Predictive Sourcing: The Solution to Price Increases and Shortages
If you’ve been searching for a way to get ahead of price increases and shortages, predictive sourcing might just be the light at the end of the tunnel you have been searching for.
Bringing together the procurement and supply chain communities, we hosted a webinar on June 22nd called Staying Ahead of Price Increases and Shortages: Procurement Experts Share Their Playbook. Our expert group of panelists included Saum Sharma, Amy Fong, and Edmund Zagorin.
Let’s face it. Procurement faces a wake-up call. It is our time. In many cases, C-suites are looking to procurement and supply chain for answers. So how can we solve the problems of price increases and shortages?
Through this webinar, we shared best practices on elevating the role of supplier relationships and dealing with price increases and shortages when market conditions can be challenging. We have compiled the highlights from our conversation in this article.
Solution One — Understand What is Upstream in Your Supply Chain
Our conversation opened with Saum Sharma sharing the two approaches we need to think about when tackling shortages. The traditional approach would be taking a thorough look at your sales and operations (S&OP) planning. A tried and true method, S&OP planning has been around for decades and does a fantastic job of creating collaboration.
According to Sharma, your sales and operations planning make up the “bedrock of predicting what’s coming to you.” He suggests bringing together team members from sales, manufacturing, and supply chain in the same room and understanding your income and demand signals.
Ask yourself:
How is your production capability stacking up against your income and demand signals? How is your supply chain structured internally and externally?
Sharma says for the second approach, procurement should utilize both traditional and advanced tools in tandem to answer and overcome shortages. He suggests looking at your supply base and categories from a quintessential procurement standpoint if they are single-sourced or even dual-sourced. Try to understand the risk of a particular category or consider utilizing a bill of materials (BOM) or BOM-based approach.
With help from these traditional methods we already have at our disposal, you can better understand your upstream and supply chain regarding inventory on hand and supply capabilities.
It can be game-changing to stay ahead of the curve by looking not only at tier-one suppliers but considering two, three, and four. This will help you understand your procurement much more efficiently.
Solution Two — How to Alleviate Talent Shortages with Predictive Sourcing
In the wake of people receiving their vaccinations and starting to bounce back from the pandemic, we are beginning to get to a point where we will be facing a talent shortage again. According to the 2020 JOLTS Report, Job Opening and Labor Turnover Survey, which looks at the U.S. labor market, the number of open jobs is back up to the point where it was two years ago. Even though there may be enough jobs to match unemployment, there are still factors keeping people from finding their ideal position.
Though vaccination rates are increasing, some people looking for work are still waiting to be fully vaccinated. Amy Fong says when we look at the data from the JOLTS Report, from a pure numbers perspective, looking at somewhere between a month and four months down the road in the U.S. market, we have essentially recovered a majority of jobs that were lost over the last couple years.
Most of the world seems to be following suit to recover vast numbers of jobs somewhere near the several-month mark, depending on where you’re located.
This means we are going to see talent shortages that drive up the cost of talent.
Amy Fong says for the past six months in the services space, her team has “been looking at opportunities for negotiating savings with providers and a lot of the big companies out there. Especially those that were more impacted by COVID.” Amy and her team were able to provide some short-term relief in the form of line-item discounts or invoice level discounts.
But the window for savings opportunities is closing. If you weren’t already talking to your providers and looking at skill rates, skill pyramids, and labor rates and adjusting during May and June, you’ve probably missed the window. As talent gets harder to find, the costs can only go up.
“I would say compounding that is the fact that COVID has really accelerated digital transformation,” says Amy Fong, “There’s a different set of skills that we need more and more of.”
Amy Fong suggests strategizing where you’re investing in new talent. Ask yourself: Where do we need to use specialists? Where do we need to rationalize who we work with? In many cases, it is beneficial to add more partners strategically to make sure that they have access to those skills, especially in the IT staffing space.
Adding external resources into procurement is becoming more and more relevant. Many leaders adopt a hybrid resource model with a core group of procurement and supply chain experts who are in-house and functioning with a hybrid resource structure where they’re using procurement as a service.
