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©Getty Images

How to procure with less market power

Will Green is news editor of Supply Management
3 December 2021

After decades of benign inflation and low interest rates, we ask how buyers can maintain control over soaring prices in a scenario they may have never encountered before

Everyone is talking about a ‘perfect storm’ and the list of supply chain snags is growing longer by the week. Challenges include the effects of the pandemic, shipping costs, chip scarcity, the lack of HGV drivers, labour shortages, gas prices, the CO2 crisis and the Suez Canal blockage – each adding another layer of complexity. Opinions differ on how long this period of shortages and inflationary pressure is likely to last; however, most agree it will continue into 2022 and is likely to reach a peak this December.

Individual sectors aside, the OECD has predicted that consumer price inflation across the G20 will hit 4.5% at the end of 2021 before dropping to 3.5% at the end of 2022 – still above pre-pandemic levels. In the UK it is expected to reach 3.1% in 2022 against the Bank of England’s 2% target.

Additionally, in a CIPS survey of 318 supply chain managers 80% said they have experienced shortages this year and 58% have had to over order stock. Managers also reported having to increase prices or stop selling certain products altogether.

Duncan Brock, CIPS group director, says: “It is becoming apparent that the shortages hitting the UK are a longer-term issue which will not be solved overnight. However, completely resetting your supply chain to replace distant suppliers with local ones is a complicated process which can make many months or even years.

“Businesses need to factor shortages into their business planning for at least the next few months to ensure they can manage their stock and processes correctly.”

Manage rising costs

Procurement association Casme has also been conducting research with its membership. Graham Crawshaw, services director, collated feedback and says the top strategy their members employ to counter inflationary pressures is shortening the duration of validity of a supplier’s quotation. Shifting the period from 30 days to 15 would take the pressure off a supplier that may be trying to account for future volatility and allow it to be more accurate.

The second most popular response was agreeing to a price rise but delaying it by around two months. Next was using price indices for commodities, including fuel and paper pulp, so prices fluctuate in response to the market. Then agreeing to a price rise but seeking additional services or value from the supplier in another way. The final strategy was holding a price but agreeing to extend the contract.

What was clear from the research is that giving a straight ‘no’ to a supplier’s request for a price rise is unlikely to result in success. “If you just say, ‘I’m not accepting the price increase’, that could jeopardise the supplier wanting to supply you if they’ve got other customers that are being a bit more flexible,” says Crawshaw. Still, price rises from a supplier should not be accepted without question. As soon as the word ‘inflation’ starts hitting the headlines, companies may see it as an opportunity to ratchet up prices.

“We have seen suppliers use increasing fuel or component costs to apply the percentage increase to the entire cost of the product,” says Dawn Tiura, president of Sourcing Industry Group, a membership association for sourcing executives. If you run out of options to maximise total value when negotiating price with a supplier, the next best thing is to change your demand pattern. “Incorporating a demand management programme to analyse product demand will also help you understand your demand pattern and make long-term decisions that eliminate unnecessary costs and help you stay ahead of inflation,” Tiura adds.

Invest in people

“When business is stable and moving along nicely, you can get away with a lean strategic procurement team,” says Gareth Thomas, senior manager at IT services and software firm Delaware UK. “When instability rears its head due to a forecasted prolonged inflationary period, increased effort will be required to go out to suppliers and engage with them.

“To achieve this, you are likely to need to bolster your team to allow strategic buyers to focus on their suppliers while you have further resources to take over other activities that are more administrative in nature. This will allow you to focus on those important conversations and negotiations.”

Although this will require conversations with board members about resourcing, these days greater value is being placed on communication with stakeholders. Well-informed executives should be aware of economic conditions because, as Thomas puts it: “No one likes surprises.” He recommends keeping a constant open dialogue with the C-suite on potential costs and price forecasts: “Don’t keep anyone in the dark. These actions will permit your organisation to assess and plan for the impacts on other integrated process areas, such as sales, manufacturing and inventory management.”

Tiura emphasises the importance of having a process to respond to price fluctuations: “Within your team, establish a process for responding to price changes that includes a proactive strategy for mitigating changes, handling negotiation and determining financial impact. Having an overarching process in place to manage inflation can help teams communicate with key stakeholders internally and externally more efficiently without causing unnecessary strain.”

Now might also be the time to consider how technology could make your life easier. According to Alan Holland, CEO at sourcing software firm Keelvar, cancelled contracts are on the rise with procurement teams “scrambling to find new suppliers and forced to spot bid”. Therefore, he says, “speed is the key” in these circumstances. “Professionals faced with supply shortages should automate and optimise the sourcing function to streamline the search for – and the awarding of – contracts to new suppliers. With the right technology, teams can set up a bid event within seconds and run hundreds simultaneously. Technology can analyse price and non-price information and suggest various awarding scenarios while balancing cost, quality, risk and other factors.”

Good relationships reduce risk

One thing all agree on is the importance of supplier relationship management during difficult times. According to Thomas, procurement professionals are essentially “salesmen in reverse” so if you don’t have an effective programme of ongoing engagement with your suppliers, do this first. “Once they’ve been awarded a supply agreement, don’t just react to them when something goes wrong. Maintain a constant dialogue between both organisations so the supplier’s representative will not find it uncomfortable to broach possible difficulties and will raise them at an early stage,” he says.

Thomas also recommends spreading risk with quota agreements so core materials require sourcing from at least two suppliers – with clauses for emergency ramp-up of supply should one not be able to fulfil its obligations. For tendering, embark on your RFx with a scoreboard of criteria mandated as a central component of your decision-making process.

“Ensure the criteria include total cost of ownership, as well as the impact of margin,” he adds. “Remember that while it might be great to have a healthy margin due to cheap components, cheap often comes with quality issues and instability. A great margin is no good if you can’t make the products to sell.”

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