In today’s economy, several factors contribute to rising prices. Wage growth, increased demand for goods and services, supply chain shortages, trade tariffs, and world-shifting events like pandemics can all significantly impact the cost of doing business. This puts financial pressure on various business functions and can be particularly frustrating for those responsible for managing spend through the procurement process.
In 2020, inflation rates started to rise. Although gradual at first, inflation rose substantially over the next two years, reaching a peak of 9.1% in June 2022. Since then, inflation has cooled—March saw rates of around 5%—but businesses still deal with bloated prices, making it difficult to run a cost-effective operation.
How Visibility and Collaboration Support Procurement
An effective procurement strategy’s most important aspects are visibility and communication between departments. Your entire organization needs to work in tandem to establish transparency regarding overall spending. By addressing individual components from each department, you can gain greater insight into your total expenditures. This allows you to identify areas where costs could be reduced or improved. For example, it may indicate that you need to introduce alternative suppliers or renegotiate your contracts with existing ones to maintain your bottom line.
Communication is also crucial to managing spend during inflationary periods, as stakeholders in your organization need assurance that their purchases are being managed effectively against budget constraints and price increases. Stakeholders need data-driven insights about any potential risks or opportunities within the supply chain so they can make informed decisions on how to best allocate resources against changing market conditions.
Discover how an effective spend management solution can support your strategic sourcing initiative. Explore Velocity’s full-service approach to data, market intelligence, and cost-effective procurement.
Implementing a Procurement Strategy Framework
With this in mind, it’s essential for organizations looking to reduce their total costs to develop a comprehensive procurement strategy framework that encompasses both visibility and communication initiatives across various departments within the organization, including finance, operations, legal, and HR. It should also include your suppliers.
A successful procurement strategy framework should include clear objectives that work toward achieving total cost savings. Some of these objectives should include:
- Strategic sourcing of goods and services at competitive rates
- Minimizing risk exposure
- Supply chain relationship management
- Benchmarking processes
- Performance metrics
- A comprehensive data strategy
- Employing automation
Five Essential Strategies for Effective Procurement During Inflationary Times
Here are a few key strategies that source-to-pay organizations should consider when implementing a successful procurement strategy framework:
1. Leverage Data Analytics
During inflationary periods, organizations need enhanced visibility into pricing trends across multiple channels—such as direct and indirect spend—to compare market rates versus internal benchmarks. Effective use of data analytics will provide insight into where your costs originate from as well as any potential opportunities or risks associated with price fluctuations. This enables you to respond to economic challenges quickly and effectively. For example, thorough analytics may reveal opportunities to consolidate suppliers in certain spend categories, allowing you to lower costs in that area of your supply chain.
2. Establish Clear Supplier Management Processes
Having visibility into strategic supplier performance metrics enables your organization to identify areas where improvement is required—whether that be the quality of materials, delays in delivery, or discrepancies with quotes supplied—so that they can be resolved before they disrupt your operations. Building strong supplier relationships based on trust and mutual understanding can lead to more favorable terms when rate hikes might occur due to rising resource costs.
3. Automate Workflows
When it comes to optimizing cost efficiency during times of heightened financial pressure, automation technologies can offer significant advantages over manual processes. Automated invoicing, payment processing, PO approvals, and more can all help improve your efficiency by enabling teams to prioritize more mission-critical tasks. This ultimately leads to faster resolution timeframes and lower administrative costs.
4. Monitor Contract Compliance
Regularly reviewing your contracts with existing suppliers is especially important during inflationary times. Key terms such as rate hikes might not have been negotiated upfront, which can lead to higher-than-expected costs down the line. Having robust contract compliance controls in place helps you ensure adherence to contractual terms while maintaining healthy, sustainable relationships even under challenging economic conditions.
5. Empower Your Employees
To mitigate the effects of inflation, it’s essential that you utilize training programs and tools that enable employees to understand supplier capabilities, purchasing policies and procedures, and industry trends to optimize your organizational buying power. Taking this proactive stance not only helps you navigate economic challenges and keep costs down but helps you stay ahead of the competition.
Develop Your Procurement Strategy With Velocity
At Velocity Procurement, our goal is to align your people, processes, and technology with your overarching business strategy so that you can experience continuous improvement, even during times of inflation.
We understand the challenges of sourcing materials and services during high inflationary periods. That’s why our team of procurement professionals is here to help you navigate these difficult times and develop a comprehensive procurement strategy tailored to your unique needs. We’ll collaborate with you every step of the way, from developing an integrated procurement network to establishing robust supply chain management practices.
Get in touch with us today to start your journey.