The high inflation of the last months, which is comparatively moderate in Switzerland, makes work extremely difficult for many purchasing managers. It is driving up the direct costs of labor, energy, materials, and transportation, making goods more expensive to produce, store and ship. Central banks have raised interest rates, so cheap money is no longer available. Rising prices result in less income available to consumers, which reduces demand for goods and services. Inflation-related cost increases tend to have a cumulative effect on the supply chain, and if your business is affected by such increases, you should quickly recognize the impact and know how to respond.
Procurement departments usually can’t control all spending, but they can influence it significantly. Working in an inflationary economy affects everyone in the same way, so it makes sense to pull together. The following strategies can help you succeed despite high inflation:
Procurement can create frameworks that ensure low-value purchases are handled by the company itself. This allows teams to focus on higher value processes earlier in the process, such as negotiating the best possible terms, working with alternative potential suppliers, or optimizing specifications and service levels.
Working even more closely with current suppliers can help identify areas where procurement can influence pricing or change specifications to reduce costs. Packaging, materials, and transportation are critical areas to consider.
Examine the resilience of your supply chain and conduct a thorough risk assessment of critical suppliers and their subcontractors to determine what risks could impact your supply chain and your company’s resilience. High inflation rates could put some suppliers in financial distress or cause them to change their behavior.
A supply chain stress test allows companies to identify potential financial risks, determine mitigation measures, and compare their resilience to that of competitors. It assesses resilience holistically based on a variety of factors: for example, industry attractiveness, business resilience, supply chain exposure, business operations, and customers. Using disruption scenarios, including variants and combinations, companies can understand their key cost drivers and where significant losses could occur through increased costs and supply disruptions. This raises awareness of supply chain risks, identifies potential gaps, and enables the implementation of appropriate strategies to increase resilience.
With more working capital, companies can buy in larger quantities and plan ahead to achieve lower effective prices. To gain a competitive advantage, companies must first know where all their spending is coming from and who approved those purchases – whether it’s marketing, the product team, legal, HR, and so on. Without comprehensive understanding of the nature and scope of the transaction history, it is not viable to protect against errors, such as unauthorized or duplicate payments. Given the current high cost of raising capital through debt, having the highest possible level of visibility across all departments and business units provides clarity on what needs to be paid and when.
Until now, rising, and high inflation has been more of a theoretical concept than a reality for most of us. It will accompany us for a long time and procurement managers should be prepared and learn from it. With the right strategies, you can be more proactive and flexible, which is essential to manage economic ups and downs.
Do you have any questions? Feel free to contact us: CONTACT