Proactive procurement professionals throughout Australia and New Zealand will be on the front foot to quell inflationary pressure with rates being increased and the possibility of further hikes looming in June.
For the first time in 11 years, The Reserve Bank of Australia on Tuesday May 3 announced it would lift Australia’s official cash rate by 25 basis points to 0.35 per cent from 0.1 per cent.
While procurement is gaining influence in businesses, no controls can be put on effects of the wider economy.
And with inflation at a 40-year high, many business leaders have little to no relevant experience to draw on.
Bain & Company has released a six-step guide to help with cost management actions to counter the effects of inflation but generate lasting value.
In a study of 5700 companies, Bain & Co says those that cut costs to improve productivity the most during previous inflationary periods achieved higher returns compared with firms that took less action.
Bain & Co says producer price index (PPI), a measure of the price of goods postproduction, has risen at an alarming rate.
“In each of the months in 2021, the PPI in the G7 countries rose at an average rate of 9.3%. Then, in January of this year it reached 13.5%, and 14.1% in February (see Figure 1). This is a stark contrast to the average of –1.5% throughout 2020,” the guide says.
They said this demonstrated “how perilously inflation was gaining speed” before the rising commodity prices caused by the war in Ukraine.
The world was in the grip of the Global Financial Crisis of 2008 – the last time we saw a significant bump in PPI.
Looking back at 2008, Bain & Co said BorgWarner, a US-based automotive supplier, weathered the storm – even outperforming the market.
The company formed a global procurement organisation to spend and buy better. Capital spending was focused on the most important strategic issues. This helped the company attain 43% compounded annual TSR growth.
Bain & Co says to overcome inflationary challenges companies need to make moves to cut costs and also build more scalable growth platforms, “positioning them to strategically reinvest in programs that deliver greater resilience and stronger purchasing and pricing capabilities.”
1. Get spending visibility
Bain & Co says it is critical to establish end-to-end actionable visibility of spending by cost category, business process, function and business unit.
“This is the foundation for all other productivity efforts. It enables the right level of accountability throughout the organisation to ensure that all decisions are made knowing the full impact on P&L,” the guide says.
2. Differentiate strategic and nonstrategic spending
- Reduce executives’ choices that may jeopardise the company’s long-term strategy
- Distinguish between strategic and nonstrategic cost-cutting, the protecting of signature customer and employee experiences, and fiduciary requirements, for example.
- Use consistent, accessible financials to prioritise higher return on investment (ROI) decisions.
- Identify where investments should be pulled back and cost savings realised.
3. Unpack the drivers of spending
Bain & Co says the next step is to dissect the prices paid and consumption (quantity or volume), including the underlying drivers, for critical cost categories.
“This step allows companies to create granular, trackable initiatives linked to a unique driver of a broader cost category. It sets the stage for a host of possible moves,” the guide says.
- Establish a preferred vendor program to increase buying power
- Re-evaluate the right make vs. buy mix for core functions like software development
- Deploy AI-powered sourcing tools to generate automated and real-time insights
4. Reduce consumption
The next step is for companies to tailor their approach to match the inflationary environment by spending better, Bain & Co says.
“One way to do this is to set up a “spending czar” or “spending control tower,” the guide says.
Bain & Co says a focus on spending better can also lead to cross-functional change breaking down silos and encouraging collaboration.
5. Eliminate work
Eliminating the work itself has the greatest impact in light of labor shortages and ballooning costs.
Bain & Co says companies can use “a clean-sheet mindset, or zero-based redesign” to reset the way work is done.
“This approach forces companies to scrutinize both what activities are performed and how those activities are performed, with specific tactics to eliminate unnecessary work and automate,” Bain & Co says.
Technologies like robotic process automation (RPA), workflow, and intelligent document processing can free up labour, increase effectiveness and create value.
Bain & Co highlighted the stability automation created for those which invested before the pandemic have “weathered the crisis better than others.” Some have leveraged automation to reduce supply chain disruptions and made higher returns, the guide says.
But on digital transformation Bain & Co said companies needed the right approach. The success stories are those that invest in identifying the opportunities and potential solutions – and the right the right plan, the guide said. “This will be a critical factor for everyone looking to leverage automation to combat inflationary pressures,” said Bain & Co.
It highlights Cigna and David’s Bridal which realised value from automating processes from $2 million to more than $100 million within a year.