Author: Brett Knox
August 11, 2023 - 3 MIN. READ
Dealing with the effects of inflation on procurement activities is undoubtedly a challenging task. One of the major consequences is the increase in raw material costs due to global inflation, ultimately resulting in higher procurement expenses. Gaining a thorough understanding of how inflation impacts raw materials can greatly enhance your ability to make well-informed procurement decisions.
What are the effects of inflation on procurement activities?
Short-term inflation can cause a sudden increase in raw material prices as demand ramps up or supply decreases. Long-term inflation can lead to declining currency values, which makes imports more expensive and exports more competitive. The latter can further drive up raw material prices as suppliers want to remain profitable. Inflation can also affect production costs, including labor and energy expenses, which can drive raw material prices up even more.
In 2023, 63% of firms expect short-term supply risk, and 73% expect long-term supply risk. In response to such risk in 2022, many businesses (increased their inventory (76%)) boosted their supplier numbers (75%), and sourced more supplies from domestic suppliers (76%). While inflation in the United States in 2023 has eased some from inflation in 2022, inflation for food was 9.5%, for energy 5.2% and for fuel oil 9.2%.
The persistence of inflation also prompts central banks to raise interest rates, which increases the cost of borrowing money and, in turn, affects costs all along the supply chain by impacting such things as cash flow, operations and inventory expenses, investments and logistics.
Overall, inflation can create a volatile environment for raw material prices, making it essential for businesses to monitor market conditions and adjust their strategies accordingly.
Strategies for Dealing with Procurement impacted by Inflation
To deal with inflation during procurement, companies must develop strategies to cope with rising costs. For the short term, the goals should be to ensure supply and price stability and minimize costs. For the long term, they should focus on implementing new procurement strategies such as the ones we suggest below.
Develop Alternative Supply Sources
One important strategy for dealing with inflation is to establish alternative supply sources. The benefits of this, in addition to lessening the impact of inflation, can include lowering the danger of supply disruptions, providing an opportunity to negotiate better prices, gaining access to new markets, and cutting the costs of transportation.
Digitize Operations
According to Emerging Europe, supply chain expenses can account for 50% to 60% of a firm's operating costs. Employing digital technologies and services can, among other advantages, allow managers to identify potential problems quickly and make adjustments to prevent a supply disruption.
Negotiate Prices
Negotiating prices is also crucial during procurement. Companies should always aim to get the best price for their raw materials. This can involve negotiating with suppliers, exploring different payment terms, and seeking discounts or deals to reduce costs.
One tool that can help with price negotiations is a should-cost analysis. This analysis allows you to research the drivers behind cost increases and understand what a service or product “should cost.” For instance, if a supplier’s materials cost increases by 3% but the firm charges 15% more, there is room to negotiate a lower price. Inflation affects everyone, and if suppliers are willing to have a conversation, the cost of inflation can be shared.
Leverage Potential Savings
Another way of dealing with the effects of inflation on procurement activities is to consider three potential savings levers:
- Price -- Consider what pricing levers you might use to obtain the best value. These can include extending current deals, ensuring that your bids are fully competitive, renegotiating with current suppliers, creating, or participating in a purchasing group or seeking protection from future price hikes.
- Process -- Examine aspects of your procurement process such as lifecycle cost management, order size and compliance to make sure it maximizes value.
- Demand -- Brainstorm how you might affect the demand or the need for a certain good or service. You might, for example, consider things such as optimizing your schedule, reducing complexity, or rationalizing certain SKUs.
Again, given inflation's impact on raw materials procurement, it is essential for companies to develop strategies to cope with rising costs, especially exploring alternative supply sources, and negotiating for the best possible price. By understanding the impact of inflation on raw materials and creating effective strategies to deal with it, companies can continue to procure the raw materials they need to maintain their operations.
Outsource to Save Time and Money
Sourcing alternative suppliers, negotiating prices with new and existing suppliers, and evaluating digital purchasing platforms to improve productivity not only takes time but requires dedicated resources. Instead of doing all this yourself, join a group purchasing program like Raiven to save you time and reduce costs.
Raiven has over $500M in aggregated buying power that it uses to negotiate deep discounts and superior service terms with industry-leading manufacturers and distributors. Companies like Raiven ensure you are receiving the lowest prices on equipment, parts, and maintenance supplies as well as a proven purchasing platform that makes buying fast and efficient. Key benefits include:
- Pre-negotiated discounts that are generating average client savings of 7-25%+ from big name suppliers like Carrier, FedEx, Ferguson, Grainger, Graybar, Home Depot, HD Supply, Office Depot, and more.
- Supply chain alerts for price and product availability changes on the items that matter to you most.
- Private marketplace houses all your preferred suppliers in one location for easy access to your discounts. No more bouncing around websites comparing prices.
- AI-powered purchasing tools that find the lowest prices even when employees shop outside your network.
Raiven is your one stop shop to save time and money. Visit Raiven to learn what we can do for you.
Article Sources:
- https://www.thomasnet.com/insights/how-businesses-can-overcome-inflation/#:~:text=During%20a%20period%20of%20inflation,engage%20in%20should%2Dcost%20analysis
- https://www.mckinsey.com/capabilities/operations/our-insights/responding-to-inflation-and-volatility-time-for-procurement-to-lead
- https://www.insightsourcing.com/4-procurement-strategies-for-rising-inflation/
- https://tradingeconomics.com/united-states/inflation-cpi
- https://kpmg.com/be/en/home/insights/2021/12/ta-raw-material-price-inflation.html
