The procurement market under pressure: how SMEs can brave the crisis

Several factors increasing costs

While the COVID-19 pandemic may have subsided, its consequences on the international procurement market still have a noticeable impact. Further significant negative effects were triggered by the Ukraine war, which shows no sign of coming to an end. Both events have led to ongoing bottlenecks in supply chains. As a result, prices for raw materials, energy and logistics have reached record highs in some areas, driven not least by considerable inflation. Although these and other cost-driving factors are slowly losing momentum, they are still intensifying competition in the meantime.

While GDP is predicted to grow modestly in 2024, the UK is still expected to lag behind the US and the EU in a number of areas, according to a recent report by Goldman Sachs. Although growth drag from the Bank of England’s rate hikes is now peaking and is likely to fade steadily through 2024, real disposable income is likely to improve by less, reflecting stickier inflation in the UK.  There’s also been a sharp increase in long-term sickness in the wake of the COVID-19 pandemic. This further constrains the supply of labour, which has already been impacted by post-Brexit shortages in some sectors. Goldman Sachs estimates that the structural unemployment rate in the UK is around 5% - above the Bank of England’s latest estimate of 4.5%. As a result, the UK’s growth-inflation tradeoff is more adverse than in other developed markets. The UK’s growth forecast of 0.6% is below that of both the euro area (0.9%) and the US (2.1%), while its expected core inflation, at 3.8%, is higher than the 2.6% in the euro area and 3.2% in the US.

These factors affect the UK’s mid-tier business sector in several ways. Its products and services are often strongly tailored to customers - many of them international - and may also be comparatively complex and therefore highly priced. This makes it difficult or even impossible for SMEs to appropriately pass on additional financial expenses to their clients.
 

What are the dangers facing UK SMEs?

The instability of the current situation poses several critical risks. Although the easing of the COVID-19 pandemic led to a certain “catch-up effect”, the resulting boom in demand for goods has already dried up. We’ve seen a changing situation where production was restricted at first, then ramped up and subsequently slowed down again. This has made operating expenses, sales and margins difficult to calculate, leading to reduced investment and access to finance.

For the time being, the development of Russia's war against Ukraine remains unpredictable. Economic sanctions have already resulted in trade between the UK and Russia falling to historically low levels, and an escalation of the conflict could lead to recession, both in the UK and in Europe. The financial crises in some emerging markets also present an additional risk, which could affect global trade. This also applies to the economic tensions between the USA and China.

The shortage of skilled workers, exacerbated by the UK’s exit from the EU, is likely to continue into 2024 and has a particular impact on the logistics and supply chain sector. The ongoing difficulty in recruiting suitably skilled personnel increasingly ties up organisational and financial resources.

Small and medium-sized enterprises have little influence over this situation, other than in their internal processes. The good news is that when it comes to digitalisation, the UK is ahead of many European countries. Recent research shows that 63% of SMEs find digitalisation useful for revenue growth, and 70% of those asked find it useful for winning new customers. However, SMEs are particularly prone to security breaches: a recent survey revealed that 97% of executives use personal devices to access work accounts, with 74% frequently sending work-related emails and texts from these devices. For UK SMEs, proactive cybersecurity measures are essential for safeguarding business operations and maintaining trust in recruitment, HR and compliance processes. 
 

What do SMEs need to focus on now?

For most companies, volatile procurement markets pose a major challenge. They need to keep an eye on the global political situation and react quickly to cost developments, while ensuring their long-term planning is not neglected. Highly specialised SMEs in particular need to formulate individual solutions to these problems. Some helpful tips:

• The longer and more complex supply chains are, the more likely they are to break. Distances should be as short as possible and the number of stakeholders kept to a minimum. Depending on the business model, market and competition, it may make sense to look for geographically close procurement agents,  ideally within the UK.
• Relying on a small number of suppliers can easily lead to dependencies – especially when it comes to essential products and services. A wider range of procurement sources is always advisable. Having several alternative suppliers will strengthen self-sufficiency and offer more options in the event of bottlenecks.
• High customer satisfaction is crucial right now. Companies need to engage with their target group and retain customers by building trust and effective communication across all channels. Ideally, communication with suppliers will be undertaken largely automatically by means of digital tools, such as interlinked systems for the integrated processing of orders, transport and payment - for example using enterprise resource planning (ERP) software.

These goals can be achieved through strategic purchasing. This involves managing small-scale operational matters in an agile manner and simultaneously providing the company with long-term secure procurement. An appropriate set of digital tools can support these aims by helping to compare offers, monitor delivery times and deadlines and make strategic decisions.

The analytical capabilities of these tools don't just optimise the purchasing process itself: they ensure that the purchasing process also funnels important data to other departments as well as higher-level management. This means that procurement tools and information can make a significant contribution to the overall success of the company.