Is your business struggling with mounting costs impacting profitability? The Grant Thornton Procurement Index can help you build a strategic, long-term view of your purchase planning.

The Grant Thornton Procurement Index compiles six of the main costs that face businesses: interest rates, exchange rates, fuel, power, labour and shipping costs. It equally weighs these economic indicators based on their relativity to historical levels over the past two years. A high score from the procurement index suggests that costs are at record highs compared to historical averages, while a low score suggests that prices are bottoming out.

This quarter’s score of 421 implies that many of the index components are nearing record price highs and does not paint a pretty picture about the current business environment. The inflationary pressures in the New Zealand economy are well documented, and these are clearly evident in the indices we track.

Q1 index: Top five takeaways for your business

1. The procurement index and other market commentary indicates rates will continue to rise. Consider how you can reduce debt or achieve the most effective financing package with existing or new lenders.
2. Supply chain difficulties are unlikely to ease any time soon. Recent research reveals that despite many firms intending to re-engineer their supply chains, most merely increased inventory. This comes at a finance cost and will likely generate SLOB inventory, so look to put in place increased management and oversight.
3. It could also be time to re-engineer your supply chains for more resiliency and flexibility. Consider how you might near shore and approve more sources of supply. Gather cross functional teams to pull apart specifications and value engineer your supply chains and operating processes.
4. The index and its elements can be used to increase your understanding of supply chain dynamics and avoid supplier price increases. While there might be temporary surcharges, don't treat them as a new level. Dig into the pricing breakdown and really understand the effect of a shipping cost increase and how margin multiplication ends up with you.
5. Build cleansheets or consider negotiation training for your buyers.
   Once you have done what you can to understand your supply chain, the effects on your costs, and what you can mitigate with procurement work, a robust understanding of your operating model pricing and channel model can help you develop your pricing strategy and pass on the remaining costs.

Index category overview

Unprecedented shipping, power and oil costs continuing an upward creep, and increasing interest rates suggest that businesses are facing continuing price increases in all areas of their expense account.

Almost every pressure we measure is showing strong upwards growth, and most of them are predicted to continue this trend. It seems likely, therefore, that the index will continue to show strong upward growth well into 2022.

Most notably, businesses are struggling to cope with soaring shipping costs and a challenging labour market. Costs continue to mount for companies and, based on our analysis, aren't going to slow down any time soon. New Zealand’s monetary policy belt is only just starting to tighten, so inflation is likely to remain an issue in the year ahead. Put simply, businesses are facing increased costs across the board, and they need to be ready to weather this storm.

Some organisations might feel compelled to take an axe to their balance sheet, but this could reduce the quality of your products and services, and damage morale internally within your company. Just as many countries learnt during recovery efforts following the global recession, sometimes a bit of investment can go a long way. Our economic context, with still relatively low interest rates, could be a good time for businesses to rejuvenate themselves with a fresh coat of paint, rather than batten down the hatches. Times like these are ideally suited to reviewing where your business is at, adjusting your strategy and processes, and looking to conduct business in new and innovative ways. Think about retooling your business models and approach to markets, while looking to maximise your company’s strengths and patching up its weaknesses. Now is also a great time for businesses to look at re-engineering and building resilience within their supply chain - possibly through avenues such as multi-sourcing and utilising more domestic production. Given the finance options available, now is the time to be bold and invest in truly innovative supply chain solutions.

Index categories and analysis

Interest rates: 90 day bank bill rate

Another Reserve Bank announcement and yet another increase in interest rates. It seems that the Reserve Bank is well truly clamping down on the monetary policy front. The half a percentage point increase says a lot about their overall direction with monetary policy. As such, market commentators expect interest rates to gradually continue to rise, with some pointing to a year of continued hikes.

Fuel: Crude oil (USD)

The Dubai crude oil index, one of the three major crude oil indices, has continued to track upwards since an initial drop at the beginning of the Covid-19 pandemic. Uncertainty surrounding the situation in Ukraine has only compounded these price pressures. OPEC is slowly raising oil production again, which should bring some price relief – but this will take some time to eventuate.

Wholesale power: Final prices

Energy generation was in the news last year for all the wrong reasons, and it appears that this is likely to continue in 2022. The Major Electricity Users Group has stated that they are concerned about the year ahead given the rises in wholesale power we are again seeing after a brief respite in Spring.

NZD exchange rates: USD average monthly

Interest rate increases have buoyed the value of the Kiwi dollar somewhat, but the market is displaying a degree of uncertainty as the situation in Ukraine unfolds. Moreover, if inflation figures in the United States continue their concerning trajectory, then hawkish Fed action is likely, which could trigger a resulting loss in value for the Kiwi dollar.

Employment rate

Unemployment plummeted to its lowest level ever at the start of February, placing immense labour cost pressure on firms across the economy. Immigration restrictions have exacerbated the labour shortage facing businesses, and this means labour cost pressure is likely to continue for the foreseeable future.

Global container freight rate index

Labour shortages, rising consumer demand and Covid-19 related supply chain disruptions have wreaked havoc on international shipping markets - a situation only worsened by events like the Ever Given's blockage of the Suez Canal. Analysts expect these high prices to remain firm in 2022, meaning this is likely to be an ongoing pain point for businesses.

What the procurement index is telling us

Interest rates, exchange rates, fuel, power, labour market costs and shipping costs form the foundation of any businesses’ expenses. The last 18 months have been unprecedented, both in terms of the pandemic and our economic performance. The index reflects this.

Spurred by never-before-seen levels of monetary policy stimulus, New Zealand seems to be coming off an economic sugar rush – where inflation has spiked and created a difficult and uncertain business environment for kiwi firms to traverse. Now, New Zealand needs to pick up the economic pieces. Almost every component of the index seems likely to continue to rise, signalling that the index could continue its march past the 90th percentile mark, and into previously unseen territory.

What will these conditions mean for Kiwi businesses? The long-term picture remains unclear, but in the immediate term, companies need to be aware of the increasing costs that they will be facing in the coming months and plan their business strategy accordingly. In addition to the top five takeaways we noted at the start of this article, companies should be considering the following:

1. Supplier visibility up and down the supply chain: do you know where inventory is at?
2. Supply chain diversification: have you done the mahi?
3. Strategic vendor management: do you have a programme in place?

More than ever, it is vital to “trust but verify” your supply chain. In the past, there was a high degree of trust in suppliers to deliver. In these times that is no longer enough. The question is, how do you get more visibility? Get in touch with our Consulting team and we can help you figure that out.