Rising input costs are putting significant pressure on businesses to find savings within their P&L. External spending often makes up more than half of the cost in the P&L and suppliers are considered an easy target to squeeze some savings versus cutting internal costs. However, with suppliers themselves facing significant inflationary pressure, they are naturally pushing back on price reduction challenges and in many cases having to make decisions on which customer order they prioritise due to disruptions in their supply chains. In this environment, trying to squeeze out suppliers is a risky strategy. Nonetheless, as external spending is such a big part of P&L costs it would be foolish not to look for opportunities there. Here are my top 3 recommended areas for businesses to focus on during this time of inflation.
Priority 1: Internal Alignment
Having better control over how spending decisions are made should be the top priority. Most mid to large companies have a good handle on their direct input cost where procurement gets involved early in the sourcing decisions and is very much aligned with the factories and supply chain. But indirect spending is driven by functional budgets and alignment between procurement and functions can vary significantly. While categories like logistics, media buying and IT have seen significant maturity over the recent years, the rest of the categories like MRO, Marketing, Professional Services, FM, HR and Contractors are considered too complex or undermanaged. The key here is not just bringing procurement as and when the spending decisions need to be made but procurement, business and finance working together to draw a full picture of the overall spending and decide how to get the best value for money from the supply market.
Priority 2: Demand management
Often businesses consider the procurement role as very much a price and negotiation exercise which is seriously limiting the value that a strong Procurement perspective can provide Considering how procurement and supply chain professionals are interfacing with the external world as well as internal, they have a unique lens around how changes in demand can optimise the overall cost. Procurement can play a lead role in identifying specification optimisation opportunities as they understand what is impacting the cost as well as get insight and innovations from suppliers on reducing wastage. Finally, procurement should also look to lead the discussion with business and finance partners to reduce the spending by putting appropriate ROI based purchase controls in place.
Priority 3: Prepare for the fall
In my procurement discussions or supplier negotiations, I often use the old adage, “whatever goes up must come down”. We are seeing hyperinflation due to a lack of investment and disruption over the Covid period and the Ukraine- Russia crisis adding further fuel to it. However, higher prices will invariably lead to higher capacity and the normalisation of temporary disruptions should bust this hyperinflation cycle. While suppliers are pushing for price increases citing commodity increases and rising freight costs, businesses need to consider ways how they will reverse the prices as soon as prices start normalising. Suppliers won’t be coming forward themselves to pass on any benefit they will see in their cost unless businesses are tracking what price increases have been agreed with reason and having appropriate contractual or governance measures in place that allow for periodic review of prices in line with set metrics. Businesses should also carefully consider price change provisions in place in any long-term contracts, as generally, they get very painful to reverse any increases agreed upon in such times.
Should you wish to discuss any aspect of the above please do get in contact with myself Robin.Agarwal@4cassociates.com or Allison.Ford-Langstaff@4cassociates.com. This is our passion and we’re happy to share thoughts and ideas with you.