Procurement 2023: BIG Trends and Predictions is an annual report published each January by Ardent Partners.
Each year, Ardent Partners identifies the “BIG trends” that emerge from its recent research that we believe will impact procurement that year. Ardent also makes a series of predictions based upon those trends that are intended to help Chief Procurement Officers, sourcing executives, category managers, and other procurement staffers focus on the important issues facing the profession in the year ahead. These findings culminate in our Procurement 2023: BIG trends and Predictions report. Today we share some of our thoughts on inflation.
Inflation’s Impact in 2023
BIG Trend: Inflation!!!
In January of 2022, the consumer price index for all items rose faster than in any month in the last 40 years. Even when adjustments were made for energy and food costs, inflation reached the highest levels it has been since the early 1980s. Inflation is a global phenomenon and 24% of CPOs in 2022 made fighting it their top priority. Inflation is the obvious enemy of the CPO because it drives higher costs, creates greater uncertainty all while increasing both wage and budget pressure.
Prediction: “Inflation” Will Not Be Curtailed
Inflation will not be curtailed in 2023 because the market is not experiencing true economic inflation. There are many causes of price increases, but many of the B2B goods and services sourced in 2022 experienced sharp price increases without a clear market explanation or rationale. For example, in Boston this summer, the price of bleach rose to $8.00 per gallon after a lifetime with a price point below one dollar per gallon. By the fall, prices had fallen to $3.50 per gallon without explanation.
In many supply markets, price increases over the last 18 months were not inflation-driven, but rather, increases driven by profit-seeking suppliers that have spent the last decade improving their products while simultaneously lowering their prices. It is important to distinguish between true inflation and businesses raising their prices to make greater profits, as they have different implications for the economy and for individual procurement teams. True inflation can erode the purchasing power of money and can affect the overall enterprise cost structure, while price increases by corporations may affect the affordability of specific goods or services. When Porter’s Five Forces model show that when suppliers have pricing power and they choose to use it, prices rise and can stay high.
Prediction: CPOs Will Need More/Better Sourcing to Hit Performance Targets
Hitting the CPO’s performance targets in 2023 will be particularly challenging. To get there, sourcing teams will have to act with greater vigilance and stretch their sourcing capabilities, supply market intelligence, category expertise, and core instincts to capacity as they try to manage and/or avoid major price increases across many categories. Inflation will remain a persistent concern for most procurement teams in 2023, but there are many ways to combat it. One effective strategy is to use should-cost models, which analyze current prices to identify opportunities for savings with suppliers. Another approach is to conduct an embedded-cost analysis, which delves deeper into the underlying factors that drive prices and can inform more effective negotiation tactics. By considering these and other negotiation strategies, sourcing teams can take a more proactive approach to positively impacting performance.
Prediction: Procurement Teams without Spend Visibility Will Be D.O.A.
CPOs running their procurement operations without visibility into spend are committing procurement malpractice. While spend visibility is a critical element to sourcing excellence, visibility into other aspects of the supplier relationship, such as supplier performance and contract compliance must also be attained in order to execute efficiently and effectively and ensure that the current suppliers are performing as agreed and meeting the needs of the business stakeholders. For example, tracking and evaluating the performance of key suppliers helps identify and mitigate supply risk and other problems, but it can also help the sourcing team better understand buying behaviors and how well the contractual requirements match actual needs. The combination of these inputs can greatly improve the process the next time a category is sourced by helping establish a more detailed and refined view of firm requirements and bid evaluation criteria. Most of the procurement teams who spend 2023 sourcing “blind” (i.e. sourcing without spend visibility) will fail to make their numbers by a big gap, and they will be “D.O.A.” (dead on arrival).
Prediction: U.S. Economy Will Have a “Soft Landing”
When it comes to predictions, Ardent Partners has done quite well over the years. Nonetheless, buyer beware!
It is Ardent’s view that U.S. will experience a “soft landing” in 2023. That means a recession, which is loosely defined as a sustained period of economic decline and typically characterized by steep job losses, high unemployment and widespread financial hardship, will be averted. Given the amount of savings and overall wealth amassed during the pandemic coupled with a very tight labor market, a recession in the US looks avoidable in 2023. Ardent is less sure about the EU and other regions, which appear to be facing steeper challenges.
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Tagged in: BIG Trends, Category Management, Chief Procurement Officer, CPO, Inflation, Predictions, Procurement, Savings, Sourcing
