Procurement fights inflation-busting increases from suppliers

Wednesday, August 18, 2021

Procurement has no choice but to fight inflation-busting increases from suppliers according to a new benchmarking study by CASME, the membership network for Indirect Procurement.

A study was conducted within CASME’s global procurement community to investigate the impact of inflation on the purchasing function.  The survey found that inflation is becoming an increasingly important concern, with Procurement adding measures to respond to increasing price demands from suppliers.

The main reasons for increased inflation are:

  • Rising demand for goods as consumer confidence grows (60%)
  • Significant increase in commodity prices (40%)
  • Shortage of components (40%)
  • Increased production costs (30%)
  • Impacts of the pandemic (30%).

Within the Inflation Procurement Examiner (SnapShot) report, which is available now to CASME subscribers, participants in the study highlighted various approaches being used by Procurement to negotiate with suppliers. Recommendations include:

  1. Agree to a shorter period for which the supplier’s quotation is valid and available for acceptance; enabling the supplier to be more accurate with pricing
  2. Attempt to delay the impact until the next budget cycle
  3. Use price-indexation formula, the average will lessen the effect of inflation
  4. Request extra services to minimise the impact of the price increase
  5. Negotiate a ‘no price increase’ agreement, trading off with a longer-term contract
  6. Identify specific cost drivers and isolate their long-term changes
  7. Use the leverage of anticipated higher future volumes, based on an increased allocation to preferred suppliers
  8. Consolidate volumes to increase leverage and maintain price stability
  9. Emphasise the long-term relationship with the supplier, which could be endangered by short-term price increases
  10. Where permitted by the organisation, consider hedging to offset the risk associated with inflation, ensuring the supplier's price remains relatively stable.

CASME’s benchmarking programme represents an opportunity to externally benchmark with other organisations to determine marketplace facts, trends and opinions. Find out more.

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