Procurement’s crucial role in weathering the cost-of-living crisis

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.”