Here it Comes – How to Avoid Inflation-Driven Bad Buying!
Have you seen the price of compost this spring? I reckon it has close to doubled – three large bags from Longacres garden centre last year cost £10 (for 180 litres). Now, you will get just 100L for the same price.
Talk to a local builder, or gardener, or fencing expert, and they will tell you of shortages in markets such as timber, cement and other basic but vital materials. In another market altogether, farmers are complaining about a lack of workers to harvest crops, and restaurants of a lack of waiting and kitchen staff. Some are having to increase wages or other benefits to attract staff.
Without going into all the causes (Brexit, pandemic, lockdown-influenced career decisions), there is one very likely outcome here – inflation. There are already some warning signs, and consumer prices in the US jumped 4.2% in the 12 months through to April, up from 2.6% in March and marking the biggest increase since September 2008. That seemed to take inflation from warning mode into “this is actually happening”. But many economists believe the effect will be short-term, a blip rather than anything that becomes established.
But we can’t be sure of that. One test is whether price rises for materials and commodities then drive wage inflation, which can result in the sort of inflationary spiral we have seen in the past. But in any case, it seems likely that many procurement professionals will be facing a difficult time in terms of the cost of what they are buying. And for the younger members of the procurement community, this might be the first time they have faced suppliers coming in with demands for significant, maybe double-digit price increases.
Those of us of an earlier vintage may even remember the days of the mid-70s, during which UK retail prices doubled over about 5 years. After moderating slightly, inflation picked up again and in 1980, my first full year as a graduate trainee with Mars Confectionery, inflation hit 18%. Great for making your pay rise look impressive, less good for buyers. Suppliers often demanded massive price increases, and buyers would go to their boss and say, “good news, I’ve negotiated a great deal – the price is only going up 10%”!
If inflation does take off, it will also put pressure on all those procurement functions that aren’t really that capable, but have had an easy time over the recent years of low inflation, when claiming “savings” has been relatively easy. However, “cost avoidance” is never a totally convincing argument and will be even harder in an inflationary world when the CFO can see real bottom line costs spiralling.
There will also be a dilemma around locking in prices. If you think inflation has further to run, this might prove to be a very good time to negotiate long-term contracts and lock-in prices now with suppliers. On the other hand, if this is a “blip”, agreeing £5 a bag for compost now might look really silly if it is back to £3 by Christmas! There is no right or wrong answer to this – but you will need to think carefully about the right approach, which in many case means balancing risk, cost and security of supply.
So this will be a real test for many procurement people and teams. If you want to avoid inflation driven “bad buying”, then here are three quick tips. There is much more that can be done of course, but these strike me as useful and sensible whatever your situation.
- Market and supplier research is more important than ever in this situation. Suppliers will tell you all sorts of “facts” about the market, prices and so on. You need to be as well informed as them (better, if possible) so you can respond and understand what the real situation is.
- Think carefully about your negotiation strategy – and if negotiations get tough, go back to basics. As well as research, look carefully at your BATNA (best alternative to a negotiated agreement), try and improve it quickly if it is week, and look at the range of negotiation preparation and approaches that might work. You don’t have to accept price increases – but you need to know how you would respond if your hard-ball negotiation really ends up with the supplier walking away.
- That includes looking beyond price – are there other benefits you can offer the supplier maybe in return for better pricing? Or if you end up accepting some price increase, can you agree some other wins for your organisation (payment terms, additional services, etc).
There is a lot more we could say, of course, but that’s a start at least and might stimulate some thinking. Meanwhile I’m redoubling my efforts to create home-made compost. (We do have no less than four large compost bins and two “heaps”)!
Great points as always, Mr. Smith. I would add the importance of LOCAL price information. The price of lumber is not the same in the UK as the Pacific Northwest — nor in China. Incidentally China’s politburo just devalued steel prices to be more competitive (the invisible hand is not really a thing there — more of the visible Mao track suit).
Get local data. Smart market research reports prepared my kids far smarter than us in Bangalore won’t do. You need local price intelligence from local sources. There is not one world price, let alone in an inflationary (or stagflationary) environment! Also double-down on cost models and open them up to collaboration with suppliers.
Finally, Mr. Smith, make sure you secure your next road bike — my local trek dealer just gave me a 12-month lead time on my dream bike.
Great points Jason. LOCAL data – yes! and the bike point is spot on too. A friend of mine went to spend £4K on a bike recently and ended up spending almost twice that AND paid the deposit before he had the chance to even ride it because there were so few bikes available. We were also told yesterday by a neighbour that the house opposite was sold in days for 15% above the asking price. Interesting times.