Inflation: Negotiate with suppliers and don’t panic

Tried-and-true methods can help procurement managers combat across-the-board price increases in an inflationary environment.

inflation

You’re worried about a period of pandemic-related inflation after what we’ve been through with our suppliers in the past couple of years? Don’t panic.

Veteran procurement professionals have lived through a number of business cycles and seen periods of pricing stability and volatility. Inflationary pressures are nothing new.

But newer buyers — joining the profession post Great Recession — may not have had to deal with too much inflationary pressure as the Federal Reserve has been active in economic policy, generally keeping the lid on prices.

Inflationary pressures are definitely building. We just don’t know if they are long-term increases or transient ones until supply and demand normalize over time. Inflation may be in headlines, but don’t get caught up in the hysteria. And don’t let your suppliers blame inflation as a reason for a price increase.

How do we negotiate with suppliers using inflation as the rationale for an increase? By relying on the tried-and-true methods of preparation, patience and poise. Just like we did before the current inflation scare.

Let’s look at some negotiation techniques to combat panic increases.

Negotiating inflation

Resist the hype. Avoid the common “everyone knows that prices are going up” strategy from suppliers. This approach has been used for cost pressures related to feedstocks, precious and base metals, borrowing costs, and even the increasing cost of medical insurance for employees. Resist unsophisticated blanket statements from suppliers and negotiate based on actual business circumstances.

Ask for proof. Request a cost break down from suppliers as part of the negotiation strategy. Identify specific areas of upward pricing pressures, but also look for corresponding drops. Not all costs are rising. This exercise is also a good impetus for cost reduction opportunities. Perhaps the stainless steel part you are using can be just as effective in plastic. Always link value analysis to negotiation, especially during a time of price volatility. There may be actual increases to deal with. Focus on them and don’t accept an across-the-board increase.

Examine the economics. Understand your business drivers and those of your suppliers. Know the short- and long-term market trends of your commodities. Knowledge allows you to negotiate from a position of strength. Be proactive in commodities that appear to be rising. Your suppliers are trying to determine price increase strategies. Take the offense in addressing the issue. You just might get some beneficial pricing … perhaps at the expense of other less proactive customers.

Manage the volatility. Sure, there may be items in short supply that come with high price tags. But these increases may not sustain. If the cost of these volatile commodities is included in the sales price, there is limited leverage to renegotiate when the price falls. Identify the volatile commodity and break it out from the cost of the purchase by negotiating a surcharge. The cost remains the same, but you are acknowledging and paying for the volatility as a separate charge that may eventually go down or even get worse. Link the surcharge to an agreed upon data source to support audits.

Leverage the relationship. Take advantage of your strategic sourcing and supplier relationships that have been cultivated over time and have withstood the perils of the pandemic. Have the difficult conversations around cost, price and value. If pricing must increase, look for other areas for offsetting reductions, including improvements in ordering efficiencies, a change in payment terms, consignment programs, early supplier involvement opportunities or offsetting reductions on other more stable commodities. Approach the negotiation in a holistic manner while not just focusing on price.

Triage your time. The truth is that prices are going up and you cannot stop, or even acknowledge, every increase. Focus on the critical-path suppliers and commodities that will have a significant impact on your business. Don’t waste time battling a relatively insignificant increase while larger and more important ones are looming. Analyze the potential impact and choose your battles wisely.

Stay the course. Use your existing negotiation skills and processes that work. Don’t lose sight of the big picture during this time of inflationary pressures. Part of our professional responsibilities is negotiating with suppliers for overall performance. Circumstances continue to change, but our jobs have not. We’ve seen a lot worse over the years. This is an opportunity to help your company, continue to add value and learn.

 

Source: www.supplychaindive.com, 26/08/2021

 

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