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Editor’s Note: March 24 Ram Charan and other experts will share a new, multi-disciplinary approach—from communication to pricing to cost cutting—to help your management team fight inflation and win. Join us >
Amid rising inflation, companies must lean on the purchasing function as a key source of intelligence. How is our cost structure going to change over the next 12 months, 24 months? How the supply will change, what will be a new way to have from origination to the customer?
In good times purchasing executives have a dominant psychology that leads them to believe they are not as important as many other functions and that their job is mostly to be sure they buy the right amount of the right product at a discounted price at least equal to that given the company’s biggest competitors.
Gone are the old days when purchasing’s main job was to browbeat suppliers into giving discounts. That strategy will not work in an inflationary environment. Now information is crucial and purchasing people need to work as partners with vendors, sharing intelligence as a competitive advantage. Companies in your value chain who have cash will likely order more than what is needed because of anticipated price increases, and this will distort the flow of goods, both price and availability in the value chain.
Both purchasing and suppliers need to have a shared understanding of what needs to change in their relationship for their mutual advantage. Purchasing becomes a link between suppliers and sales and marketing, moving information in both directions so that sales and marketing can seek better uses for purchased materials and suppliers understand the impact of their pricing decisions on the company’s value chain and competitive position. Jointly planning ahead for the post-inflation, post-recession world can cement valuable long-term relationships.
Training programs for purchasing people to enhance their knowledge of the company’s value chain and purchasing’s role in it can be useful, as are efforts to promote greater coordination between purchasing, manufacturing, logistics and R&D. Purchasing people should be alert to opportunities for new products or segments based on their knowledge of inflation’s varied impact on suppliers and raw materials.
Purchasing should treat the natural temptation to hedge cautiously. Hedging costs money and it can go the wrong way. Purchasing is also at the forefront of evaluating suppliers for evidence that they might have trouble delivering or even face bankruptcy.