Survey Reveals Proactive Procurement Approaches to Navigate Inflation

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Nov 09, 2018, 15:39 ET

Institute for Supply Management^® and A.T. Kearney publish inflation supply chain analysis

TEMPE, Ariz. and CHICAGO, Nov. 9, 2018 /PRNewswire/ -- The Institute for Supply Management^® (ISM^®) and A.T. Kearney released a special report and survey of supply management professionals across industries assessing economic projections for inflation. The report, entitled, "High Inflation: Unchartered Waters for Supply Management," provides analysis and recommendations for procurement organizations to navigate a higher price environment.

"We're seeing business contacts starting to shift their decision-making because of pricing pressures and the current trade environment," said Tom Derry, Institute for Supply Management^® CEO. "Businesses are revising sourcing and distribution strategies they have relied on for decades."

Economic signals including the ISM^® Report on Business^® Prices Index, Bureau of Labor Statistics (BLS) Consumer Price Index (CPI), the October jobs report indicating wage growth, as well as rising prices felt by companies across industries, point toward inflationary times. Commodity costs rising, growing price volatility, and geopolitical uncertainty add a growing layer of business considerations.

For procurement professionals, lost purchasing power is the primary concern. Pointing to bottom-line cost savings may become more difficult during times of inflation, when procurement success can mean avoiding supplier price increases. Additionally, the survey revealed commodities play a key role versus non-commodities, along with the following insights.

More than 63 percent of business leaders are concerned about price inflation for commodities and raw materials;
Nearly 48 percent of businesses are concerned or very concerned with their level of trade and inflation uncertainty;
80 percent of companies believe that their suppliers are only average or below average at controlling costs; and
67 percent believe the top approach to managing cost inflation is building strong supplier relationships, with more than 52% noting improving inventory management.

"Inflation is here. It's just not sharp inflation, but it's here. … We see it in the index; we see it in certain commodities," shared Anthony Nieves, CPSM, C.P.M., A.P.P., CFPM, Chair of the ISM Non-Manufacturing Business Survey Committee.

Tariffs and trade turmoil coupled with higher prices create an environment few modern supply management practitioners have seen. Tested strategies to address it include the following actions: block and refuse to accept higher prices, transfer or share risk with suppliers, create financial hedges, deflect and pass costs to consumers, and operationally build up inventory.

However, based on those surveyed, the report reveals areas of organizational strength and strategies to better navigate inflation for long-term success. Below are the recommended proactive procurement approaches to take, according to participants.

Supplier Selection: Noted as the top approach (67 percent), company preparation to control supplier costs and build stronger supplier relationships can help power procurement through inflationary times.
Improved Stakeholder Communication: As inflation impacts procurement success and cost savings, stakeholder identification and engagement through formalized processes become crucial (53 percent agree). This includes collaboration, as 62 percent of participants partner with finance to assess implications and plan for purchasing negotiations.
Formal Market Analysis: Majority of companies (57 percent) do not have a formal market analysis program in place, but this is a missed opportunity to extract more value from the supply base.

"While tariffs and trade issues are top of mind, there are multiple strategies companies can implement to navigate these challenges—both in the near-term and long-term—to gain a competitive edge in these uncertain times, " shared Jane Wanklyn, partner at A.T. Kearney.

When procurement actions are aligned with the development of a company's strengths, higher prices throughout a supply chain can be better addressed.

To see more insights and learn more, click here to download the inflation and procurement white paper.

About Institute for Supply Management^®

Institute for Supply Management^® (ISM^®) is the first and leading not-for-profit professional supply management organization worldwide. Its 45,000 members in more than 90 countries around the world manage about US$1 trillion in corporate and government supply chain procurement annually. Founded in 1915 by practitioners, ISM is committed to advancing the practice of supply management to drive value and competitive advantage for its members, contributing to a prosperous and sustainable world. ISM empowers and leads the profession through the ISM Report On Business^®, its highly-regarded certification and training programs, corporate services, events and the ISM Mastery Model^®. The Manufacturing and Non-Manufacturing ISM Report On Business^® are two of the most reliable economic indicators available, providing guidance to supply management professionals, economists, analysts, and government and business leaders. For more information, please visit www.instituteforsupplymanagement.org.

About A.T. Kearney

A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since 1926, we have been trusted advisors to the world's foremost organizations. A.T. Kearney is a partner-owned firm, committed to helping clients achieve immediate impact and growing advantage on their most mission-critical issues. For more information, visit www.atkearney.com.