While buyers have had to manage rising commodity prices over the past decade, a whole generation of buyers have had no experience of high levels of inflation and significant price increase requests across all spend. For their more experienced colleagues - who were at work in the 1970s and 1980s - dealing with such requests was a part of daily life.
So what’s behind this new inflationary environment? Over-spending by Western economies resulting in massive debts, compounded by huge government bailouts, was always going to feed through into higher prices.
This high debt and low interest rate environment has led to a significant fall in the exchange rate resulting in higher import cost, and now as economies begin to recover increased demand for commodities fuels these inflationary pressures further.
It is predictable suppliers will seek price increases based on these factors to protect their margins. The stakes are high as the process of settlement will impact the margins of both buyer and seller. The ability to drive a mutually beneficial outcome will separate the leaders from the laggards.
So what should CPOs be doing to ensure their teams shine in this inflationary climate? Here are five steps leaders must take to prevent inflation destabilising the results of their past success.
1. Manage expectations.
It is vital the CPO engages with senior management to set their expectations of price movements. Cost increases should not come as a surprise to them, so get them ready to accept realistic pricing. You must also condition your own supply base to manage price increases from their own suppliers and develop a relationship based on continuous improvement. Introduce a 90-day notice period for any price increases to allow for a negotiated outcome.
2. Ensure you have a process.
Introduce a process to enable you to respond when suppliers announce increased prices. The emphasis is on respond, as buyers should never passively accept a price increase request. It is your duty to challenge, validate, offset and negotiate any increase in price.
3. Draw up a strategy.
Don’t wait for suppliers to ask you for price increases before taking action. Proactively forecast the financial impact of inflation on a category-by-category basis, including when you think it will take effect. Develop countermeasures and mitigation strategies ahead of any price request.
4. Build capability.
Seek management support for building increased capability in your team to challenge and manage suppliers who are raising prices.
5. Communicate effectively.
Just as procurement reports cost savings, it should report price increases. And as important as the impact of any increase is the justification of the rise and why the organisation should accept it.
The risk of doing nothing is high, but with every threat comes opportunity. Here, it is to shine and remain on the CEO’s agenda. So be prepared.