Businesses should thoroughly investigate the price rises their suppliers are requesting before agreeing to new terms amid concerns some firms are seeking increases worth significantly more than actual cost increases.
This is according to procurement and supply chain management consultancy INVERTO, part of Boston Consulting Group, which found that some suppliers and service providers are asking for price increases of between 10% and 30%, while their costs have only risen by between 5% and 15%.
Sushank Agarwal, Managing Director at INVERTO, said that more businesses should request full cost transparency from their suppliers to prove that their price rises are genuine and justified. He states that this approach enables fact-based open discussions that are mutually acceptable.
Agarwal highlighted that the same approach should be taken once inflation subsides and key input cost drivers begin to fall again. At this point – likely to occur for most in late 2023 or 2024 – businesses should ask for suppliers to cut their prices again using the same fact-based analytical approach.
Energy prices and shipping rates have already begun to fall from their 2022 peaks, meaning businesses should be aware of the potential for negotiating prices down on this basis later in the year.
Agarwal: “There are some suppliers who appear to be using inflation to grow their profit margins. Too many businesses lack the cost breakdown insights to help them recognise when that happens.
“In many industries, price rises of above 10% may well be justified. However, justifying an increase of 30% is a lot more difficult. Querying those rises and interrogating the data behind them is something more businesses should go through with their suppliers.
“The process of having suppliers justify their prices should become an established part of the procurement process for many more businesses. That doesn’t just go for periods of inflation but periods of deflation too. If a supplier’s prices rise due to their costs increasing, clients should look at how to ensure prices fall again when costs reduce.
“Momentum in negotiations has been with suppliers over the last two years as the price of inputs has risen and supplies of some goods have fallen. This is likely to start to reverse in the medium-term and businesses should be prepared to consider pushing down on pricing when it does.”
Areas in which businesses may need to most closely scrutinise their supplier’s costs include energy prices, transport costs, commodities and costs of chemicals.
Agarwal stated that any decision to ‘push back’ on suppliers’ price increases should be taken with an awareness of the risks. In a market where prices have been rising and supply volumes may be limited, some suppliers may prioritise serving clients that are willing to pay elevated prices. Customers could instead look at the possibility of closer relationships with their key suppliers in order to secure supplies, such as through benefit-sharing.
To help businesses to monitor their suppliers’ costs and negotiate pricing with them, INVERTO has created its Value Protector tool. This tool allows buyers to independently assess the costs of all their suppliers’ inputs across the locations in which they operate. This gives businesses the information they need to judge whether the price rises demanded by suppliers are genuine or to decide whether to negotiate price decreases.
Businesses can then use the insights provided by Value Protector during meetings with suppliers in order to base the negotiations on the true cost increases they have experienced.
Agarwal concluded: “Monitoring the supplier’s input costs is challenging enough for a single supplier, let alone a large number who operate in different locations around the world. That process can also be hampered if suppliers are unwilling to openly share data on costs.
“In the current trading conditions, suppliers need a fair margin to survive. Therefore, when the data insights show that a price increase is justified, it should be paid. However, being able to monitor costs independently and use data when discussing pricing with suppliers changes the dynamics of negotiations and can lead to lower prices where requests have been inflated.”
NAM Implications:
- Real world negotiators may prefer to play catch-up via CPIs that reflect current cost price increases first…
