In January of 2022, inflation reached its highest rate in 40 years. Scarcity of raw materials, supply chain disruptions and labor shortages have contributed to rising prices, impacting business and consumer budgets alike.
Yet when suppliers come calling for increased prices due to inflation, it can be difficult to tell what’s justifiable and what is just an attempt to take advantage of the current environment.
That's why we invited Art of Procurement’s Philip Ideson, Kelly Barner and Helen Mackenzie to discuss strategies that procurement professionals can use when faced with inflationary increase requests.
Q&A Insights
Our panelists held an insightful Q&A-style webinar, moderated by Ashley Cruz of ProcurementIQ. Watch the full webinar to hear the responses to audience questions, such as:
- Would a Should Cost Analysis help procurement identify the true nature of cost increases?
- What documentation should procurement request to justify increases associated with employee wage growth?
- What are best practices for breaking down and analyzing increases across a supplier’s catalogue of 100,000+ SKUs?
- What are best practices for dealing with cost increases tied to CPI, which varies widely from country to country?
- How should procurement respond if a supplier doesn’t want to be transparent about their costs?
Food for Thought
Along with questions, attendees submitted insightful feedback and tips related to the discussion. Read some of our favorites below:
“Getting a supplier to align that the discussion is about cost rather than price can be used to help highlight the intent is to manage costs and help them preserve their incremental margins.”
“RFI/RFP is certainly a good way to turn up the fire on the vendor issuing a price increase and may deter them from pushing forward with the request to not lose the business.”
“I agree with the ‘5-year-old’ approach of asking why multiple times. That exact situation occurred in a negotiation when the supplier wanted an escalation clause. It turned out their need was for staff retention, so we agreed to a very narrow set of circumstances for price increases.”
Digging Deeper
Our live Q&A session offered lots of answers to audience questions, but we didn't quite make it through the full list. Below are some of the lingering questions and our suggestions for how to best address similar scenarios:
1. Are shorter-term agreements a good idea for 2022?
While you always run the risk that prices could continue rising, if you can’t negotiate a contract with pricing tied to a cost index, a shorter-term agreement is likely preferable. Just remember to balance the reduced risk of a shorter-term contract against the added time that your team will spend on the contract again in just a few months’ time.
2. How should we approach multi-year agreements, given that suppliers are likely to hedge and include a margin for their own safety?
The benefit of multi-year agreements will vary based on the product, and the size and importance of the contract to your business. If it’s a critical product for which you foresee supply chain issues, securing the volume early may be worth the added cost. If it’s a contract substantially longer than the market average contract length, then you should be able to negotiate a highly favorable discount. Either way, the best strategy to mitigate wide safety margins is to tie the price movement to an index, especially if the price of input costs tends to be volatile. You can also try to negotiate a long-term contract that allows for annual price and volume review, or one that has an opt-out clause.
3. How can we mitigate increases when service providers want to tie their price to Cost of Living Adjustments (COLA)?
The COLA index and Consumer Price Index (CPI) are both measures of inflation that intend to capture consumer costs, such as food and beverages, housing, apparel, transportation, medical care, recreation and other goods and services. Therefore, COLA and CPI are generally bad indicators of supplier costs. Our recommended strategy: Keep asking “why” to dig deeper with the supplier, determine how closely it has historically aligned with their costs, and offer an alternative index, or work to negotiate a standard fee cap instead.
4. What are best practices for mitigating cost increases with your largest supplier, or when the supplier has already developed a deep knowledge of internal platforms and processes?
When the relationship is critical to business operations, or switching costs are so high that the supplier knows that option is off the table, buyers lose a lot of negotiation leverage. A partnership-focused approach to negotiations will serve you best in this situation. Try looking for ways to reduce the cost to serve, reduce demand internally, or work with your supplier to find other points of value that you can give (e.g. longer contract term) in exchange for a smaller increase.
Interested in more events like this? Share your comments and suggestions for future webinar topics by contacting your ProcurementIQ representative or marketing.iq@procurementiq.com.
