|18th May 2022||Blog|
With the continuing cost pressures facing universities and consumers alike, SUPC’s Head of Procurement Services Rob Johnson re-visits the topic of reducing price increases and considers approaches which could be used with your suppliers.
As recently as October last year I wrote an article addressing how price increase requests could be handled. This was released at the same time as Daniel Craig was about to make his last outing as James Bond; his replacement as 007 has yet to be announced but given the current challenges we are all experiencing I thought it sensible to re-visit this topic and consider some supplementary approaches which might be deployed.
The approaches proposed in my prior article are still very much valid, but it is interesting to note how rapidly the situation regarding cost pressures has deteriorated.
Given the range and extent of increases being submitted by suppliers, it is important to prioritise effort and focus – both across your supply base and within a specific request. All requests for increase must be recorded and “triaged” so that the finite resources and time available to procurement teams are applied to achieve optimum effect. As soon as a request is received it is necessary to establish how much is spent with the supplier and to calculate the financial impact of such a request. This basic calculation should inform the priority the request is assigned.
The October article referenced using the Kraljic matrix to segment and review categories and this remains an important starting point in profiling potential impact. Products or services which may be categorised as critical or strategic are worthy of greater focus than those in leverage or acquisition quadrants. While spend may be higher on some leverage items, the competitive forces which surround leverage categories will likely serve to suppress suppliers’ preparedness to increase prices, beyond that which market forces will permit. You may still see increases arising in leverage categories, but suppliers know they are putting their order books at risk when they propose a price increase. Suppliers in the critical or strategic quadrants may be less constrained by the forces of competition and may be prepared to adopt a more assertive stance re-proposing price increases.
A key principle here is to divorce the concept of “price” from that of “cost”. The focus of procurement’s pushback and challenge must be to understand and validate how the supplier’s costs may have increased and what that means for the change in price proposed. The supplier should not present a new price which yields them a higher margin than they were previously achieving. Even if input costs have increased, it should not mean that the supplier can command a higher profit.
Your approach to your suppliers must require them to provide a breakdown of their input costs and supporting evidence of what they have done to manage the extent of the increases they are requesting. We should be asking suppliers the following:
- What have they done to offset the impact of increases on the cost of input materials?
- Are they able to support their requests with independent indices or information?
- What are their proposals regarding a return to lower pricing if their costs subside in the future?
Inflation is running at levels not seen for many years and this will inevitably begin to work its way into impacting the cost of labour and wages. It is probably still too early to see the impact of UK wage inflation working its way into increased pricing, but it will arise and it is important to be able to respond. We should be asking suppliers the following:
- What has the supplier done to offset the increase?
- Has the supplier absorbed some of the labour cost pressure or are they passing it all through to their customer base?
- What productivity improvements are they seeking to achieve or secure from their workforce?
A further step in challenging a request for an increase, particularly with suppliers who may supply across a range of products or items, is to drill down into the detail of the request. A supplier may provide a new price list covering their entire catalogue; isolate out those items you buy from that long list and identify those you buy most of.
- Prepare a ranked list by spend and prepare a “Pareto analysis” of those products showing the greatest impact.
- Focus your time and analysis on these products rather than the entire list; if price increases vary across the list, challenge the supplier to explain why they vary.
- Reference them back to provide supporting evidence of the increased costs incurred.
As buyers, we must recognise that we have a professional obligation to push back on price increase requests and so play a significant part in the effort to suppress inflation. If increases go unchallenged this will inevitably prompt a snowball effect of higher prices across all areas and sectors of the economy. We all have a part to play in helping to re-stabilise the economy. Whilst that may sound somewhat grandiose it is a genuine and heartfelt opinion and I believe one which should be shared with suppliers.
For support in this area or any other from SUPC, please contact SUPC Head of Procurement Services Rob Johnson.