How to deal with price increases?
Aug 15, 2023 - What is an appropriate price increase from suppliers? Companies needs to determine whether suppliers are passing along an increase that’s in line with inflation’s effect on the supplier’s costs. Although it’s not possible to answer this question exactly, procurement organizations can at least pressure test the increase by determining if it falls within a fair range or not.
Five things right now:
1) Gain a full understanding of raw material index prices, dynamics, and outlook. Price increases should be attributable to a limited number of clearly articulated causes, not to vague supply-and-demand. Procurement organizations should understand, have access to the data, and track the elements that trigger price increases and cancel these increases once those drivers are no longer applicable.
2) Ensure suppliers can clearly showcase the impact of price increases in the market on suppliers’ prices. Using clean-sheet or cost breakdown methodology to identify the strongest contributor for the price increase is key. For example, an industrial company was faced with a 20 percent price increase for a component. The company reduced the increase to less than 7 percent by demonstrating that the share of raw materials and other input costs the supplier was blaming, was substantially lower in the final cost price, and by showing that the reference used by the supplier was incorrect.
3) Leverage ongoing partnerships, honest dialogue with suppliers, and view the situation as not permanent. The winning suppliers are those who understand their broader role and how to enhance cost resiliency and working towards minimizing passing on costs to customers, which can create unintended consequences.
4) Prioritize optimizing specifications. When prices are high, the impact of a yield improvement, waste reduction, or replacing is amplified. Now is the time to push through alternative specifications or supplier qualifications which in the past, were untouchable: in an inflationary market, the argument of sharing benefits with customers can easily be countered by price stability and certainty.
5) Explore new suppliers. If all else fails, re-consider your suppliers and exploring opportunities to engage other suppliers can be highly effective. While this process will not be as done at once, a strategic review can help identify suppliers who might be able to provide better costing or service.
EPG is one of the leading procurement outsourcing providers in China and have been serving companies with our expertise for over ten years. By partnering with EPG, you gain access to the extensive capacity, capability and scalability of our business. Improved efficiency, increased visibility and transparency, reduced process waste and overall cost reduction will help you deliver maximum value to the company internally and externally.
Even if the work is carried out by EPG, you will maintain full control. We work with total transparency and you will make all important decisions, such as what types of improvements to focus on and which suppliers may be involved.
Procurement organizations can respond to inflation—and save their companies a lot of money.
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