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Many procurement officers around the country need help making the right procurement decisions amidst rising Inflation.
It’s sad to say, but Nigeria seems like the only place in the universe where the law of gravity isn’t obeyed regarding the prices of goods or services. Once prices go up, they never come down. Of course, this is nobody’s fault because we regularly walk into Inflation.
Nigeria’s inflation has been higher than the average African and sub-Saharan countries. It rose to 29.90% in January 2024 from 28.92% in December 2023. It then increased to 31.70% in February, marking a 1.90% increase from the rate in January. Statistics show that Nigeria’s February 2024 inflation rate was 9.79% higher than the 21.91% recorded in February 2023.
The inflation rate jumped to 33.20% in March 2024 compared to 31.70% in February. With the numbers going up and never coming down, you can agree that the law of gravity doesn’t work here.
As a procurement officer, you would ask, how do I deal with vendors and effectively manage the procurement processes with these ever-rising and never-falling increases? Let’s look at what ways work best, but before that, let’s understand the procurement process and how Inflation affects it.
What is the Procurement Process?
Unlike what people think, procurement goes beyond just purchasing goods and services.
The procurement process refers to the steps involved in acquiring goods or services required by an organisation for its operational needs. It involves identifying what your organisation needs, sourcing suppliers who can satisfactorily deliver on those needs, negotiating favourable contracts, purchasing the goods or services needed, and maintaining good relationships with suppliers and vendors.
If this is the procurement process, how does Inflation affect it? Why does it make procurement officers have sleepless nights and think about different approaches to handling processes differently than they used to? The answer to these questions is just what you would read next.
How does Inflation affect the procurement management process?
Yes, Inflation leads to an increase in prices of goods and services, but isn’t that all there is to it? What other possible dangers could this pose to affect the entire procurement process? Let’s see
Increase in cost of goods and services
This tops the list. It’s common knowledge that Inflation leads to increased prices of goods and services, affecting budget allocation. Your Organisation will be forced to increase its budget, spending more on the same quantity of goods or services, you could have gotten way cheaper.
No organisation or individual wants to spend more on goods or services that could be obtained for less, but Inflation will tell you, “Sorry, not on my watch.”
Frequent Adjustments in Supplier Contracts
Ultimately, everyone needs to keep afloat, and suppliers are not exempted. When there’s Inflation, suppliers adjust their prices to cover several expenses, including materials.
The procurement manager, on the other hand, is focused on securing a fair bargain to ensure the organisation isn’t spending above its budget. These factors impact the contract negotiation process, causing adjustments every time there’s a shift in the market, making it difficult for the procurement manager to arrive at a fair deal.
Broken Relationship with Suppliers
Some suppliers might reduce the quality of their products or services to stay in business. The ones who do not might be too expensive.
The procurement officer’s primary concern is to get the best quality product or service at the best price possible. Inflation doesn’t help his case. This might affect the relationships he’s managed to build with these suppliers or vendors over the years.
Supply Chain Disruptions
Inflation might lead to supply chain disruptions, as suppliers might find it difficult to source raw materials or get them to the procurement officers at the appropriate time.
Situations like this can drive the procurement officer to frustration if there are no other alternatives to deal with it.
Budget Limitations
Due to the increased cost of items which of course is the result of inflation, organisations have to work with limited budgets as the prices are no longer the same. Prices that could cover some items will not be the same anymore which becomes a major challenge in managing budgets.
The procurement officer comes off worse as he now has to find ways around cutting costs while still getting good quality products or services.
Potential Impact on Projects
Imagine your organisation has a capital-intensive project, like building a new facility. With Inflation, the cost of materials will rise, which will become a headache for the officer charged with procuring these materials. This would significantly impact the initial cost budgeted for the project.
We’ve established the fact that indeed inflation does affect the procurement process in different ways, giving the procurement management team a lot to worry about trying to get the situation under control.
While Inflation cannot be stopped or handled, its impact on the procurement process can be limited. It can be efficiently managed to reduce its effect giving the procurement team some level of control in managing the process.
How to manage the effect of Inflation on the Procurement process
Difficult, yes, but possible. Let’s look at a few ways the procurement management team can reduce the impact of Inflation from ruining the entire procurement process.
By Staying on top of Market Trends
Even if it means having a radio glued to your ears, please do. Procurement officers must always stay informed of new economic and market trends and how inflation rates affect the prices of goods and services.
This ensures nothing surprises you. You can anticipate price changes and adjust your procurement strategies to counter the potential effect on your procurement process.
Think Long-term while Negotiating Contracts
Negotiating long-term contracts with suppliers is essential. It allows you to renegotiate terms in cases of price increase due to Inflation. These contracts should be flexible, giving room for price changes and renegotiating the earlier agreed terms stated in the contract.
Build New Bridges without Burning the Old ones
By bridges, we mean relationships with suppliers and vendors. Always establish relationships with new vendors and suppliers while maintaining cordial relationships with existing ones.
This is important for maintaining a large pool of trusted suppliers and vendors should you need alternative sources of supplies in the event of emergencies. It also allows for competitive pricing and reduces the risk of supply chain disruption. Instead of depending on one vendor, you have a handful of others, just in case.
Better Inventory Management
By better managing your inventory, you reduce the risk of running out of stock or having one too many, which increases cost. Of course, this is quite difficult to achieve manually. That’s why the process can and should be automated with Instanta.
Instanta provides data analytics and accurate inventory predictions. This allows you to avoid making guesses and predicting inventory stock levels without knowing what’s needed and what’s not.
Review Existing Contracts
Yes, it’s a contract, but you shouldn’t hesitate to suggest a renegotiation when the need arises. Always renegotiate terms and prices with existing suppliers to find mutually beneficial solutions in cases of Inflation. If this is done properly, no party has to feel the impact more.
Procurement Management Software saves you the stress
Again, the Instanta management software plays a vital role, as it is the most trusted and reliable software available. Instanta provides insights to better manage your procurement process by offering predictive analytics and real-time tracking.
With Instanta, you can quickly identify and respond to changes in the procurement process caused by Inflation. Nothing makes the job easier.
Implement Cost-Saving Initiatives
If there’s a way to save cost without compromising quality, do it.
Encourage Collaboration from Different Units
Every unit should be in sync with each other. There should be a joint effort between the different units of your organisation to enable better procurement decisions. Finance should be able to determine how much can be allocated for procurement, letting the operations unit adequately plan for their needs.
This ensures all procurement plans align with your business objectives and budget.
Controlling or stopping Inflation is barely possible, but the effects it might have can be reduced by implementing any/all of the strategies mentioned above.
Yes, Inflation might be a concern for procurement managers, but on the bright side, it offers you new ways to seize valuable opportunities and make the best of the situation. It also gives room for critical thinking birthing solutions to a complex problem and these are essential skills.
