adr international Procurement consultants

A threat of inflation: what we must do

Massive government support to end the global downturn will have consequences, says Robin Jackson, and procurement people must be prepared to deal with them

In these tumultuous times, I'm reminded of the words of Ronald Reagan who once joked that the eight most frightening words in the English language were "I'm from the government, I'm here to help".

Well, like it or not, we now have that government help on a colossal multi-trillion dollar scale, nationally and internationally - huge quantitative easing (printing money, albeit electronically), recession-busting increases in public spending and direct support and public ownership of the banks, plus the lowest interest rates ever. The Bank of England's rate is now the lowest in its more than 300-year history.

So once the dust has settled what will this all mean for the global economy and the procurement community?

A standard economic text book would tell us that increasing the money supply and creating the loosest fiscal controls ever known will give us too much money chasing too few goods and lead to inflation. In the UK you can add a significant depreciation in the value of sterling to the inflationary mix.

All that new government-injected money sloshing about in the global economy, classical economic theory tells us, will drive the prices of commodities, goods and services higher. We can already see it starting to happen with key commodities - including copper, steel and oil - rebounding from their earlier lows.

• First, start changing senior management expectations - over the golden decade senior managers have built up their expectation that input price will reduce every year. That is no longer going to happen. Get them ready to accept flat pricing at best.
• Seek their support for investment in up-skilling your team to build up your defences so that your procurement professionals can face the challenge of suppliers' raising prices. Many of today's procurement professionals may have experienced price increase requests on specific commodities but not high levels of inflation and significant price increase requests across all spend.
  
• Avoid negotiating on the basis of cost analysis. Understanding a supplier's costs will only help to justify their price increases. You need to change tack and avoid talking cost breakdowns!
• Introduce a process to enable you to respond when suppliers increase prices, outlining, for example, the steps you will take, whether you will accept increases or try to offset them, and whether you will be able to change suppliers or source from low-cost sources.
• Condition your supply base. Launch a detailed and prolonged campaign of vendor conditioning to get your suppliers to minimise price hikes to you and instead address the price increases on their purchases.
• Set out your priorities. Forecast the potential financial impact of inflation category-by-category including when you think it will take effect. It's no longer sensible "if it ever was" to wait for suppliers to ask you for price increases and then to react. It's time to be proactive and plan how you will eliminate or at least minimise price increases.

This is not a comprehensive set of guidelines, merely a few pointers. But one thing is for sure: the risk of doing nothing is high. Inflation indicators currently remain subdued but that doesn't mean inflation will remain asleep. When it reappears in 12-18 months procurement will be at the sharp end of all that government help. So be prepared.

Robin Jackson is CEO of ADR International

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