Lessons Amid Inflation and Volatility: Delivering Value in an Inflationary Environment

The world has faced so many challenges over the last few years and the adversity shows no signs of abating any time soon. From the devastation of the global COVID-19 crisis to the Russian invasion of Ukraine, subsequent geopolitical events have driven up prices across the world and made the business of moving products and materials from one place to another infinitely more difficult than at any other point in living memory.

However, in times such as these, procurement serves an important function and can actually serve as a mitigating factor in the face of disruption caused by global events.

"In times of geopolitical instability, spiraling inflation, volatile energy prices and supply chains, procurement holds a crucial role in counteracting the effects of these disruptions,” says McKinsey. "In parallel, procurement functions need to get prepared to capture opportunities from a looming recession […] from generating full risk transparency and adjusting the procurement operating model to driving end-to-end margin management and cross-functional nerve centers.”

Inflation and Volatility

According to research by McKinsey, procurement leaders have gone on record and labelled this the most challenging environment for the function in at least the last 20 or 30 years. However, as Ezra Greenberg, a global leader in McKinsey’s work on macroeconomic scenarios and trends, states, this current environment is the result of several macro trends which have conspired to create it.

"We’re getting through this Omicron wave, which has been quite devastating, and inflationary forces had built up to an extent that was quite unexpected. That was in large part driven by the supply–demand imbalances that were driven by all of the COVID shocks, and the commodity price increases that came along with that, and all the supply chain woes that we’ve all been suffering through over the last several months. Then with the Russian invasion of Ukraine, we had a second commodity shock that’s still passing through the system. That extra jolt is really what has pushed central banks to the point of what you’re seeing now.”

However, even in the face of such inflation and volatility, there still exists an opportunity for procurement departments to drive value for the organizations they serve and evolve into an even more strategic function in the future. Procurement is now moving from the firefighting mode it’s been locked in for the past few years and accepting that this approach is no longer sustainable, which is inspiring the need for investment and change in its operating model.

Questions

In order to effectively challenge the current environment and become a force for value and growth which flies in the face of many the volatility and inflation we are experiencing in the market right now, procurement needs to become a more flexible and agile machine which has the policy and processes in place to better respond to such a rapidly evolving landscape.

This starts with the supplier network and identifying which factors are causing disruption, which of those factors are under your direct control, which are beyond our direct control, and subsequently making decisions which increase the former whilst reducing the latter.

"For example, what is our exposure? Understanding exposure to volatility, to commodities, to different input costs, at the deeper level,” says McKinsey Operations partner, Roman Belotserkovskiy. "Understanding supply markets and the dynamics behind suppliers. Oftentimes, we know our suppliers, but few organizations really understand what is driving the supply chains behind our suppliers. Then when distractions happen, a lot of that can be attributed to second- and third-degree effects that we now have to understand and oftentimes help suppliers mitigate through collaboration and much closer involvement in how we work together.”

We talk a lot about vetting suppliers, but those conversations usually revolve around ethical and legal concerns which can impact brand safety. However, in an environment such as the one we find ourselves in today, it is just as important to vet suppliers for risk related to the ongoing geopolitical situation. For example, do the challenges moving goods through or around Russia right now impact the ability of your procurement function to operate? Does inflation and rising process make it unprofitable to use certain suppliers over others?

These questions and more need to be answered if procurement is to be a force for good and continue to deliver value in the current climate.

Final Thoughts

The challenges of the current geopolitical climate are not going anywhere anytime soon, and procurement officers need to evolve to survive and thrive in this environment. Asking the tough questions now and securing investment and change in the right areas will help convert your procurement function into a more agile and flexible animal which can continue to deliver value in any circumstances.

Delivering value in the face of volatility and inflation is sure to be part of the conversation at ProcureCon Connect 2023, being held in June, at the Rancho Bernardo Inn, San Diego, CA.

Download the agenda today for more information and insights.