A global recession is looming, according to most economists. What remains to be determined is its length, severity and impact on various sectors of the global economy.
To combat the effects of high inflation and recession fears, chief procurement officers, category managers and sourcing professionals need to prepare for a potential double whammy – a slowdown in demand and supply shortages. As a result, innovative and sustainable tools and levers to achieve rapid and sustainable cost reductions are once again at the top of the agenda. According to GEP’s assessment of 22 categories in the latest edition of our Spend Category Outlook Report 2023, most, if not all, procurement professionals will face intense scrutiny from finance teams looking to cut non-urgent and non-critical spend.
The IMF anticipates lower global growth in 2023 driven by inflation pressures, geopolitical issues and a slowdown in China. The US, China and the euro area are likely to stall. For many, 2023 may feel like a recession regardless of whether the technical conditions for one are met.
To add to the uncertainty, more interest rate hikes could come as central banks seek to tame inflation aggressively. Moreover, businesses that have invested capital to address supply chain disruptions and are now seeing increases in capital cost may pass on the impact of those costs to end consumers.
How procurement pros can respond
To be sure, some sectors will be more heavily impacted by the recession than others. Innovation will be particularly important in the energy category in 2023. Procurement teams can bolster their long-term energy strategy by integrating technological innovations such as real-time electricity and gas consumption tracking, which can help reduce costs by improving negotiating positions. In addition, distributed energy technologies such as on-site renewable energy can help companies hedge against the volatility of fossil fuel prices.
However, the impact of the recession and economic turbulence will go beyond categories such as construction and logistics, which are severely squeezed by supply chain disruptions and raw materials shortages. For example, HR, legal and marketing will need to adjust to ensure they have the proper staffing levels to meet demand. Facilities management must pivot if the recession forces companies to reduce office space. Likewise, real estate will need to be ready if the market cools significantly.
The key in every industry will be to equip procurement with the tools and strategies to pivot as the recession waxes and wanes, as many economists predict it will over the next several years.
In our wide-ranging and comprehensive report, we offer a number of cost-reduction measures and technologies, including:
- Leverage innovations such as artificial intelligence that can make sourcing more cost-efficient through real-time analytics and insights.
- Focus on alternative means of cost takeout internally and via innovation with suppliers.
- Optimize cost and supplier performance using dynamic pricing models.
- Deploy digital category management and pipeline-strengthening tools and solutions.
- Develop and implement sustainable supplier programs and tracking tools.
- Create new skill sets and strengthen existing ones around pipeline generation and stakeholder relationship building.
While a recession may prompt some enterprises to pull back on their sustainability efforts, relegating ESG to the sidelines is not a smart move. Setting sustainability goals is especially crucial for spend categories such as construction and engineering that have been affected by raw material shortages.
To mitigate supply chain disruptions, relationship-based engagement with suppliers remains essential. Category and sourcing teams should prioritize working with suppliers focusing on ESG reporting and enablement and prioritizing long-term sustainability to meet ESG goals and lower costs through new green technologies.
Volatility and uncertainty in 2023 will make it difficult to control costs if you’re not looking ahead. Achieving better visibility into supply chain partners across the value chain is essential in developing the resilience to respond to risks with agility. To learn more about the most critical actions procurement teams in 22 indirect and direct spend categories can take, you can download and read the GEP Spend Category Outlook 2023 report.