Procurement’s crucial role in weathering the cost-of-living crisis
After years when procurement focused on the broader business agenda, the cost-of-doing-business crisis is now shifting attention back to what it does best: controlling costs
The cost of living, or doing business, is already dominating the political and economic landscape and is likely to for some time. Stemming largely from vast increases in energy and fuel bills, this is spreading into rising costs in almost every category, ranging from foodstuffs to clothing, household items and transport.
For procurement functions, this has brought about a renewed urgency and focus on what the function has always done best: reducing costs or at least mitigating price increases as much as possible. “It’s given us another chance to shine,” says Simon Geale, executive vice president, procurement, at consultancy firm Proxima. “Most functions are facing significant volatility and cost headwinds from all directions, and simply don’t have the resources to address all the challenges that they face. Where there is strong or visionary procurement leadership, procurement teams are getting the opportunity to do bigger and bolder things.”
Mike Hales, partner procurement, at Kearney, observes that has combined old-style procurement basics, such as e-auctions, with strategic initiatives that include challenging specifications from the business and engaging with key suppliers to mitigate price increases. “There has been a clear shift from finding the lowest cost to the best cost, where cost optimisation is balanced with supply chain risk and resilience,” he says.
This means costs are being examined from top to bottom, says Geale, to strip out any unnecessary elements. “You’re looking for any lever that can improve the situation,” he says. “Internally, there may be a big impact in recalibrating demand and reducing waste. Externally, in a seller’s market, it’s important to put yourselves in the shoes of the supplier and understand what they are looking for. A supplier might be looking to manage their own volatility and cost pressures, so simplicity of specification and predictability of demand will be valuable to them.”
Some traditional procurement tactics are also being revisited. “Levers include economies of scale from combining volume across a company’s many buyers and agreeing to multi-year contractual relationships with defined commercials, driving value for parties by reducing the complexity and increasing stability,” says Hales. “Negotiation skills are still key, but they are often viewed purely as a means of securing additional price concessions at the end of the commercialisation process.”
Technology can also help to mitigate cost increases, helping to drive collaboration internally, which can lead to fresh approaches, suggests Riccardo Drentin, a partner at McKinsey. “For example, early-warning systems detected by artificial intelligence can support timely renegotiations or capacity contracting, potentially saving millions to the company in shortages or overstock,” he says. “Simple changes like carefully planning to place one big order rather than multiple small ones can help limit any surcharges for rushed delivery or less-than-minimum order quantities. This gives procurement the purchasing power to negotiate discounts on key items.”
As well as immediate changes to specifications or purchases, procurement professionals are looking at longer-term measures that can help to provide some predictability. “Some are asking sourcing and engineering teams to reimagine the products most affected by inflation,” says Drentin. “Others are investing in innovations, looking at everything from shipping with alternate carriers to sourcing from alternative regions or even adjusting product design using different materials, packaging or product features. The aim is to respond to elevated production costs while maintaining the functionality customers require.”
Other initiatives involve working closely with both internal teams and suppliers, to reduce waste and encourage innovation. “Demand shipping involves working across key spend owners to test wants versus needs and identify areas to simplify specifications,” says Hales. “For example, products can be value-engineered or restructured into reusable modules or platforms to improve performance and customer satisfaction while lowering costs.”
Key supplier collaborative improvement, meanwhile, requires analysis and consideration of the suppliers who can drive and boost a firm’s competitive advantage. “Teams will define strategic objectives and mutually beneficial outcomes, with both the buyer and supplier teams then investing their resources into a series of collaborative working sessions to identify, implement and track mutual value,” adds Hales.
For buyers of commodities, such as those traded on markets, entering into a contract to buy at an agreed price and date in the future can be used to generate certainty around future pricing. This approach can also be taken with individual suppliers, essentially stockpiling items for future use. “The advice is generally just not to do what you have always done but to think deeper about market dynamics and constraints, and how other buyers may be reacting,” says Geale. “Some markets have naturally become spot markets but others are more volatile and the gains from creating business certainty may outweigh some pricing wins. You need to look at it on a case-by-case basis.”
Many of the wider initiatives that procurement has been involved in in recent years – such as reducing risk, sustainability and the move to net zero – will remain important, but the current situation is a chance for the function to remind the business of just how much value it can bring. “It creates opportunities,” says Drentin. “The first is to maintain margins and rectify the pricing mistakes of the past.
“The second area is making operations more resilient to ongoing disruption. With a deep expertise of supplier markets and an ability to lead cross-functional reaction teams, procurement’s role is elevated from managing enterprise costs to working as a strategic partner with other business leaders to achieve profitable growth.”
Geale is also excited by the prospect of a return to a more cost-focused mandate. “In the last few years, procurement has been thrust into the spotlight, and as a profession I think we’ve been grateful to be recognised for our impact beyond cost,” he says. “But now is the time to step forward and remind everyone that we are the commercial architects in a business and uniquely positioned to help our customers to face these cost challenges. Our job is to find any and every means to help the business outperform the competition and emerge stronger.”