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Procurement teams have an important mission: keep prices in check. But in times of rising inflation, keeping prices low can seem like a daunting challenge. This blog offers tips on how procurement professionals can fight inflation and add value to their company's bottom line.
Inflation is a word that has been on everyone's lips lately. And while it's easy to understand why inflation is bad for you, it's much tougher to see how exactly it affects your company.
From supply-chain disruptions to expansionary economic policies, tightening labor markets, and sustainability imperatives, inflation is here to stay whether we like it or not.
Inflation rates are high, and very few commodities have been able to escape the price pressure. According to the Organization of National Statistics (ONS), UK's inflation rate has surged to a 40-year-high of 10.1 percent in July, and inflation in the eurozone also continues to soar to record highs, hitting 8.9 percent in July.
These turbulent conditions have triggered price pressures and forced businesses to leverage the procurement power of their organizations and maintain economic balance.
Commodity Market Trends Fueling Inflation
- On the 1st of August 2022, the price of natural gas reached GBP 480.5/100 therm; an increase of 30% week-on-week (w-o-w) and 337% year-on-year (y-o-y).
- In the last three years, the animal product index has increased by 54%. In July 2022, the European Dairy Mintec Category Index (MCI) continued its upward trend, reaching an average price of EUR 4,882/MT. The index had risen steadily for twelve consecutive months and was up by over 1,635 points from the previous year. That's a 50% increase as compared to the average value of July 2021. The prices of butter, skimmed milk powder, cheddar, and whole milk powder have all increased significantly.
- Energy prices have increased by 227% over the last three years, which is more than the overall commodity index.
- The grains and oilseed index has risen by 132.7% over the last three years.
- The metal index rose 60%, while the plastic index rose by 60.5% over the last three years.
- The value of soft commodities has increased by over 76.4% during the last three years.
- The steel index has increased by more than 101% in the last three years.
- The volatility in commodity prices is currently at 12.04%, which is above the historical average range.
If you want to get more information about the commodity market trends, please download the Mintec Monthly Market Mover Report here.
How Can Procurement Fight Inflation and Ensure Stability?
With the world economy in a state of flux, procurement professionals are tasked with fighting the ills of inflation by keeping costs and prices within a healthy range. But, it's no small task—with cost of production rising and wages soaring, it seems like everywhere you look there's another product or service going up in price at an alarming rate. So when it comes time to plan for inflation, how are we supposed to keep our heads above water? How do we mitigate its impact?
We're glad you asked! Here're 4 steps you can take to curb inflation:
1. Understand Your Price Changes
The first and most important step is to understand how your prices change and corresponding cost changes. This will enable you to prioritize and address the categories, suppliers and items with highest impact on your business.
It's also important to make sure that you understand where the changes are coming from - whether they're specific to a particular supplier or category, or if they're industry-wide trends.
This will help you identify any external factors that may be driving price increases that aren't within your control.
2. Integrate Currencies to Isolate Foreign Exchange Effect
Businesses often source goods and services from different countries, as a result, they are exposed to fluctuating exchange rates. Hence, procurement professionals are always looking for new ways to get the most bang for their buck, and that often means integrating currencies.
But what does it mean to integrate currencies? And how can you do it?
To integrate currencies, you have to be able to isolate the effects of exchange rates so that you can isolate underlying price development of associated goods & services. With solutions like Ignite, you can integrate relevant exchange rates to isolate currency effects, underlying price development of associated goods & services as well as your exposure to different currencies.
You can also use this information to understand your currency exposure, assess hedging measures, etc.
3. Benchmark Vs. Inflation or Industry Indices
In the last few years, we've seen a lot of price increases across a wide range of categories. In some cases, these price increases have been dramatic—sometimes as high as 200% or more.
But how can you tell if your organization is experiencing an unusual increase in prices? Are your competitors seeing similar price increases? And if so, how are they managing their procurement processes around those changes?
To understand if your price changes are in line with market development and how you are performing, solutions like Ignite lets you upload general inflation rates or industry specific indices and compare development with the specific price changes you are facing. This helps you understand if you're experiencing an unusual increase in prices that is out of the ordinary.
4. Compare Specific Commodity Prices
Procurement professionals should assess risk and prioritize when it comes to inflation protection. If you want to know more about how inflation impacts specific commodities, compare specific commodity prices, and focus on categories that drive the most inflation risk for their company, such as products with high commodity value and/or those that are likely to face supplier requests for price increases in the near future.
Solutions like Ignite make this simple and take you a step ahead by giving you even deeper insights on prioritization so you can further increase leverage with suppliers. It does so by integrating relevant commodity prices with opportunities or items to analyze them side-by-side and adjust for commodity shares.
Ignite has partnered with Mintec Limited—world's leading independent provider of global commodity price data & market intelligence—to help companies understand their supplier prices better, analyse spend, and negotiate with greater confidence.
Procurement organizations can use this information to make informed and targeted decisions about how to protect themselves from inflation.
The world of procurement has changed. The way we buy goods and services has evolved over the past few years, but the tools we use to do so haven’t kept up.
The traditional approach to procurement is no longer sufficient. As a result, many procurement organizations are struggling to do everything that they need to do in order to fight inflation and drive business results.
For many procurement professionals looking beyond their company's walls and understanding how their actions affect the market at large is not an easy task.
That's where solutions like Ignite comes in!
We know that inflation is one of the biggest threats to your bottom line, that’s why we created Ignite Procurement — a new solution that helps procurement teams get real-time visibility into their spend, free up time spent on searching, processing, analyzing data, and gain insights into how they can stay proactive and ahead of inflationary pressures.
How does Ignite help Procurement Teams beat Inflation?
Ignite helps procurement teams by providing a single source of truth for all procurement data and enabling them to make faster decisions based on facts.
Ignite seamlessly integrates all your data sources, but it doesn't stop there. It enriches that data with AI, supplier financials, commodities and currencies, and collects any qualitative info you need as well. This way, you can save time and elevate value creation.
Ignite lets you benchmark against inflation or industry indices, so you know if the price changes you're facing are in line with market development and how you are performing. It also lets you upload general inflation rates or industry specific indices to compare development with the specific price changes you face. It also uses classification to help you segment erroneous transactions.
But that's not all! We also let you assess price changes inclusive and exclusive currency effect, incorporate them into supplier negotiations and even visualize spend and price changes per base currency so that you can get a clear picture of what's happening in your organization.
Book your slot today, and learn how we can help you avoid risk and save money by giving you the power of correct and holistic data, transparency, and actionable analytics to empower data-driven decision-making.