So in 2022, we’re emerging from the pandemic amidst great uncertainty, As of today, procurement’s long-term future remains bright, even if things look challenging in the near-term. Over the next few weeks, Ardent Partners will look at the some of the macro-level issues that are generating the largest problems for Chief Procurement Officers and their teams today. Today we look at inflation.
Inflation: Global Impact
According to Investopedia, inflation is “a rise in prices, which can be translated as the decline of purchasing power over time. The rate at which purchasing power drops can be reflected in the average price increase [of the goods and services purchased].”
This year, we have seen unprecedented rates of inflation. For example:
- In January of this year, the consumer price index for all items rose faster than in any month in the last 40 years.
- The Consumer Price Index rose 8.2 percent in the year through September.
- Even when adjustments are made for energy and food costs, inflation is the highest it has been since the early 1980s.
- In the US, Central bankers have raised interest rates five times this year and are expected to make another big move at their meeting on November 2.
- While the bullets above are U.S.-based figures, inflation is a global phenomenon.
- According to the IMF, global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022
- Inflation in the U.K. remains at a 40-year high
- According to the WSJ, “Policy makers around the world see rising risks that the global economic slowdown could turn into a steeper slump due to strong inflation, high energy costs and climbing interest rates.”
While central banks and governments around the world are doing what they can to fight inflation (raising interest rates and setting policy) inflation is not expected to go away anytime soon.
Inflation: CPO Impact
While inflation is generally reported as a measure of consumer buying power, it’s impact on supply chains and procurement organizations has been equally severe. The biggest impact of inflation on procurement to date has been the huge drop in savings rates achieved in 2021 and 2022. In fact, heading into 2022, 24% of all CPOs made fighting inflation one of their top priorities this year. Additionally, the number of CPOs making savings a top priority this year has nearly doubled. Savings is not a great measure of procurement’s overall value, but in this year and next, it is much more important to CFOS and other executives. The increased demand for savings is directly connected to the high inflationary environment that began in 2021 and continues today.
There are many causes of inflation, but many goods and services are experiencing sharp price increases without a clear market explanation or rationale. To combat this, sourcing teams will have to act with greater vigilance and stretch their sourcing capabilities, supply market intelligence, category expertise, and core instincts to capacity as they try to manage and/or avoid major price increases across many categories. This is particularly true because, one large percentage of the recent price increases is not based in market economics. Some companies (and overall industries) are clearly taking advantage of the current market to raise prices aggressively.
Inflation’s impact on procurement can take many forms but generally fall into several large categories
- Higher costs
- Wage pressure
- Budget pressure
- Competitive pressure
- Revenue pressure
- Increased uncertainty
Procurement Must Lead the Fight Against Inflation
It is procurement’s imperative to lead the fight against inflation. Full stop. But, as business uncertainty persists and volatility remains at the highest level, classic inflation-fighting strategies may not be enough. Teams planning to address the risks and impact of inflation at their next quarterly category meeting could be too late. In today’s battle against inflation, speed and agility are everything… decisiveness is also critical.
Much in the way that risk events are most-effectively managed with a cross-functional approach. Inflation should be dealt with the same way, with resources drawn from all impacted areas. This can be achieved with the development of a what I am calling a “Rapid Response Inflation Hub” that tracks pricing, prioritizes risks and develops/executes agile strategies. From this hub, three key types of strategies can be developed and refined:
- Internal collaboration strategies
- Category intelligence strategies
- Advanced sourcing strategies
Within each of these areas, there are a series of strategies to use in the fight against inflation. We will come back and look at each of these areas in more detail, but we’re also going to develop an inflation-focused webinar in a few weeks. We’ll add the details here. Until then, keep up the good fight!
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