The eye-watering, gut-wrenching 250% rise in the cost of wholesale energy since January is causing sleepless nights for millions in the UK, but for many CPOs, the pressures are reaching breaking point.
Energy price risk management strategy is nothing new to procurement managers, but maintaining steady manageable input operational costs through good buying practices was built on 30 years of manageable price inflation and the occasional peak and trough. The generation of business leaders that navigated the energy nightmare of the 1970s has long since had their feet up with their pipes and slippers, leaving many of the current crops in disarray and panic.
The supply chain sensitivity to energy prices has become glaringly apparent with the direct pass-through of costs from raw material sourcing to the consumer or whatever unlucky entity that finds itself carrying the can when it explodes. We need the energy to extract and process raw materials, we need the energy to convert them, we need the energy to heat the factories and we need energy to power the buildings that house the workers that sell or consume those products. The consistent predictable manageable input cost has become the price dictator and we can’t control the beast.
Or can we? Because in every crisis there is opportunity.
Energy was always the sleeping monster with sharp teeth that was going to eat CPOs for breakfast when it was finally woken. The signing of the Paris agreement in 2015 was the birth of a CPO energy problem that very few were aware of. The vast majority of our Scope 3 emissions are contained in the energy required for producing and converting the raw materials in the products we purchase. The reduction and elimination of as much of the energy used in the entire supply chain as we can achieve is the only solution to avoiding expensive and controversial carbon offsetting. It now transpires that reducing and eliminating as much of the energy cost throughout the entire supply is the key to business survival.
Being intrusive upstream in the supply chain to reduce and manage tier 1,2 and 3 supplier costs has been standard practice for procurement leaders for decades, but how many of us have end-to-end energy cost management strategies? How many of us have been accepting the energy inflation pass-through that suppliers have been unwilling to manage or swallow? The bitter pill of a 250% increase is simply unswallowable, so cost management is the only solution.
So don’t delay, now is the time to energise your end-to-end energy reduction and elimination strategy because the work you do now will:
- create profit opportunities in the short term.
- de-risk your business in the long-term; and
- help deliver the long-term environmental emissions commitments that you will be duty-bound to deliver.
If the cost of energy is keeping you up at night, why not contact David Moran, Consultant, Allison-Ford Langstaff, Managing Partner, 4C Services and Thought Leadership at 4C Associates to help kick start your supply chain energy management programme.
