Relationships
To protect your organization from inflation, it’s crucial to encourage internal alignment between your procurement department and other departments. By working collaboratively, you can align your procurement objectives with overall business goals and strategies. This alignment enables you to anticipate potential inflationary pressures and take proactive measures to mitigate their impact.
Furthermore, establishing transparent, open communication channels with your suppliers is essential for navigating inflationary pressures. Encourage suppliers to share information about their cost structures, such as raw material prices, labor costs, and transportation expenses. This allows you to better understand the factors contributing to price increases and identify areas for negotiation or alternative sourcing options.
Actively Engage Your Suppliers and Perform Quick Bids
Regularly revising and assessing the supplier market is essential for leveraging competitive pricing and protecting your organization from inflation. Conducting sourcing events, such as request for proposals (RFPs) or request for quotations (RFQs), allows you to engage multiple suppliers simultaneously, encouraging healthy competition and driving down costs.
Additionally, implementing a quick bidding process can be an effective procurement strategy. These expedited bidding events focus on urgent requirements or specific categories, allowing you to obtain competitive bids and secure favorable pricing terms quickly. Quick bids are particularly useful during times of inflation when market dynamics and prices fluctuate rapidly.
Negotiate Favorable Contract Terms
Negotiating favorable contract terms is a powerful method for protecting your procurement organization from inflation. When drafting contracts with suppliers, consider including provisions that address price volatility and protect against unexpected cost increases.
One approach to this is to include price ceilings or caps that limit the extent to which prices can rise during the contract period. This helps mitigate the risk of sudden price surges and provides much-needed budget certainty. You can also incorporate inflation adjustment clauses in your contracts, allowing periodic price changes based on inflation indices or specific economic indicators.
Implement Robust Procurement Technology
In an increasingly complex and dynamic business environment, leveraging advanced procurement technology is essential for protecting your organization from inflation. Robust procurement technology solutions provide automation, analytics, and supplier management capabilities that streamline procurement processes, enhance efficiency, and drive cost savings.
By automating your procurement workflows, you can reduce manual effort and human error and enhance operational efficiency. And, with analytics capabilities, your procurement technology provides valuable insights into spending patterns, supplier performance, market trends, and more. Using these insights allows you to make data-driven decisions that mitigate the impact of inflation.
Harness the Expertise of a Procurement Specialist
Partnering with a procurement expert can provide invaluable support in navigating inflation and protecting your procurement organization. These experienced professionals possess in-depth market knowledge, extensive supplier networks, and expertise in optimizing your procurement strategy. By leveraging their knowledge and experience, you can stay ahead of inflationary trends, adapt your procurement strategy, and make informed decisions that protect your organization from rising costs.
Find Your Procurement Solution With Velocity
Ready to protect your procurement organization from inflation and optimize your sourcing practices? Take the next step toward success by partnering with Velocity Procurement, your industry-leading procurement specialist. Our expert team is here to guide you through the unique challenges of inflation, help you streamline your procurement processes, and achieve cost savings.
Get in touch with us today and unlock the full potential of your procurement organization.