Inflation: a word that nearly everyone in the nation dreads – yet one we’re hearing all too often. As supply chain disruptions continue to rule headlines thanks to ongoing political crises, changes in production patterns, and the COVID-19 pandemic, prices for goods and materials are climbing. As a result, supply chain professionals are preparing for the emerging possibility that inflation is here to stay.
According to the World Bank, food and oil commodity prices are currently placed well above the last five-year average. Oil prices over the last two years haven’t been this high since the 1973 oil crisis and food commodities haven’t cost this much since 2008. The same report also indicated prices aren’t likely to drop in this area until 2023 or 2024.
As you might expect, these rising prices are creating tension across various industries, and they are incredibly troubling for procurement teams who have dedicated years – if
not decades – to finding and securing higher cost savings. Now, procurement leaders must contend with the struggle of maintaining profits using materials from their current suppliers or choosing to spend more to produce the same products.
This sounds like a heavy lift – and it will be challenging, make no mistake – but there is a path that offers procurement leaders the ability to remain resilient in the face of the roadblocks inflation brings to the table. However, there are several data-driven options many supply chain professionals are already considering to strengthen their supply chain agility to combat the strain of inflation.
After the last few years, procurement professionals are incredibly familiar with planning for the worst-case scenario. From the war in Ukraine to the ongoing aftershocks of the COVID-19 pandemic, you’d be hard-pressed to find a part of the supply chain not touched by these global events.
That’s why understanding your entire value chain’s vulnerability to supply chain disruptions is so essential, according to a 2022 Harvard Business Review report. Understanding your immediate suppliers and the challenges they’re facing is an excellent start, but understanding the full life cycle of your supplier’s suppliers – and where they’re most vulnerable to disruption – will help you and your team better coordinate efforts in the event that a disruption threatens your sources of supply.
In the same vein, it’s vital to ensure your organization is keeping an eye on its capital structure and that key decision-makers are paying extra attention to the global markets and policies that may impact your suppliers.
Be Wise when Cutting Costs
While the desire to apply universal cost-cutting measures to an entire organization is typically strong during periods of inflation, extreme cost reduction actions are often ill-advised. Instead of ordering across-the-board salary, expenditure, and headcount slashes, use a scalpel and your best judgment to prioritize employee retention, the cash operating cycle, and ongoing growth.
It’s time to set aside long-term growth ideals and focus on rationalizing activities, customers, segments, and suppliers to ensure your organization’s short-term survival will be ensured as inflation drags on. Supply chain professionals are now all too familiar with finite resources that may not be renewed, and it’s time to focus on those that hold the most promise in terms of keeping your company afloat.
Finally, keeping morale high and preventing attrition is equally important during times of inflation as cutting costs and saving money. It costs more in productivity and expenditure to hire and train new employees than it does to retain them. Additionally, it’s incredibly important that organizations communicate with employees and offer them accommodations for personal needs that may make them more inclined to remain with your organization.
Invest in data
Anything your organization can do to reduce costs, and thus reduce risks, is essential as we look ahead toward a years-long period of inflation. Leveraging supplier diversity allows procurement professionals to achieve higher cost savings at an operational level, but doing this without a solid data foundation is incredibly challenging. Our recent discussions with procurement professionals revealed that enriched supplier data is key for those looking to build a wider supplier base that allows for innovation and flexibility in the face of inflation-caused disruptions.
A supplier data foundation that employs modern machine learning does more than just help procurement professionals maintain accurate supplier information. It also empowers users to diversify their supply chains, giving existing and potential suppliers an incentive to better negotiate pricing and do everything they can to earn or keep their business – which also drives down costs.
No matter the use, supplier data is central to success when it comes to fending off inflation, as it gives your team an opportunity to analyze all the risk factors at play and decide which interests are best to focus on. While it may be tempting to reduce costs across the board and at all times, there are some areas in which it may pay (literally) to spend more money for better quality.
As the world looks ahead toward a post-COVID, inflation-riddled future, sourcing and procurement leaders must be prepared to respond to all the challenges inflation presents. Building contingency plans, keeping a pulse on the larger scope of global suppliers and markets, and having agile and centralized data on hand are all essential tools in creating a plan to address these changes – and come out on the other end stronger for it.