Even though the US economy has been moving toward recovery in 2021, slowing pace of vaccination rates and the more transmissible Delta variant threaten to slow economic growth and complicate procurement processes. Here are the top five trends procurement professionals should keep an eye on for the remainder of 2021:
1. Delta variant threatens to stifle recovering procurement processes
- Production delays: An uptick in virus transmission rates will result in additional manufacturing and warehousing facility stoppages, which increase manufacturers’ variable costs in the form of machinery downtime and coronavirus testing and compliance. As production costs rise due to temporary worker shortages and facility closures, manufacturers and wholesalers will pass additional costs to buyers through higher prices, thereby contributing to inflation.
- Supplier price increases and more inflation: Virus outbreaks at Tesla, Nike, FedEx, Costco, Amazon and other large firms are exacerbating supply shortages and in turn, driving up prices for goods and services. For instance, the consumer price index (CPI) is up 5.4% from June 2020 and is expected to rise further as supply chains stumble in the wake of the Delta variant’s surging transmission. MSC Industrial, one of the largest domestic industrial equipment distributors, has raised prices twice in 2021 and stated another price hike is likely.
2. Supply chain disruptions: the saga continues
- Long lead times and worker shortages: Shipping crews at commercial ports around the world are contracting the virus at very fast rates and to make matters worse, the International Chamber of Shipping (ICS) estimates that only 2.5% of transportation crew members are vaccinated worldwide. Surging transmission among shipping crew members has prompted China, South Korea, Taiwan and other nations to completely cut off crew members’ access to land, stranding 100,000 crew members at sea. Another 100,000 workers globally are stranded on land, unable to rotate into their shifts due to virus transmission risks.
- Rising freight and shipping costs: Because ships transport about 90% of world trade, the immediate outlook for global supply chains is dim. Extremely tight vessel capacity and the ongoing container shortage is also squeezing global supply chains, resulting in the longest lead times in international shipping since 1951 according to Arbor Data Science. Despite President Biden’s July 9th executive order that targeted anti-competitive practices in the shipping industry, container prices are up approximately 140% from July 2020, resulting in significant increases in shipping rates. Shipping industry experts predict stabilization in shipping and supplier delivery times in March 2022, at the earliest.
3. Return to office and hybrid work models require new procurement processes
- Centralize spending and rethink processes: As cities and workplaces reopen, procurement professionals are increasingly tasked with reinventing internal controls on spending. Procurement professionals must reign in maverick spending by company employees as the state of emergency has more or less stabilized. Procurement professionals are recentralizing spend with top category managers and should consider reexamining cost-saving targets by employing zero-based category management, in which a firm evaluates every expense item in every category and justifies its existence.
4. Do not let adverse weather events catch your team by surprise
- Floods, freezes and fires – oh my! A confluence of extreme weather events in 2021 will continue to disrupt procurement and professionals should create contingency plans in key areas of spend. Flash floods in the Southeast, the polar vortex in Texas in February and the historic mobilization of firefighting resources on the West Coast are just a few examples of unpredictable weather events temporarily suspending supply chains. Furthermore, a La Niña watch issued for the Northern Hemisphere during the fall and winter of 2021 threatens more extreme weather to come. La Niña weather patterns make atmospheric conditions more conducive to hurricanes and tropical storms in the Atlantic Ocean, creating colder conditions in the Great Lakes and make the Southwest drier.
- Leverage digital transformation: Procurement professionals that are investing in digital systems, such as ERP systems and procurement software, should leverage artificial intelligence solutions and set up a system to receive alerts when an extreme weather event is imminent. Buyers should set up alerts in the locations of suppliers, key ports and warehouses to mitigate unexpected disruptions caused by weather. Finally, procurement professionals should consider increasing inventories to account for just-in-case flexibility and build out action plans in the event of extreme weather.
5. Rising commodity prices will create more headaches
- Volatility is the only certainty: The reopening of the global economy has sent demand and prices for key commodities soaring, including oil, lumber, liquified natural gas (LNG), iron ore, copper, aluminum, grain, palm oil and other agricultural products. Even though some commodity prices have fallen from recent highs during the pandemic, investors and buyers see significant opportunity for more growth in commodity prices. For instance, cash-flush consumers, the impending trillion-dollar domestic infrastructure plan and China’s significant post-pandemic spending are expected to drive key commodity prices higher.
- Keep your eye on the supply: Buyers should keep a close eye on the global supply of commodities as the most significant indicator of price trajectory. For instance, China released reserves of copper, zinc and aluminum in June to help drive down prices from historic levels. Moreover, domestic steel output reached 1.86 million net tons the week ending July 17, 2021. This level of output highlights an increase of 37.7% year over year and indicates steel prices may slip in the coming weeks as more supply comes online. Therefore, category managers need to keep their finger on the pulse of commodity demand and supplies in order to stay ahead of rapid price changes and enter contract negotiations armed with the information to negotiate the best contract terms possible.
Contract Best Practices: What can buyers do to protect themselves?
- Negotiate renewal caps – Buyers should negotiate renewal caps (i.e., price ceilings for renewal rate increases) in their contracts to increase protection against significant price escalations. Although some suppliers will try to justify contract renewal price increases by pointing to growth in the CPI, buyers should always negotiate renewal increases. For example, buyers should suggest and leverage a reduction in the quantity of goods or services being procured when a supplier raises prices on par with the CPI. Some suppliers will honor the renewal cap only on the products the buyer orders at the time of the renewal if the buyer agrees to not reduce the quantity of goods or services being procured. Buyers should also specify the desired contract terms, including end of term rights, renewal increases, price gaps, length of time and grace periods.
- Negotiate price hold clauses – Buyers that are unsure about their demand in the immediate outlook should negotiate price hold clauses into their contract. Price holds honor a negotiated discount for a specified amount of product and period of time and help buyers protect themselves against future price increases. Buyers should specify the desired contract terms, including future add-on protections, minimum purchase requirements, validity periods and products covered.
- Implement KPIs and SLAs – Buyers should enhance their visibility into supplier performance to increase negotiation leverage. Buyers should include key performance indicators (KPIs) and service level agreements (SLAs) in the RFP and the final contract. Buyers should consider including the following metrics to track performance: quantity ordered versus quantity received, advanced shipping notice (ASN) accuracy rates, rate of on-time deliveries, compliance rates (i.e., ratio of disputes to total invoices) and the defect rate (i.e., faults per unit or defects per million.)
By: Riley Mallon
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