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Procurement and Inflation – Input and Guidance

May 3, 2022

Season 3, Episode 16

The Hackett Group Senior Procurement Advisor Nicolas Walden talked with Associate Principal Jonathan Fehring about the impact of inflation on procurement, and how procurement leaders can address it.

Show Notes

Welcome to the Hackett Group’s Business Excelleration Podcast, where – week after week – we hear from experts on how to avoid obstacles, manage detours, and celebrate milestones on the journey to world-class performance. Today’s episode is hosted by Nic Walden, Senior Advisor at the Hackett Group. His guest is Jonathan Fehring, Associate Principal in Hackett’s Principal Advisory Practice.

Up until last year, inflation was not really a huge topic in procurement. The longevity and false predictions of the experts should be somewhat alarming as we see record inflation in almost every category. The response of the government was a major jumpstart to the inflation we are now seeing. This period is one of significant volatility, uncertainty, high demand, supply constraints, lockdowns and reopening, tight labor markets and more. In the U.S., the government directly financially supported those who were laid off. Whereas in Europe, the government incentivized companies not to lay people off. Many Europeans naturally slip back into their same positions while Americans were forced to reconsider the jobs they undertook moving forward. This is where we see the spiraling increase in wages and products. Inflation is not only impacting goods, but also services, labor, and property values.

From a policy perspective, the U.S. stopped accepting Russian oil which has significantly driven up prices. While America is not as dependent on Russian resources as European countries, the impact is still being felt day today including increased food prices. These impacts are more than likely here to stay for the long haul as Russia has refused payments in any currency other than rubles and European storage tanks are basically empty. One of the biggest drivers will have to be reducing demand and consumption of energy. There are too many things converging at this point to think that these sensations are transitory. Companies are raising prices and people are continuing to spend the money and Jonathan predicts these prices could remain until 2024. We are encouraged to look at the numbers and follow the data as it develops. It all starts at supply and demand and imbalances in the markets. Then, Nic shares a data point from Hackett’s client polls. In April, the expectation in terms of how high and how long of prices seem to be continuing to shift to the right.

Jonathan speaks to how we can manage in this time of inflation. Many clients are becoming less optimistic in their ability to hit price reduction goals. It is essential to make sure that incentive structures are aligned in mitigating inflation. Outside of that, it is a huge focus area and companies should be doing more intentional sourcing whenever possible. One third of companies reported that they are passing on pricing details directly to the consumer. Eventually, pre-existing contracts will have to be re-negotiated. This is where we will begin to see even more companies passing on prices. In seller’s markets, strategies and tactics must change as we recognize that prices are going up. As companies are approached by suppliers, they are encouraged to look at the data themselves and understand the structure of costs.

As we talk about delivering cost savings, maybe we should change the discussion from just talking about cost and actually thinking about how we change the mix. This includes how we look at requirements, specification and how some companies responded to semiconductors challenges. There may also be an opportunity in how we can better manage demand in certain areas. In closing, Jonathan reiterates that there is not a one single bullet approach to addressing these changes.

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