UK Economic Growth Looks Good – But Procurement Should Prepare for Inflation

Remember the predictions of doom, decline and plagues of cockroaches for the UK economy if we voted to leave the EU? There was more previous-word-eating from the Bank of England last week when the forecast for economic growth in 2017 was raised to a pretty healthy 2%.

The good old British consumer is maxing out on their credit cards and upping the mortgage to fund current spending, whilst anyone who spends time in London must feel that the hordes of tourists getting in the way are contributing something to the positive outlook.

However, the fact is we have not actually left the EU yet or even triggered the process. So it is too early to say really whether this will all change, once the real exit gets into gear. There is certainly some nervousness around, with a view that large corporates will start making investment decisions that don’t favour the UK. On the other hand, where else would you invest at the moment? Much of the EU looks pretty unstable – politically, economically (Greece back in the headlines) and socially, and the reaction of major firms, particularly the IT giants, to President Trump’s immigration actions suggests not all businesses are going to rush to invest in the US just now.

So maybe the UK isn’t too badly placed, notwithstanding Brexit. However, this is a period of uncertainty, and as we’ve said before, procurement and supply chain executives need to be looking hard at risk issues and contributing to wider organisational debate around investment and planning decisions.

One thing for certain in the UK at least – inflation is back. Now it is all relative; my peers were reminiscing about very early days at Mars at the recent alumni dinner, remembering years when we got pay rises of 15% or 20%. Yes, but that was just to keep up with retail price inflation!  The inflation  outlook for 2017 is 2.7% - not in the same league as those days, but more than we have been used to for some time, as we have had three years at 1% or less.

So in preparation for those suppliers coming through the door with worried expressions and proposals to increase prices, here are the three key steps procurement can take to be prepared for such discussions:

  1. Understand the cost drivers behind the goods or services you are buying. Even if that tells you the supplier does have a good case, it is better to understand that from a negotiation point of view. The percentage of the product’s cost base actually impacted by the fall of sterling, for instance, is a key point.

 

  1. Think about your BATNA and know what alternatives you might have if a particular product is getting more expensive. Can you switch suppliers? Substitute a lower-priced product to maintain (or even reduce) costs if price increases are inevitable? We should always be looking to improve value, but if prices are going to be somewhat more volatile, that makes it a particularly good time to be looking at these options.

 

  1. Negotiate, of course. Know your BATNA, strengthen it where possible, and be strong with suppliers. We might accept that the supplier is under cost pressure - but what are they doing about it? They should be taking action to address the cost base. And if I had Reckitt Benkiser in as a supplier, I might point out that their CEO was paid £23 million last year, so hard for them to claim too much financial hardship! (There are many other parallels).

 

Indeed, we might argue that procurement is more challenging but also more fun in an environment where a bit if inflation gets into the system. For those of us brought up in the day when suppliers regularly came in looking for 5, 10 or 20% price increases, it certainly adds a bit of excitement to the negotiations! But as always, “be prepared” is the key recommendation.

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