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7 Tips for Managing Inflation in the Procurement Department
Rising inflation is hitting businesses hard. In many cases, cutting back on purchasing isn’t an option. Manufacturing companies still require direct materials in order to manufacture products. Transportation companies still need packing supplies. Those in the healthcare industry still need to purchase equipment and medications. Despite inflation, companies in these, and a wide variety of other industries, have to keep making purchases.
So what can you do to save money when costs are going up on materials your company needs?
This is the sort of challenge that the procurement department is uniquely situated to handle. While keeping costs the same as they were before prices went up is unrealistic, there are strategies procurement can use to mitigate the effects of inflation.
1) Improve Visibility
This might not seem like a way to combat inflation, but it’s a key step in identifying and implementing new procurement strategies. Without insight into your own procurement process and supply chain, you’ll have a hard time finding ways to cut costs and improve your process.
If you’re still working with a paper-based system or your digital procurement system is outdated and hard to use, automating with new e-Procurement software should be your first goal. NextProcess’ Purchase Order Module provides immediate oversight for your procurement process. It makes the whole process more transparent. You’ll also have real-time access to data with standard and customized reporting options putting key data right at your fingertips.
2) Look at Your Suppliers
Use the increased visibility afforded by quality eProcurement software to take a close look at your suppliers. Companies that you already have a strong relationship with are more likely to work with your procurement department on prices and alert you in advance of upcoming price increases. Also, make note of any products that you only purchase from one supplier. This is a great opportunity for your company to get away from single-source suppliers and build backup options into your supply chain.
With increased insight into your suppliers, you can see which ones consistently deliver for your company and communicate when there are unavoidable disruptions. You’ll also be able to identify any suppliers that it might be good to find a replacement for. NextProcess’ procurement software includes supplier management features to simplify relationships with suppliers. You’ll be able to keep track of supplier information, contracts, and history much more easily.
3) Review Contracts
As you’re reviewing your suppliers, make sure you also review contracts. In many cases, contracts detail how price increases should be handled so you’ll want to review those agreements. In other cases, you might not have a formal contract with suppliers and might be missing out on potential cost breaks.
As you’re reviewing contracts, keep in mind that you need to make sure you’re enforcing purchasing policies and agreements on your end as well. NextProcess software is easy to customize so you can automatically incorporate and enforce purchasing agreements with key vendors. Features like punch-out catalogs and item catalogs also make it easy for employees to place orders within the purchasing system, reducing the risk of maverick spending.
4) Negotiate with Suppliers
Suppliers also must deal with rising costs and supply chain disruptions. As such, it’s unlikely that your negotiations will result in no increases in price. However, you don’t just need to accept all price increases. Doing your homework and starting conversations with suppliers that you have a good relationship with can help keep costs down.
According to procurement consultant and university professor Jimmy Anklesaria, who spoke at the CPO Live Roundtable event in London earlier this year, the goal isn’t just to bargain your suppliers down to a lower cost. The goal is to understand how inflation really impacts your whole supply chain. When procurement professionals understand this, they can find ways to work with suppliers and reduce costs, ideally in ways that benefit both companies.
5) Consider Hedging
There are a few different types of hedging that your company can consider using to try and protect against price increases. There are some potential downsides, but depending on your industry, business goals, and other factors hedging might work well for you.
When reviewing and negotiating contracts, one hedging strategy is to agree to fixed pricing on certain products. This protects your company in the event of a price increase. However, if prices start going down, you’re locked into that higher price.
Another hedging option is to buy up inventory now. This strategy operates on the assumption that prices will go up and you want to stockpile products now while the costs are lower. The downside of this strategy is that it can tie up significant resources. You will need warehouse space to store the additional supplies. You’ll also be tying up financial resources, which could impact company cash flow.
6) Collaborate on Creative Solutions
Managing inflation falls squarely on procurement’s shoulders, but it’s not just this department’s problem alone. Procurement needs to work with accounts payable to manage relationships with suppliers and negotiate benefits such as early-payment discounts. Procurement should also work with travel and expense, capital projects, R&D, operations, sales, and other departments (depending on your company).
Collaboratively, you can often find creative ways to decrease costs in certain areas to offset inflation. Additionally, coordinating with other departments before making decisions that will impact them can avoid any unintentional downsides to your cost-cutting strategies. Keeping the lines of communication open within your company will help lead to more strategic procurement solutions.
7) Spend Time on High-Impact Tasks
The procurement strategies discussed in this article require a high level of engagement from the procurement department. You won’t have time for all this if your procurement process requires a bunch of time-consuming tasks like manual data entry, tracking down purchase order errors, or curtailing maverick spending.
An e-Procurement solution from NextProcess automates any of these tasks, making the entire procurement process run more smoothly. It also helps cut costs in the procurement department. By automating procurement, you’ll free up employees to devote themselves to high-impact tasks such as negotiating with suppliers, improving your supply chain, and collaborating across your company. And if you automate more than one department using NextProcess software, that makes collaboration even simpler. Contact us to set up a free demo and see first-hand how our procurement software can support your company’s strategic goals.