The cost of living crisis has seen food prices rise following supply chain challenges © Matthew Horwood/Getty Images
The cost of living crisis has seen food prices rise following supply chain challenges © Matthew Horwood/Getty Images

How should procurement respond to the cost of living crisis?

15 July 2022

Soaring inflation has sparked a “cost of living crisis” across the UK, raising questions about how procurement should be responding.

The situation has manifested itself in rows between suppliers and retailers over how cost increases should be accommodated, as well as concerns suppliers are using the crisis to hike prices without justification.

“These costs are unprecedented throughout the whole supply chain,” Ged Futter, director at analysts the Retail Mind and former buyer at Asda, told Supply Management

“What has also never happened before is not just the scale, but it's the speed with which it hits the supply chain. Previously, you might have an agreement that was in place and 12 months – those agreements have been ripped up. 

“Previously, you might give a retailer three months' notice [of a price increase]. Now you might give a retailer three weeks' notice. That's the reality that the supply chains are having to deal with.”

When the suppliers stop supplying 

When Heinz and Mars stopped supplying Tesco in a pricing dispute after the suppliers said they needed to up prices in a bid to offset rising inflation, it raised questions over who should bear the brunt of the crisis: consumers or suppliers. 

Tesco took the side of the consumer, with a spokesperson saying: “With household budgets under increasing pressure, now more than ever we have a responsibility to ensure customers get the best possible value, and we will not pass on unjustifiable price increases to our customers.”

And indeed, research by Ivalua found 71% of procurement leaders said they suppliers had taken advantage of supply chain problems to unjustifiably increase prices. 

However, the issue isn’t clear cut. The UK’s small and independent businesses are facing record inflation, which is threatening their viability.

Butter brand Lurpak announced it was encouraging retailers to raise the price of its butter to create a “fairer” deal for farmers.

Lurpak's owner Arla Foods said: “We understand that recent inflation in food prices is hitting many households really hard right now. Unfortunately, our farmers are facing a similar situation with prices for the feed, fertiliser and fuel they need to produce milk, all rising significantly in recent months.

“While we don't set the prices on the shelves, we do work closely with the retailers to ensure our farmers receive a fair price for the milk they produce.”

Futter warned refusing to raise prices could have a long-term impact on the UK’s food security. “That, long term, will have a significant impact on our ability to be sourcing products in the UK. We are not a country who can be self-sufficient.” 

Nimble procurement more important than ever

So how should procurement leaders be tackling the cost of living crisis?

Martin McTague, national chair of the Federation of Small Businesses, told SM that SMEs are well placed to adapt to quickly changing inflationary environments. 

He said: “Small businesses are often able to be adaptable to shifts in consumer demands, which is helpful as the cost of living crisis intensifies and demand falls for big-ticket or higher-priced items. Nimble procurement is more important than ever, to avoid being left with less viable inventory.”

Joshua Nicholls, senior consultant at Proxima, told SM procurement teams must educate themselves to identify where price inflation is hitting the hardest to effectively combat the largest risks. Procurement leaders, he said, should also commit to longer-term contracts and conduct supplier price benchmarking reviews to offset inflationary increases.

He added: “Businesses can also look at implementing additional transformational controls to combat inflation, which may include changes to approval processes, thereby creating greater control over expenditure during difficult periods.” 

It is “vital” procurement teams respond to the cost of living crisis and the inflationary pressures, or risk weakening supply chains in the long term.

Nicholls said: “Rising costs have forced businesses to compromise on quality and even de-prioritise projects to keep within their budget. This is a dangerous game and it’s vitally important to secure the best value for money on any investment being made in the current market to ensure that costs do not spiral out of control.”

Ultimately, Futter argued, it all comes down to communication and relationships with suppliers. 

“Retailers need to go about the cost of living crisis in a grown-up way, by having conversations about how they can work closely with their suppliers to understand their supply base better,” Futter said. “Retailers need to take their heads out of the sand. They keep trying to deny this is taking place.”

Futter said longer term contracts can help mitigate disruption and foster stronger relationships with suppliers. “Procurement leaders must look at how they can give longer term contracts,” he said. “If a supplier has got a longer term contract, they can invest more, and they can invest to be more efficient. Then that efficiency can be shared throughout the supply chain.”

The issues reach to the heart of procurement itself. 

Futter concluded: “The role of the buyer is to understand their supply chain. It's their job to understand their supply base and to work with it, and to look further ahead at risk and do whatever they can to mitigate as much of that risk as possible. Where they can't mitigate it, they have to work with that supply base to find a way through it.”

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