It’s no secret that corporate procurement and supply chain resources have been gradually leaned out over the last 15 years. Today, what we are seeing is that the average procurement and supply chain professional is being asked to do the work of two to three people in comparison with, say, 2007.
One of the most acute vulnerabilities this leaning out of resources has caused is the inability of procurement and supply chain professionals to effectively defend their organizations’ bottom-lines through dedicated and vigilant expense management.
In today’s inflationary environment, if buyers are not continuously engaging in the “joust” with their MRO and indirect supplier base, the suppliers are winning. And the harsh reality is that lately, the suppliers have been winning a lot. So even as inflation begins to trend downward, the damages wrought by this cycle have still taken root in buyers’ bottom lines.
It is unmistakably correct that MRO and indirect suppliers view real inflation as a margin-grabbing opportunity.
Here are just a handful of indirect expense examples (among dozens) observed over the last 18 months:
- Security guard services provider tells the customer that a $1MM raise will be required in order to retain the guard force. However, when the dust settles on the matter, it turns out that less than half the requested raise was truly needed to cover the effects of inflation and retain the guard force.
- Uniform rental supplier demands an 11% price increase. Within weeks, the same vendor is executing a new agreement representing a significant cost decrease. The vendor had already been enjoying robust margins prior to the increase demand and was simply using the broader reality of inflation to increase profitability in this account—and the subsequent negotiation proved as much.
- Waste haulers already imposing CPI increases have also been increasing base rates and fuel surcharges (a consideration already baked into CPI increases)—even as service performance has steadily been worsening.
MRO and indirect category managers should be on high alert for suppliers using legitimate inflation to pad their profits.
Of course, overburdened and understaffed procurement and supply chain departments simply aren’t equipped to drop everything and perform deep-dive category analyses every time a supplier asks for an increase.
What, then, can vulnerable buyers do to defend their bottom lines in 2023?
- A suspicious eye should be cast at all cost increases, especially as we see the easing of macro-level inflation. This one probably goes without saying as buyers are already wired this way, but all practitioners should have a heightened sense of awareness that margin-grabbing is—and has been—a huge part of the inflation story.
- Make sure to optimize the timing of your marketplace activities. Indirect suppliers are generally emboldened in 2023, seeing leaned-out procurement departments and doubting they’ll dedicate the time and resources to cumbersome supplier transitions. Without the threat of lost business, the buyer loses nearly all leverage. So, carefully plan any open-market processes and make sure your incumbents are viewing you as a legitimate threat to take your business elsewhere. This means planning for transitions even if you don’t desire to leave your incumbent. Bottom line—get your ducks in a row before charging into any negotiations or open-market processes.
- Don’t leave any category unguarded. Assess your bandwidth and priorities, and then put strategies in place to guard against unchecked increases in categories you don’t have the time to manage. If you’re not engaged in the joust with your indirect suppliers, you’re losing…so find someone to do the jousting for you. No business is resourced to do everything in-house in 2023, so figure out what you’re going to self-perform and then find outsourced solutions for the rest, knowing that any spend lacking a strategy will assuredly harm your bottom line.
The smart golfer knows when to “minimize the damage” by chipping out of the trees and back into play. Likewise, smart buyers will need to minimize the damage of this inflationary period by incurring only truly necessary and warranted increases and fending off margin-grabbing efforts by MRO and indirect suppliers.