Procurement

How supply chain disruption and inflation impact procurement


Over the past two years, the global pandemic has exposed existing weaknesses in global supply chains—high consumer demand and increasing supply chain costs have created difficulties in procurement worldwide, with soaring inflation impacting business spend and, ultimately, profitability [1].

Countries rely heavily on imports, and, as Willy Shih, economist at Harvard Business School, states: “Global supply chains have really brought us a cornucopia of products that we might not otherwise be able to have as much variety of, or as attractive a cost. When you buy a product off a store’s shelf or online, that’s the tail-end of the journey that might have begun a year ago, in a factory that might be half a world away.” [2]

e-Commerce has made it seem like ordering goods online is easy—with a few clicks on a screen, a package can be delivered to your doorstep. However, behind the scenes, those goods undergo a complicated process that usually happens with few glitches, for millions of orders each day worldwide. Despite all the automation we have today, goods are usually shipped hundreds or thousands of miles, handled by hundreds of people (sailors, truck drivers, warehouse workers, delivery drivers, and more) on their journey, and moved into stores and homes to meet unparalleled high consumer demand and meet convenience expectations.

The impact of the pandemic on procurement and supply chain management

However, the effects of Covid-19 and other global events caused unpredictable workforce problems on a global scale—quarantine, isolation, social distancing, and mass sanitization measures in the workplace meant that the stakeholders in the global supply chain could not work as efficiently as they did pre-Covid. These capacity constraints had the ripple effect of product and labor shortages, and wage increases. This, in turn, led to raw material cost hikes. This creates the perfect storm, with all these factors contributing to inflation rising dramatically.

In this article, we’ll examine how procurement and supply chain management within businesses can prevail in these difficult times.

Inflation

The USA is facing an inflation high, with price gains month-on-month exceeding those seen in the 1980s.

The US Consumer Price Index (CPI) increased by 5.4% for the 12 months preceding June 2021, which was the highest CPI increase since August 2008 [3]. European inflation also increased beyond the European Central Bank’s target of 2% by May 2021. In addition, the Producer Price Index (PPI) surged to 7.8%, the highest increase since this measurement came into effect in November 2010 [4]. The PPI is often seen as an earlier predictor of inflation than the CPI, since it measures price changes (the average change in selling prices over time, received by domestic producers of goods and services) before they reach consumers.

With the world believing that the 2021 CPI and PPI figures were the worst of what we could expect, the CPI report in February 2022 showed that prices rose a further 7.9% compared to the previous year— corroborating the highest annualized growth in CPI inflation since January of 1982 [5].

As Catherine Rampell, a columnist for the Washington Post, explains—inflation is a self-fulfilling prophecy, as people expect it to continue. Businesses expect the cost of goods and services to increase, so they preemptively raise their prices. At the same time, members of the workforce expect their expenses to increase, so they demand higher wages. If stakeholders across the board raise prices and wages in anticipation of higher costs congruently, inflation becomes self-fulfilling, and consumes wage gains.

To combat this cycle, businesses need to manage their expectations of procurement and supply chain management and how their costs will increase. Doing this will not only improve their procurement strategies, but will also aid in normalizing national interest rates and inflation [1].

Supply chain disruption

As many as 94% of Fortune 1000 companies are experiencing supply chain disruption because of the pandemic, while 75% report that their business operations have been negatively impacted. A further 55% even plan to downgrade their outlook on year-on-year growth or have already done so [6].

Mid-market companies have had even more of a challenge, showing a negative 1.2% growth in gross revenue in Q4 of 2020, then adapting to supply chain disruption and inflation to hit 8% growth in Q2 of 2021, rising to 12.3% in Q4 of 2021. In December 2021, Chubb and the National Center for the Middle Market surveyed 1,000 executive-level employees across mid-market companies, to enable the middle market to understand business trends and risks. The survey showed that despite growth in gross revenue at the end of Q4 2021, up to 67% of mid-market companies reported doing somewhat better than before the global pandemic [7].

Christine Romans, author, correspondent, and anchor for CNN, points out that demand for goods is unbelievably high worldwide with the pandemic and other factors causing astonishing purchasing behavior, and, due to the demand surge, businesses are raising prices. With the supply chain as snarled as it is, keeping up with this demand has become a grave issue [1].

