Inflation: Supply chain managers' latest cost challenge
- The return of inflation is making it difficult for companies to keep their supply chain costs in check, according to an analysis from Bain & Company.
- Businesses need an integrated approach to cost management to weather inflation and shifting trade relations.
- "Successful leadership teams combat inflation before it takes its toll," the analysis said.
The onus is on the supplier to justify their proposed price increase. Make them!
Supply chain managers may be out of practice when dealing with cost increases from suppliers. While it may be laudable to reduce costs as much as possible to offset price increases, supply chain managers need to take an active role in resisting price increases from suppliers. And that message needs to be sent loud and clear throughout the supply chain.
After a period of low inflation and relative quiet on the cost front, cost increases are on the horizon. The seller may claim increases in raw material, labor costs, health insurance and the prices they pay to their suppliers are driving costs up. Some may also blame the tariffs and trade wars. Buyers will counter with pressure from top management to lower costs due overhead pressures, coupled with end customer demands that prices be lowered. Market pressures abound throughout the supply chain.
There is a difference between price increases from arm’s length commodity suppliers and those where there is a stronger relationship. Price increases from relationship-based suppliers may be harder to mitigate, but not impossible. While there is a more open book approach to material, labor and overhead costs, shared risk and progressive processes like lean and early supplier involvement are supposed to reduce overall costs, not increase them.
Competition and market dynamics will often act as a governor on pricing for commodity items like hardware, road salt, copy paper and such. A well-timed RFQ is sometimes all that’s needed to have an incumbent supplier delay or suspend a price increase. And perhaps there is a new supplier out there that will offer better pricing and service. A price increase letter may be the push you need to check out the market to and validate your pricing and sourcing.
Make it a habit to resist any and all price increases. While you can’t stop them all, some may be rescinded or delayed. With an assertive approach the supplier community will know that you are paying attention which can set the stage for future negotiations. Pick your battles wisely and look at overall cost impact. Some price increases are just too insignificant to worry about. Others may damage your business, adding to that ever expanding risk profile.
- Bain & Company Cost Inflation Is Back, Putting Supply Chains at Risk