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Why You Should be Tracking Indirect Procurement Category Inflation

Posted by: 
Ranajit Dey
 | Jan 2021

Since 2011, global indirect procurement spend has been growing by around 7% annually. To take control, you need to start tracking indirect category inflation.

 

According to McKinsey, global indirect procurement spend has been growing by an estimated 7% each year since 2011. Many of the inflationary factors driving this rise are well outside of most organisations’ control – so what can today’s procurement teams do to keep these essential costs under control?

The short (and deceptively simple) answer is to improve inflation forecasting. Just as they do for their direct categories, procurement teams should be collecting intelligence to help them understand what will happen next in their indirect procurement categories, so they can stay ahead of costly shifts.

Armed with that insight, procurement teams can begin negotiating better contracts and deals. They can also start making proactive improvements to sourcing strategies for their indirect procurement categories, helping to keep spend under control.

If the answer is so simple, why aren’t procurement teams already doing it?

It sounds simple. But in practice, keeping up with what’s happening in major indirect procurement categories can be an extremely challenging task.

Subcategories like global shipping, logistics services, and real estate are all governed and impacted by a huge number of complex global drivers, regulations, and indices.

That complexity, paired with an entrenched perception that many of these indirect commodities and services are inflexibly priced, with little room for negotiation, naturally leads procurement teams to focus their efforts elsewhere.

The result is that most teams do very little indirect category forecasting, leaving them at the mercy of their global suppliers – a big reason why spend is slowly creeping upwards every year.

A-road-with-arrows

Retaking control with market intelligence services

By using the intelligence and forecasting services offered by an expert partner like The Smart Cube, procurement teams can take the complexity out of understanding shifts in their indirect procurement categories.

Those services translate the vast array of global forces impacting prices into easily understandable shifts and trends. When paired with a procurement team’s own insights and data, they can enable better supplier, contract, and pricing discussions worldwide.

Let’s look at three key global indirect procurement categories as examples:

Road transportation

In anticipation of the world returning to its pre-COVID state, organisations of all kinds are restocking and refilling shelves to meet the expected rise in consumer demand.

Unfortunately, thanks to COVID restrictions in regions like the EU, and an existing global driver shortage, the volume of available drivers won’t be able to scale to meet this demand perfectly.

Together, those forces will see trucking costs rise by 3.04% in the US, and as much as 5.45% in the UK, in 2021.

However, the easing of COVID restrictions on drivers across the EU means this increase will be far less pronounced in much of mainland Europe.

Ocean logistics

As manufacturing outputs return to pre-COVID levels, and businesses begin to restock at higher volumes once more, demand for ocean logistics services is also predicted to rise significantly over the coming months.

Ocean logistics operators are facing all the same challenges as their road logistics counterparts – rising demand, worker shortage, and COVID-based limitations on movement. However, they’re also contending with major regulatory changes.

The shift to low-sulphur fuels in particular means that many ships must spend long periods of time out of commission, as they’re retrofitted to meet new standards.

This means that shipping prices in 2021 will rise even more sharply than trucking costs – with prices projected to rise by an average of around 13% worldwide.

Warehousing

With the COVID-19 crisis keeping shoppers away from physical stores, many brands are expanding their ecommerce operations. This has caused a surge in demand for warehouse space.

In many regions, this demand has been largely offset by reduced manufacturing outputs, and by companies going out of business and therefore freeing up existing warehouse stock.

In the APAC region for example, 68% of total shoppers have turned to online channels. But reductions in the volumes of products being manufactured in countries such as China mean that warehouse prices are only projected to increase by 1.37% year on year.

Warehouse-with-blue-drums

Indirect inflation forecasting in action

Those examples are just three of the areas that The Smart Cube researches and evaluates as part of its bi-annual indirect inflation forecast reports for a major global CPG company.

Before engaging with The Smart Cube, it relied purely on its own historical data to forecast indirect spend inflation. So, the company asked us to provide visibility of the macro factors impacting its indirect subcategories that it could use alongside its own data to build up a reliable, personalised view of forecasted inflation.

Using projected year-on-year price change forecasts for everything from packaging and pallet pricing to facilities management costs, the company is now empowered to make informed indirect purchasing and contract decisions. Now, the company can negotiate indirect procurement contracts just as shrewdly and confidently as it does its direct procurement agreements.

To learn more about our indirect inflation forecasting and explore the kinds of inflation insights we deliver for businesses across the globe, please get in touch to see our latest inflation forecast dashboards or talk to one of our intelligence experts.