As locally made goods are usually more expensive (the US has higher wages compared to other countries, for example), parts or materials tend to be imported and then assembled nationally, rather than being wholly manufactured in the US. Globalization has enabled middle-class communities to afford goods previously only available to upper-class sectors of society, but the disruption in global supply chain management has led to a smaller selection of goods, at higher prices.

According to Matt Egan, CNN reporter for business, the economy, and financial markets, making forecasts for supply chain management is difficult and largely inaccurate in the current global climate. This is due to numerous factors, such as:

  • Unforeseeable changes in the pandemic
  • The Russia-Ukraine conflict
  • Rising oil prices
  • And other interacting factors working against accurate predictions

Procurement challenges

With multiple organizations worldwide downgrading their outlook on growth because of supply chain disruption and inflation hikes, resilience becomes a major challenge to be overcome, as change is the only constant. Procurement and supply chain management is key to developing resiliency, as these two functions orchestrate the operations between an organization and its suppliers.

Malcolm Harrison, the group CEO of the Chartered Institute of Procurement and Supply in the UK, says that resilience and value have always been the predominant goals for all procurement and supply chain professionals [7]. However, organizations have also tended to focus on strong (and often single-sourced) supply chains that have worked so efficiently over the past several decades that their one-dimensionality and increased business risk has gone unnoticed.

Patrick Van Hull, an industry thought leader at Kinaxis (a global supply chain management company) points out that this precarious, one-dimensional system has now mutated into a business profitability issue, where the focus is on “quick fixes and last-minute saves”, rather than long-term agility [7].

How to combat the challenges of procurement and supply chain management

There are several ways in which organizations can combat challenges and mitigate procurement and supply chain management risks, ensuring resilience while maintaining growth over the long term.

Cross-functional collaboration

As the collaborative authors at McKinsey point out, failing to synchronize procurement plants across multiple functions in an organization can have long-reaching negative consequences [3]. Rather, organizations should build an infrastructure of cross-functional roles to enable rapid collaboration and action on multiple projects, focusing on handling the rapidly changing costs associated with procurement today.

An end-to-end operating model across functions will ensure that market uncertainty is dealt with timeously, while mitigating the impact of inflation and supply chain disruption on production and/or distribution.

This promotion of internal alignment improves supplier transparency. When procurement, finance, operations, and engineering regularly communicate to align their strategies for supply and demand balance, cost management becomes a priority for businesses and suppliers alike.

Negotiate with suppliers

Relying on single sourcing is no longer an option in this economic climate. Rather, your organization should aim to create as many valuable supplier alternatives as possible, even substituting your procurement strategies with lower-cost substitutes to put pressure on approved suppliers, and to discover better suppliers with lower prices [4].

As part of this process, you could also renegotiate your contract terms with existing suppliers. Fact-based discussions about longer-term agreements or purchasing volumes, along with negotiating index-based pricing terms (based on CPI and PPI) will improve resilience, mitigate risk, and reinforce organization cost management.

Dr Alireza Shokri, an associate professor in operations and supply chain management at Northumbria University, states that collaborative supply chain risk management enables you to build trust with your suppliers, strengthen relationships, and develop prevention and mitigation strategies for times of disruption [7].

Digitalize procurement

Van Hull affirms that organizations that invested in digital transformation before the Covid-19 pandemic financially outperformed industry averages and maintained their competitive edge during the pandemic.

Autonomous procurement, or procurement where processes are automated, empowers organizations to manage spend intelligently, allowing machines to carry out procurement work and let people focus on developing strategic relationships with suppliers [8]. These digitalized business networks assist in making teams more productive, essentially improving innovation so that future supply chain disruption has fewer impacts on procurement in organizations.

Examine expenses

To mitigate the impact of inflation on organizations, procurement professionals can critically assess their sales, general, and administrative expenses [9]. This includes tackling:

  • Discretionary spend
  • Consulting and services
  • Direct spend
  • And tail spend

Controlling costs and eliminating rogue spend not only improves the bottom line in an organization, it also allows for more working capital to invest in long-term procurement strategies.

How a spend management solution can ensure procurement resilience

Cloud-based procurement software that proactively manages spend, is one of the key defenses that your business can employ to combat the impacts of inflation and mitigate supply chain disruption risks.

