Ukraine-Russia War: Combating The Increase In Raw Material Prices

Even in the absence of a crisis, procurement costs normally constitute a large percentage — almost a third — of the total supply chain expenses. So, in the presence of two simultaneous global crises — with the pandemic still in its dying embers, and the ongoing Russia-Ukraine war — the steep rise in material costs across the globe has been an inevitability. The war, especially, is responsible for a huge surge in procurement prices everywhere due to the historical significance of the two involved countries in the global raw material market.

Russia is a major exporter of, amongst other materials, minerals, iron, fertilizers, wood, aluminum, wheat, and ores. Ukraine is not far behind either, with the country being a leading exporter of seed oils, corn, iron ore, and wheat, amongst other raw materials. So, naturally, businesses need to act and take measures to reduce their own procurement expenses using the following ways:

Updating inventory policy and parameters for critical materials

In a bid to keep their procurement lean, businesses only purchase stock when a critical threshold has been reached in their inventory, and the next batch of raw material is imminently needed. While that strategy helps businesses avoid overstocking and works in most circumstances, it is certainly not suitable for a situation like now. The solution to this problem is maintaining a buffer over the original buffer stock most companies already maintain in their material storage warehouses. This 'wartime buffer' can be used in case supplies are needed to keep the production operations going when the price of materials reaches record levels. 

Several businesses that are still keeping a lean procurement and inventory levels are the ones that are most affected by this disruption.

Therefore, maintaining a 'wartime stock' buffer lets businesses refrain from paying for fresh materials and saves them from the war-driven material inflation to some degree. 

Activating alternative sources of supply 

Again, most businesses may be using the multi-sourcing approach, which involves buying from multiple vendors to save time and money. In times of war, such businesses must be quick to evaluate their vendor options in terms of quality and pricing and alternate between primary and secondary suppliers to regularly replenish their inventory from time to time. Switching between suppliers for material purchases helps companies repel the steep rise in material prices and also creates a larger network of vendors for even more flexibility in procurement operations.

Verifying the prices quoted vs. prices in effect during order placements

In a very realistic scenario, there could be a possibility in which vendors provide a certain quote weeks before an order is placed, only to increase the prices dramatically when the date of placing the order comes around. To avoid overpaying in this way, shippers can include specific clauses in the service contract to keep prices in control between the quote phase and the order placement phase. 

Businesses can use automated invoice reconciliation tools to compare the steepness in the price difference between the two phases as a part of this verification process. A checklist of quotes and orders allows shippers to keep track of such figures.

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Building and leveraging long-term partnerships with vendors

Long-term partnerships build a sense of guarantee and security for all stakeholders in trade. Starting a long-term partnership depends on the financing options available to each party. One of the simplest ways for businesses to create smooth financing solutions is to seek the services of a supply chain financial solutions provider. Having a reliable supply chain financing provider brings a steady source of financing into the daily functioning of businesses. This steady source of financing helps vendors and other businesses with consolidating their operations and their working capital. This allows such stakeholders to continue with their daily functioning with minimal to no downtime. 

This can result in a long and fruitful working relationship between businesses and vendors. This relationship is critical, as it can be leveraged to get discounts on procurement and material supplies during times of crisis like wars or recessions.

Avoiding protectionism during policy-making

While all other measures listed here talk about what businesses can do to address the high procurement costs, another critical stakeholder in this process is the national governments of all given countries. Their role in helping businesses and individuals survive is played out through the effective use of policies and the regulation of prices and the overall material flow to keep procurement costs in check for everyone. 

On many occasions in the past, governments have made the mistake of adopting ultra-protectionist policies, and thereby denying resources to other countries by hiking prices or other measures. An example of this is the way in which most rich countries moved in quickly to stake their claim to vaccine supplies or purchase vaccine licenses as soon as they became available. As a result of this vaccine hoarding and ‘vaccine nationalism,’ there are several estimates that suggest that several low-income countries will have to wait until 2023 to completely vaccinate their respective populations.

Material price inflation is inherently global in nature. So, governments must not use protectionism and create policies that isolate other countries and push this inflation further.

Leveraging indirect procurement 

While businesses focus on reducing the costs of material and procurement, they can also pay attention to making their indirect procurement more efficient. If businesses invest in indirect procurement in terms of technology and personnel, they can ensure that their daily functioning is more efficient and lesser resources are used in multiple operations, especially procurement. Although indirect procurement does not influence the bottom line of companies in the way direct procurement does, it is just as important for influencing the overall continuity and procurement of any business.

Negotiate new supplier contracts/extensions aggressively

In the current time, businesses need to be strategic at every possible phase. This includes the time when they negotiate contract extensions or signings with their suppliers. Businesses need to be more aggressive during such negotiations. The new terms in their contracts must be focused on lowering the prices of materials. Moreover, existing contracts need to be extended only if suppliers are offering their materials at consistently lower prices. Tactics such as renegotiation and bundling can be used for this purpose.

A situation like the current one requires businesses to have the most resourceful financial and technology service partners by their side to maintain continuity and cost-efficiency. Bizongo can be this solution for businesses looking to navigate their B2B operations with ease with our supply chain financing and vendor management solutions.

Kindly contact us to know more about our bevy of services for B2B businesses.