Buyers are operating in “one of the hardest inflationary environments seen in decades”, according to McKinsey.
UK inflation hit 5.4% in December, the highest in almost 30 years, according to the Office for National Statistics.
In response McKinsey has produced a guide to help buyers negotiate with suppliers who are seeking to hike prices.
1. Analyse the hike
McKinsey said the first step in responding to a supplier price rise is to analyse the hike. This involves identifying the main cost inputs that have the highest level of change and estimating the percentage of the total cost these inputs make up. A starting point must be chosen from which to calculate the change in input costs, perhaps reviewing the past 3-5 years of economic data to see how prices have fluctuated. Finally an acceptable price increase range should be calculated.
2. Prioritise categories
Next, categories must be prioritised based on the company’s exposure, including understanding which face inflation and the terms of contracts.
Immediate actions to mitigate inflation might include maximising spend on existing contracts whose prices aren’t indexed for inflation and requesting clawbacks on unindexed contracts that covered periods when commodity prices fell.
Other options include accelerating value engineering and adjusting batch sizes or order frequency. Optimising supplier footprints for better control over logistics, cost, tariffs, and inventory is worth considering.
3. Seek win-win negotiations
If price rises appear unavoidable seek win-win negotiations such as asking vendors to help fund promotions to partly offset price rises for customers. If all else fails, consider exploring new suppliers.
“For many years, inflation rates in much of the world remained low, a relic of the 1970s that little concerned most procurement, supply chain, and operations leaders. Specific commodities would experience sharp price increases, but those forces typically eased before they could trigger broad-based price pressures across swathes of the economy,” said McKinsey.
“However, that’s changed, and merchants today are planning and buying for their categories amid one of the hardest inflationary environments industry has seen in decades. When a supplier brings a price increase to a merchant, especially in this economic environment, the buyer may not have the right tools, capacity, or time to determine whether a price increase is warranted.”
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