End-to-end operating model for procurement

With cloud procurement software, teams from different departments within your organization can have access to business-critical systems, including factors such as:

  • The ability to access their procurement software from any location, from any device—which is crucial in today’s remote-enabled workforce.
  • Requisitions on-the-go, for all request types, from purchasing to expense claims.
  • Real-time updates on requisitions, approval workflows, purchasing, and invoicing.
  • Effective supplier management, catalogs, and PunchOut capabilities.
  • Centralized purchase orders generated digitally, with attachments uploaded for streamlined processing.
  • Change orders for streamlined procurement when supply chain management is impacted by global events and disruptions.
  • Two- or three-way invoice matching for reduced procurement cycle times and greater accuracy.

Digital procurement analysis

Procurement tools facilitate visibility over spend, with built-in analytics for spend by:

  • Employee
  • Budget
  • Department
  • Transaction
  • And vendor

This enables your organization to apply budget adjustments where needed in today’s agile environment, as well as provides supporting data for negotiation and relationship-building with suppliers.

This analysis of spend during your procure-to-pay cycle allows you to make informed business decisions, identify inefficiencies, and address any risks to procurement.

This data visualization should include:

  • Budget pop-ups and dashboards for financial period or departmental budgets, employee spend, transactional spend, and spend by supplier
  • Budget vs actual spend analysis
  • Real-time insights into costs and risk factors
  • Intuitive reports on all spending activities

Supply chain management

When streamlining your procurement strategies, you need to focus on improving your supply chain management. This includes identifying how many suppliers your organization purchases from, how much they are charging you (and whether it’s in line with current inflation), and which of your suppliers provide the best value (and are most sustainable to develop relationships with) in your organization.

Spend management or procurement software allows you to enhance supply chain management, by providing the following:

  • Business intelligence and reporting tools for visibility over supplier management
  • Efficient supplier consolidation
  • PunchOut catalog integration for business-only pricing and volume discounts, confidence in supply, assured shipping, and order fulfillment
  • Contract compliance for improved supplier relationships
  • More streamlined accounts payable processing, with approved suppliers and payment terms already in the system

Saving on time and cost

Integrated, digital procurement and spend management solutions provide you with an opportunity to optimize your supplier base, eliminate time-consuming paper-based processes, and ultimately save time and money.

The procurement software should provide you with the following time and cost savings:

  • Automated email notifications
  • Configurable cost allocation and approval workflows
  • Streamlined submission of requisitions and expense claims
  • Electronically managed quoting and approvals
  • Automatic purchase order generation and delivery to suppliers
  • On-demand multi-device accessibility and mobile process efficiency

Fraxion: Providing you with digital procurement tools to limit disruption and ensure resilience

Procurement and supply chain management does not need to be challenging in these times. Take advantage of the features and tools offered by cloud procurement software to digitize your processes, manage your suppliers, and extend visibility and control over your spend.

With effective procurement tools like Fraxion’s complete solution for proactive spend management, you can elevate your processes and achieve your cost containment objectives.

Contact us to arrange a custom demo of how Fraxion can assist you with procurement efficiency and business resilience.

References

[1] M. Egan, C. Rampell and C. Romans, Interviewees, The Impact of Inflation and Supply Chain Issues. [Interview]. 9 February 2022.
[2] C. Mims, “CHAIN REACTION: Why Global Supply Chains May Never Be the Same,” Wall Street Journal, New York, 2022.
[3] J. Basar, R. Belotserkovskiy, T. Burns, M. Mussacaleca, A. Thoma and J. Vandaele, “Responding to inflation and volatility: Time for procurement to lead,” McKinsey & Company, New York, 2021.
[4] D. Hayes, “Building resilience: 3 ways your Procurement team can protect itself against inflation,” ProcureAbility, Jacksonville, 2021.
[5] T. Tepper, “Why is inflation so high?,” Forbes Advisor, Jersey City, 2022.
[6] Accenture, “Supply chain disruption and how to respond,” Accenture Insights, Chicago, 2021.
[7] Chubb, “Middle Market Indicator: Market Dynamics Outlook 2021 Year-End,” National Center for the Middle Market, Columbus, 2021.
[8] O. Pickup, “Five ways to better manage supply chain disruption,” Ranconteur: Content for business decision-makers, London, 2021.
[9]S. Galer, “How Procurement Leaders Are Weathering The Staggering Costs of Supply Chain Disruption,” Forbes Innovation, Jersey City, 2021.
[10] Procurious HQ, “Is Inflation Killing Your Supply Chain?,” Procurious, Guildford, 2022.

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