As we slowly open the living room drapes to peek at the pandemic landscape, we see that a lot has changed.
Our relationship with work is different. Many companies are moving to flexible and remote attendance with a greater reliance on technology to get the job done. Supply chains may be in tatters, with some suppliers a casualty of the pandemic and others barely hanging on. And your own companies may have changed products and services offered and markets served, forcing changes to your procurement strategy and the supplier mix.
But one thing is certain during this late pandemic reawakening: Your prices are going up and there is not a lot you can do about it. It’s the great reset. And it’s been a long time coming.
Let’s look at a few of the factors impacting prices.
Is the current level of inflation transitory or permanent?
The answer depends on the pundit, but there is no doubt that prices are going up quite quickly. Yet there are signs that prices generally won’t continue to grow in leaps and bounds, and it pays to remember the simple economics lessons of supply and demand.
Scarcity drives price increases as we can see from the rapid rise of the cost of lumber in late 2020 and early 2021. The combination of extraordinary high prices dampening demand, lumber mills coming back online due to labor availability, and the opportunity for suppliers to take advantage of a high-priced market quickly allowed prices to fall as levels of supply increased.
Oil prices and their related impact on commodities also jumped as demand picked back up earlier this year. However, oil producing nations recently increased production, dampening further price increases. We see pricing pressures on computer chips that are forcing new car prices higher amid widespread shortages. There are also pricing pressures, and shortages, on resins and rubber.
Where are prices rising the fastest? Follow the scarcity. But be aware there is almost always a market reset when prices get into the bubble zone. And note suppliers are more careful these days to manage the bullwhip effect on their business.
2. Supply chain disruptions
Gaps in supply cause buyers to look at the spot market for products to meet production schedules.
Existing long-term supply agreements can be at risk or may even be canceled due to pandemic related realignment of supply chains. Buyers need to be creative to find products from alternate suppliers and expect to pay more. While not necessarily inflationary, some suppliers take advantage of restricted supply to charge above market rates for products and services in high demand.
But there are also opportunities in this kind of chaos.
All procurement professionals have discovered new suppliers, and often better pricing, when on the hunt to overcome a shortage. It behooves new suppliers not to take advantage of a new, or casual customer. It may provide an opportunity to win future business.
Rest assured that seller’s markets don’t last forever, nor do buyer’s markets. Keep this in mind when supply chains return to normal.
3. Changes to business strategies
The pandemic forced companies to come to grips with their strengths and weaknesses.
Many companies took the opportunity to take a serious look at their business strategies, from pricing and margin analysis to product and service offerings, to reshoring manufacturing, to the types of customers that they are willing to serve. Most of your suppliers have adjusted their business strategies to meet changing market needs. Don’t let those changes be a surprise to you.
Suppliers may have adjusted their profit margins to more realistic levels, pruned product lines, divested poor performing divisions, and made tough decisions for their own survival. Your company may have even done the same. The impact from these changes will be far reaching. Procurement professionals may need to ramp up their strategic sourcing initiatives when they realize that their existing long term supply agreements, or even casual sources of supply, are at risk.
Take stock of this great supplier reset and see where your suppliers, and supply chains, have changed. While things may seem somewhat normal with your tier 1 suppliers, changes upstream may have a profound impact on their business — and yours. Task your key suppliers to determine the health of their own supply chains.
Pre-pandemic, unreasonable pressures to continually reduce costs, increase supply chain efficiencies, lean out inventories, and fine tune logistics created unrealistic expectations and anxiety for sellers and buyers alike.
Higher prices may actually be a welcome outcome of this pandemic by reducing stress on overtaxed or overstressed supply chains. Suppliers may even get some breathing room, allowing them to become a stronger company and better supplier.
Not all resets are bad.