How to Protect Against Price Hikes and Product Shortages in Procurement
By Hugo Britt | August 5, 2021
Procurement would be simple if prices never changed. We could choose a supplier, negotiate a price that is agreeable to both parties, sit back, and relax. Unfortunately, this is rarely the case.
Price hikes happen as a result of:
- Ever-changing prices of commodities (raw materials like oil, gas, coffee).
- Suppliers suddenly increasing the cost of their products or services in response to rising costs in their own supply chains.
- Disruptive events such as cyberattacks, pandemics, or shipping delays.
- Unexpected shortages driving up demand and cost.
4 ways to prepare for price hikes and product shortages in procurement
In this article, we’ll explore how sourcing teams can get ahead – and stay ahead – of shortages and avoid the pain of a price hike.
Shift from Just-in-Time to Just-in-Case supply chains
Just-in-Time (JIT) supply chain management means purchasing only as much as you require, based on expected customer demand. Following lean procurement principles, the goal of JIT is to reduce costs, keep inventory to a minimum, and minimize the need for warehouse space.
However, JIT only works well when supply chains are operating seamlessly. JIT strategies collapsed dramatically during the massive disruption caused by the COVID-19 crisis.
The alternative to JIT is Just-in-Case (JIC): purchasing more than you need. This strategy involves calculating how long your business would take to return to productivity after a major disruption such as a cyberattack, and purchase enough vital goods and materials to last for that period, thus ensuring business continuity.
As expected, the downside of JIC is increased warehousing costs, but it provides businesses with a buffer against price hikes and shortages.
For example, a stationery manufacturer follows a Just-in-Case policy of purchasing and storing enough ink to meet five months of average demand. In September, the region’s biggest ink supplier suffered a factory fire. While its competitors are impacted by the resulting ink shortage and price hike, the stationery manufacturer knows that it has enough ink on hand to last until January, by which time the supplier will have rebuilt its warehouse and returned to usual productivity.
A hedge in procurement is a deal made to try to lessen the impact of a potential future price increase. Buyers “hedge” by purchasing similar quantities of the same product (say, microchips), in two separate markets at the same time. If the price increases in one market, hopefully this will be offset by a price decrease in the other market. Another form of hedging involves purchasing a futures contract to protect against potential price increases.
The practice is widely used but comes with a warning: buying hedges is a form of speculative trading, which means that an incorrect guess will lead to losing your investment.
Predictive analysis leverages the power of big data, AI, and machine learning to predict future outcomes (such as a price hike) to support procurement decision-making. Predictive analysis tools draw their data from everywhere – external market insights, internal buying patterns, and even weather forecasts – to make an intelligent, data-based guess about price movements.
For example, a procurement professional may intend to purchase a bulk order of coffee beans in August. However, the predictive analysis software looks at historical price patterns and rainfall data in coffee growing regions and advises the buyer to wait until October, by which time prices are expected to fall by 20%.
Join a GPO
Joining a group purchasing organization will give you access to pre-arranged contracts with built-in, steady pricing. Una membership offers price protection with contracts that lock in prices for several years at a time.
The power of bulk purchasing also enables our members to comfortably shift to a Just-in-Case model and purchase more than they need (at an affordable price) should they need to protect against future shortages.
To learn more about how a GPO can help prepare you for future price hikes and product shortages in procurement, contact Una today.