Solution Three — Diversify Category Management
During the webinar, our CEO Edmund Zagorin shared an insightful anecdote from his time in the field:
When faced with a price increase from a supplier, it’s critical to have data about what’s happening in the market and to have options and alternatives. Frequently, dual sourcing and diversification of a supplier base mean that when a supplier increases prices, they should know that it is risky to do so because your business from a procurement standpoint can never be taken for granted. The second it is, regardless of what’s happening in the market at large, you can expect a price increase. Or if the supplier is doing their job, that’s what they should ideally be doing.
We are seeing a move towards diversification strategies in categories that we haven’t seen before. This includes categories like maintenance repair and operations and even logistics.
These are often sole-source or even specialized process manufacturing categories like raw material inputs or raw material setups where frequently just due to chemical formulas. It’s quite common for those to be sole-source.
Other Considerations and Solutions
When dealing with a supplier who comes to you asking for a price increase, there are several options for your best practices.
When looking at planning surrounding talent, it is far more strategic to open up your agreements to include skill premiums. Take a look at what you are paying for in-demand skills, and make sure these skills are genuinely still in demand. With such a quickly moving market, what is advertised as in-demand in the IT-sphere, for example, may not be the relevant skills you need now.
Consider what your staffing pyramids and ratios look like, and consider what other levers and terms you can adjust during negotiation.
“I think keeping it competitive from the start is going to be better,” says Amy Fong, “In this market where we see costs going up across the board, you need to think about not just cost, but value for the business and what procurement as a partner needs to be doing to enable the business to be successful. In 2022, that may not be the lowest cost solution.”
With last year’s shortages on the shelves, we learned that something is better than nothing. Trading in your plush toilet paper for a lower-quality brand may not be your first choice, but it is a lot better than not having it at all. Figuring out your trade-offs—where you will settle and where you will not—is vital for procurement teams. Think about it; it is far better to have supply than none.
Procurement usually goes after the cheapest source—but this is not always the most strategic route and can be a clear distinguisher of a good procurement team from a starter procurement team. You can be the supply don on cost, but these are the things where they’ll come back to you, and they got some relevant market insight to prove their point.
On diversification of supply base, it is essential to identify and understand your product and understand the cost factors added to your product. Or perhaps the most effective method would be to look at the bill of material and look at your parts. Ask yourself which one is at most risk, and you can diversify the supply base and give yourself the potential for controlling cost.
Leaders in the industry are doing what they can to understand the breakdown of cost. By focusing on the total cost of acquisition, leaders ask for a breakdown in pricing on the supply side. Suppose your relationship with a strategic supplier is more of a partnership model, understanding that both you and the supplier have to make a margin. In that case, it can be helpful to ask what the raw material cost for your supplier is.
Once you start teasing out these details, it can give you entirely new insight into what you’re buying and can make you feel far more secure in the details of your transactions.
Objectively Define Price Increases and Shortages and Inflated Costs
Edmund Zagorin expressed how important it is to not just talk about inflated prices but to consider what you’re comparing inflation to. Many market prices have increased recently, but chances are you’re not sourcing a category every month or even every year if you’re like most sourcing teams. There might be quite a bit of time that has passed since a category was previously sourced. But when sourcing is done with early stakeholder involvement and conducted with conviction around exploring different options, you can create substantial value.
During the webinar, Edmund Zagorin shared two examples. The first is Dover Chemical, which uses predictive sourcing as one of its elements to manage costs and ensure operational efficiency and capacity in its supply chain. Because of this, Dover Chemical can leverage Arkestro to run these speedy predictive sourcing processes, which creates options for them.
It ultimately means that their suppliers benefit because many times, the suppliers have to increase the price to factor in the cycle time. If they’re not getting paid in a certain amount of time, then that means they have to bake in that delay. Faster cycles can create win-wins by allowing suppliers to get paid faster and, in turn, pass the cost savings associated with that decreased cycle onto the business.
The second example mentioned is Purita Water, a chemical company that was able to go out to bid for raw materials in a market that’s not necessarily that favorable and, through diversification, found significant opportunities for cost savings and for passing on operational efficiencies associated with faster processes.
Ultimately, price increases and shortages are a permanent part of procurement and sourcing, and we will always need to have a strategy to deal with them. For more information about how Arkestro can help you stay ahead of the market, get a demo from our team.
Resources
Procurement and Supply Chain Resources:
- Deloitte 2021 CPO study
- GEP HBR article on supply chain risk
- Kearney report on Future of Procurement
- Forbes, Supply Disruptions article
- Everest Group Evolving Challenges in Managing 3rd Party Services article