Price increases can be offset through careful purchasing and market testing.
Supplier inflation has been affecting firms for some time now. But if it wasn’t a steep inflationary rise because of the pandemic, it was due to geopolitical events such as the Russian invasion of Ukraine or the conflict in and around Iran, or to government policy on taxation and Brexit.
So, what can firms do to keep their ships upright in the face of such (permanent) economic headwinds when buying supplies?
A change in pricing methods
Rob Sansom, client solution director at Procure4, reckons the pricing landscape for all business sectors has shifted significantly in recent years, away from relatively stable, cost-based pricing to a far more dynamic and volatile environment.
“Global disruptions”, he says, “have all contributed to increased uncertainty across supply chains and input costs. As a result, pricing is no longer just a function of negotiation.”
Similarly, Joanne McCourt, CEO of Ebit Intelligent Procurement, believes: “Operating through uncertainty has become the norm” and thinks that “developing stronger customer and supplier partnerships is now very important.”
She says: “Customers and suppliers are – rightfully – becoming more demanding of each other” and that “’cost inflation’ is no longer the blanket rationale and customers are looking for more measurable and guaranteed returns for their investment.”
Correspondingly, buyers and suppliers have had to become more sophisticated in how they act.
How to respond to increases
Naturally, how firms respond to price increases will depend on their size, supplier power, market structure, and the availability of alternatives.
The starting point for Sansom is to: “Negotiate with intelligence rather than aggression”. This means “understanding the supplier’s cost drivers – what has actually increased, by how much, and whether those changes are temporary or structural – so that conversations are grounded in fact rather than assumption?”
For McCourt, there isn’t a ‘one-size-fits-all’ approach. Even so, she says: “I wouldn’t take cost increases lying down; they need to be reviewed and challenged, and the business may need to make some changes quickly to manage the impact.”
Sansom says it is important to focus on total value rather than price. He reminds us that “a lower-cost supplier can often create greater cost elsewhere through issues with quality, reliability, or service.”
None of this should stop firms from reviewing specifications and finding substitutes to lower costs. Sansom gives a practical example of this: “Businesses that faced shortages of niche ingredients during recent geopolitical disruptions… rather than absorbing sustained price increases, they responded by reformulating products, identifying alternative inputs, and reducing reliance on single sources.”
McCourt would also look for opportunities to cut costs to balance out price increases. That said, she recognises that “there might be a need to make difficult and more strategic decisions elsewhere… I would always recommend going out to the market, even if it’s just to validate that other suppliers are pricing similarly – you only know what you know.”
David vs Goliath
The heft of a big corporation gives it leverage, but that doesn’t mean that it’s all over for the smaller organisation.
McCourt says: “At times like this it is about thinking outside of the box, based on your unique circumstances, considering both the short and long-term consequences.”
Sansom takes the same line, saying, “while smaller firms may lack the scale of larger organisations, they still have a number of effective levers available when negotiating with suppliers.”
He explains: “One approach is to increase their perceived value by bundling spend where possible. Consolidating purchases can strengthen their position and make the relationship more commercially attractive to the supplier. Similarly, offering longer-term commitments can be used to negotiate greater price stability.”
Sansom also recommends that smaller firms look beyond price and negotiate on broader commercial terms. This might include improved payment terms, priority allocation during periods of constraint, or enhanced service levels.
But if a price increase is coming, Sansom thinks there is room to shape how it is applied. “Rather than accepting permanent uplifts, businesses can push for temporary surcharges that are reviewed or removed as market conditions stabilise; linking pricing to specific indices or cost drivers can also introduce greater transparency, while reviewing clauses ensure that prices adjust if underlying conditions improve.”
Whatever the route, McCourt suggests that it’s all about people and that “having good quality relationships with your suppliers will put you in a stronger position to agree compromises that are fairer for all.”
Professional help
Many can do much themselves. However, McCourt considers it “strange for businesses to want to create their own internal indirect procurement engine – they didn’t create their businesses to become indirect procurement experts.”
So clearly, there will be a point when external support is needed.
From Sansom’s perspective, this could be when cost increases become significant (10-20% or more), supplier concentration is high, internal procurement expertise is limited, or contractual arrangements are complex.
It should be no surprise he says external specialists can “bring a combination of market insight and execution capability that is often difficult to replicate internally.” By this he means “access to benchmarking data, structured negotiation expertise, deeper supplier intelligence, and the ability to optimise contracts in line with current market conditions.”
McCourt thinks the same, remarking: “outsourcing procurement is an option that allows businesses to work with a professional partner who has the relationships in the market, and can operate at speed within a wider network to deliver ROI and positive outcomes.”
Of course there’s a cost, but Sansom says “the value generated should significantly outweigh the cost of engagement.”
Wrap up
The balance of power is moving. AI, analytics and real-time data give suppliers and buyers more insight into pricing and the ability to forecast more accurately. But even with such knowledge, firms need to prepare for volatility rather than react to it.
Ultimately, the best-performing firms are those that have struck the right balance between commercial discipline and supplier relationships while protecting the business.