Reference no: EM133298701

Question: For many years, inflation rates in much of the world remained low, a relic of the 1970s that little concerned most procurement, supply-chain, project and operations leaders. Specific commodities would experience sharp price increases, but those forces typically eased before they could trigger broad-based price pressures across swaths of the economy. However, that has since changed, and merchants today are planning and buying for their categories amid one of the hardest inflationary environments industry has seen in decades. When a supplier brings a price increase to a merchant, especially in this economic environment, the buyer may not have the right tools, capacity, or time to determine whether a price increase is warranted.

How can an organization know that short-term price increases are fair and in line with expectations? How can companies prepare to deal with the long-term consequences of inflationary markets? No one can perfectly predict the next set of inflationary pressures, but it's reasonable to assume that they will return eventually. Project managers can prepare now to minimize the impact when that day arrives. Some of the strategies that need to be incorporated include employing a range of sourcing and contracting techniques to reduce exposure to additional costs. For example, diversifying the supplier base for priority raw materials gives companies greater ability to substitute other sources should prices spike. In some circumstances, it is possible to partner with suppliers to share supply-chain risk by using fixed, long-term contracts.

Project managers can include terms and conditions in contracts to adjust the timing of contract expiration and risk exposure. For example, volumes might be agreed on for the long term, with pricing updated frequently as the market changes. Other approaches include using public indexes or developing synthetic price indexes-that is, tying contract prices to a market price for a particular class of commodities or underlying cost drivers. Using collars to restrict price changes to a specified range and matching contract terms with those of supplier contracts can also help in structuring risk and allocating it fairly. Customers may also be willing and able to absorb some degree of risk, perhaps in exchange for reduced prices or other concessions.

In addition, project leaders can transfer risk externally by collaborating with other companies in pursuit of shared goals. Such cooperation can create a win-win situation that reduces both cost and risk. For instance, a manufacturer can gain access to raw materials outside its home market by contracting to swap or share raw materials with another manufacturer, allowing both companies to reduce costs and giving them the flexibility they need to minimize supply-chain risk.