Making Sure the Price Is Right

With inflation on the rise and the fallout from Brexit expected to see costs increase, procurement teams need to consider how to mitigate against price rises from their suppliers. Daniel Ball, director at eProcurement specialist, Wax Digital suggests best practice for ensuring procurement remains in control of their costs.

The Brexit effect on Sterling’s value has seen increasing costs for importing goods or buying services from overseas, and is one of the factors behind the current spike in inflation. For example, the impact is thought to be making itself felt across the food sector, a heavily import-reliant industry, with the CGA Prestige Foodservice Price Index (FPI) reporting a year-on-year rise of 8.8% in June. For those UK businesses involved in overseas trade with suppliers it’s clearly not great news.

With the unending Brexit negotiations, businesses are going to have to assume that, until any chinks of certainty and detail emerge, downward exchange rates and upward inflationary pressures will continue, so they’ll need to get to grips with cost increases in the supply chain. Of course, we all know that exchange rate fluctuations and rises in inflation are difficult to predict, but organisations can take steps to actively protect themselves from sudden price increases.

So, here are three practical tips for ensuring you’re better equipped to handle any future supply cost volatility:

  1. Be proactive

It’s important that procurement professionals, particularly those with an overseas supply chain become more proactive and disciplined when it comes to their sourcing and tendering activities. This will enable them to lock down pricing for a given period of time so that they are exempt from any cost or exchange rate fluctuations. We see many clients fixing in costs with suppliers for set periods, or agreeing a maximum allowable uplift in pricing over a set period. In return you’ll need to be prepared to be open to offer more favourable payment terms, levels of guaranteed work or longer contracts.

  1. Collaborate with finance

Large multi-national enterprises, who do much of their buying overseas are adept at mitigating exchange rate and inflationary pressures, using complex management instruments borne from operational necessity. But if you’re a smaller organisation that only does a portion of business internationally, protecting against inflationary or exchange rate hikes won’t necessarily be a core competence.

If nothing is in place it may be time for procurement to raise the topic with the FD – most of the large banks can offer FX and inflation hedging tools. If your organisation uses these instruments already, then procurement needs to collaborate more closely with finance to discuss how to extend these current arrangements into more areas of purchasing, not just perhaps direct expenditure, but into indirect categories at risk too.

  1. Assess risk

Speaking of risk, supply chain evaluation needs to include risk matrices which cover not simply the core KPIs around financial stability, performance etc, but in the case of overseas suppliers then factors such as geopolitical, logistics and currency metrics too. Procurement professionals need to understand their supplier tiers, from the critical strategic ones that support production or service delivery, to the mid-tier in the larger spend categories and into the long tail invoicing infrequently. They then need to decide which parts of the supply chain will need a secondary wave of potential suppliers lined up to mitigate risk if things change significantly. This alternative supply chain may be more expensive, but will minimise the impact to business as usual if there are significant changes to the exchange rate.

With Brexit looming, guarantees on price with overseas suppliers may be difficult to predict. But, proactive planning and careful thought into your sourcing and contract management processes can help ensure you have pricing control agreed with your suppliers. This, coupled with working closely with finance to use available financial protections, and having ‘plan B’ providers in place in high-spend areas, should help organisations protect themselves against any unforeseen, or unanticipated shock price changes.

 

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