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Why You Need to Track Indirect Procurement Category Inflation

Published March 10, 2021

Written by: Ranajit Dey
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Ranajit Dey

At The Smart Cube, Ranajit is responsible for the end-to-end delivery of projects for clients across verticals – especially in the Technology, Media, Telecom (TMT) space. An in-house IT expert, Ranajit has keen interest in the procurement and strategy aspects in non-IT domains as well. He. Holds an MBA in IT Systems and B.Tech in Computer Science. Ranajit spends time watching cricket when he is not providing market intelligence to clients.

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According to McKinsey, global indirect procurement spend has been growing by an estimated 7% each year since 2011. Many of the inflationary factors driving this rise are well outside of most organizations’ control – so what can today’s procurement teams do to keep these essential costs under control?

The short (and deceptively simple) answer is to improve inflation forecasting. Just as they do for their direct categories, procurement teams should be collecting intelligence to help them understand what will happen next in their indirect procurement categories, so they can stay ahead of costly shifts.

Armed with that insight, procurement teams can begin negotiating better contracts and deals. They can also start making proactive improvements to sourcing strategies for their indirect procurement categories, helping to keep spend under control.

If the answer is so simple, why aren’t procurement teams already doing it?

It sounds simple. But in practice, keeping up with what’s happening in major indirect procurement categories can be an extremely challenging task.

Subcategories like global shipping, logistics services and real estate are all governed and impacted by a huge number of complex global drivers, regulations and indices.

That complexity, paired with an entrenched perception that many of these indirect commodities and services are inflexibly priced, with little room for negotiation, naturally leads procurement teams to focus their efforts elsewhere.

The result is that most teams do very little indirect category forecasting, leaving them at the mercy of their global suppliers – a big reason why spend is slowly creeping upwards every year.

Retaking Control with Market Intelligence Services An outcome-based contract is an operational model that requires a strong customer and service provider relationship, trust, and a genuine sharing of risk and reward.

By using the intelligence and forecasting services offered by an expert partner, procurement teams can take the complexity out of understanding shifts in their indirect procurement categories.

Those services translate the vast array of global forces impacting prices into easily understandable shifts and trends. When paired with a procurement team’s own insights and data, they can enable better supplier, contract and pricing discussions worldwide.

Let’s look at three key global indirect procurement categories as examples:

Road Transportation

In anticipation of the world returning to its pre-COVID state, organizations of all kinds are restocking and refilling shelves to meet the expected rise in consumer demand.

Unfortunately, thanks to COVID restrictions in regions like the EU, and an existing global driver shortage, the volume of available drivers won’t be able to scale to meet this demand perfectly.

Together, those forces will see trucking costs rise by 3.04% in the U.S., and as much as 5.45% in the U.K., in 2021.

However, the easing of COVID restrictions on drivers across the EU means this increase will be far less pronounced in much of mainland Europe.

Ocean Logistics

As manufacturing outputs return to pre-COVID levels, and businesses begin to restock at higher volumes once more, demand for ocean logistics services is also predicted to rise significantly over the coming months.

Ocean logistics operators are facing all the same challenges as their road logistics counterparts – rising demand, worker shortage and COVID-based limitations on movement. However, they’re also contending with major regulatory changes.

The shift to low-sulphur fuels in particular means that many ships must spend long periods of time out of commission, as they’re retrofitted to meet new standards.

This means that shipping prices in 2021 will rise even more sharply than trucking costs – with prices projected to rise by an average of around 13% worldwide.

Warehousing

With the COVID-19 crisis keeping shoppers away from physical stores, many brands are expanding their ecommerce operations. This has caused a surge in demand for warehouse space.

In many regions, this demand has been largely offset by reduced manufacturing outputs, and by companies going out of business and therefore freeing up existing warehouse stock.

In the APAC region for example, 68% of total shoppers have turned to online channels. But reductions in the volumes of products being manufactured in countries such as China mean that warehouse prices are only projected to increase by 1.37% year on year.

Indirect Inflation Forecasting in Action

Those examples are just three of the areas that a trusted partner can research and evaluate as part of indirect inflation forecast reports.

One major CPG company specifically, before engaging with its expert partner in the space, relied purely on its own historical data to forecast indirect spend inflation. So, the company relied on the partner to provide visibility of the macro factors impacting its indirect subcategories that it could use alongside its own data to build up a reliable, personalised view of forecasted inflation.

Using projected year-on-year price change forecasts for everything from packaging and pallet pricing to facilities management costs, the company is now empowered to make informed indirect purchasing and contract decisions. Now, the company can negotiate indirect procurement contracts just as shrewdly and confidently as it does its direct procurement agreements.

Indirect inflation forecasting is necessary in order to take control of global indirect procurement spending. Just as they do for their direct categories, procurement teams must source robust intelligence to help them understand what will happen next.

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