It would be difficult to avoid the newsworthy discussion around inflation right now. The Consumer Price Index (CPI) just registered two consecutive readings that have not been seen since the rapid inflation days of the 1980s. This index measures the pricing paid for common consumer goods, and it is on the rise. Less articles have been written about an index that applies more to us in our professional lives, the Producer Price Index (PPI). It is conceivable that the CPI could increase due to supply disruptions and increased demand without the PPI increasing very much at all. Unfortunately, that is not the case today. The 2021 PPI numbers are even more startling than those registered for consumer prices.
While many consumers are feeling the rise of the cost of gas for example, procurement professionals are experiencing the pricing increases at a much higher rate when purchasing products that support their business operations. The 12 month PPI rose 9.7% in 2021 (6.9% excl. food and energy. It would seem that not all of the inflation has (yet) made its way to the consumer level. Couple that with rising wages and a tight labor market, and businesses everywhere will be scrambling to control costs in order to maintain healthy margins.
What can be done from a purchasing standpoint to fight these pressures without turning your supply chain upside down? Let’s talk about several strategies to combat inflation higher than most of us have ever dealt with in our careers.
RFP to Pinch a Penny
You might be tempted to RFP everything. It is the tried-and-true method to push down costs. In this environment, though, it has some major flaws. First, it is incredibly time consuming…but then again it always has been a huge investment of time. That has not changed. Even if you have the bandwidth, there are other major obstacles to consider. Along with rising prices, we are fighting supply shortages across the market that are making prices more inflexible than ever. Unless you are presenting the supply base with a different opportunity than before, this is unlikely to be very successful. Additionally, it is likely that your own teams are busier than ever. Switching a few suppliers may be feasible, but there will certainly be low limits to how quickly and productively you can progress in this manner.
Open Supplier Discussions Opens Up Opportunity
A far better option to drive down costs is to work with your current suppliers and find ways to reduce costs that benefits both you and the supplier. Can you adjust order parameters that drive down cost to serve like increasing minimum orders, limiting delivery frequency, or altering package size? How about minimizing services visits, altering KPIs, or just generally better aligning your requirements to the suppliers’ ideal customer? Open discussions with suppliers often uncover such opportunities.
Capturing Rogue Spend
A second method to avoid price inflation is growing the bottom line. While initially this may seem counterproductive to your savings efforts, growing the spend levels for a supplier can allow them to cut pricing while gaining margin dollars and identify more savings for your organization. This goes beyond whatever narrow set of goods they are currently providing and finding uncontracted spend that can be brought into the agreement. Completing a Spend Categorization is one solid method that our Members utilize to find spend not associated with a national supplier agreement. Call it rogue spend, tail spend, or some other undesirable moniker. Chances are not only will you be able to get better pricing on those goods and services through a negotiated agreement, but if the overall basket represents a large increase in business for a supplier, you may be able to pull down pricing on existing purchases as well.
Building OEM Relationships
When working with distributors, there may be an opportunity to negotiate directly with original equipment manufacturers (OEM) in a given space to lower costs. Many manufacturers are willing to build relationships with their end customers even when dealing through a distributor. While this can be time intensive, the benefits are long lasting, and often can cut across suppliers when the manufacturer has multiple lines of business. Often the manufacturer will ask for you to switch to their products where available, so the analysis needs to be at a product type level rather than a manufacturer level (find all paper products, not just Brand X paper towels). You should be able to find at least a few manufacturers in every category that provide enough benefit to have discussions. CoVest has built many fruitful relationships with reputable OEMs already as our volume with individual manufacturers far exceed the average individual company. Most of our activity in developed CoVest categories lies with manufacturer discussions and savings are passed along directly to the CoVest Member.
Consider the Alternative
If you have exhausted all of the above options or you are out of the precious time that they require, consider selected item alternatives to create savings. Your suppliers should be helpful in this regard. Have them work on a list of product alternatives (taking product availability into account!) and work with your internal stakeholders to find out which of those changes are acceptable. A couple of notes of caution should be observed in this process. First, most suppliers will only show you alternatives that BOTH save you money and increase their margins. That is fine, but it does limit the universe of potential product switches. Consider augmenting your suppliers’ homework by looking at very high spend items and finding some product switches of your own within the suppliers’ catalogs. The second consideration is less about creating savings, and more about tracking those savings. Alternatives are notoriously hard to track if you are making a large number of product switches at the same time across multiple categories.
Aligning the Product to the Supplier
One outside of the box way to create savings without wreaking too much havoc within your supply base is to right size your purchases across suppliers. Are you buying the right items from the right suppliers? Just because your bearings and power transmission supplier CAN sell you PPE, you might want to ask yourself if you SHOULD be buying it from them. Are you getting Janitorial supplies from your restroom cleaner when your beloved industrial supplies provider sells thousands of times the volume than your restroom servicer? Evaluating the product and aligning it to the appropriate supplier requires a keen sense of pricing models across a variety of suppliers with overlapping product supplies. This is a service that CoVest builds into our Spend Categorization process, where we bucket spend according to a supplier’s area of expertise and ability to provide savings on a given product. It is not just about finding spend, but also about bringing it to the right suppliers.
The next 12 months are likely to be a wild ride in the purchasing area, even if we are able to decelerate our price increases. The above strategies, taken together, can go beyond containing the pricing increases and actually drive down pricing. Of course, partnering with someone that is already performing these activities and has a robust Group Purchasing program would as well.
Whitepaper Download: Conquering the Spend Categorization