Steel is among the commodities where prices have risen ©PA Wire/PA Images
Steel is among the commodities where prices have risen ©PA Wire/PA Images

How CPOs should prepare for 'rough seas'

Will Green is news editor of Supply Management
7 June 2018

CPOs should be entering into long-term contracts, communicating with key stakeholders and consolidating the supplier base because procurement is facing “rough seas ahead”, according to a report.

In a report Alix Partners said CPOs should improve production methodology, increase two-way communication with suppliers and institute a “champion/challenger” model for all key categories, with 70-80% of business going to the champion and the remainder going to a single challenger to “keep both parties hungry”.

“Now is the time to prepare for a more inflationary cost environment,” said the report.

The report said the past decade had seen a period of disinflation, with prices driven down by the 2008 recession, globalisation and the spread of new technology.

“The traditional business models of many industries are being disrupted by technological innovation too, putting a cap on the ability to pass price increases on to consumers,” said the report. “For example, in the business-to-business space, the e-commerce giant Alibaba has already revolutionised the way smaller businesses source products, displacing smaller, local suppliers, and allowing access to a global supply chain.

“Meanwhile, procure-2-pay systems such as Ariba, Coupa, and Emptoris have provided transparency on the requisition, receiving, and paying of goods and services and have improved internal controls, giving procurement teams further leverage when negotiating with suppliers.”

However, the rise of protectionism and a potential trade war, increasing commodity prices, stronger demand for certain goods and services and a reduction in the business benefits of globalisation, as labour markets in low-cost countries tighten and costs rise, mean “storm clouds” are on the horizon.

The report also recommends:

• Exploring strategies including lowering product specifications, cost workshops, zero-based budgeting and the appointment of a “spend tsar” to “temper demand and consumption of goods and services”.

• Employing dynamic inventory management to increase levels of goods where prices are rising and lower them as prices drop.

• Developing a clear and ongoing communication strategy with stakeholders.

• Instituting a price increase approval process with vendors.

• Executing a “cost-to-price” initiative by assembling a team to “understand the direct relationship between input-cost inflation and necessary customer price increases to maintain or improve product margins”.

• Holding a supplier conference where suppliers are given indicative cost-reduction targets and asked to come up with ideas.

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