Published Monday 6th December 2021
When is a price increase a cost saving?
Back in the days of inflation that last happened in the 1990s, many in procurement would pat themselves on the back for mitigating price increases when suppliers wanted even more. These “savings” would then be compared with the general inflation rate and many would receive bonuses on the back of this supposed stellar performance.
The problem was that many of these “savings” were complete fiction. It has always been a good procurement practice to have a proper breakdown of the supplier’s costs. Then the purchaser can take a zero-based view of the supplier’s costs and profit margins.
In the current environment, this is especially important since many suppliers are looking for price increases based on their assertion that inflation is impacting their supply chain. Those costs could be fuel, shipment, commodity or bottleneck related. But they may also be temporary. This is why the concept of open-book pricing became so popular two decades ago.
Unfortunately, many procurement personnel have never done a proper cost breakdown of their supplier’s prices and have been lucky over recent decades when the migration of manufacturing to low-cost country locations made savings much easier to achieve.
That era is pretty much over and that will mean that procurement functions everywhere will need to make sure that they have done their homework properly.
Expect plenty of battles between procurement departments hailing the savings they have made and the accountants who will question whether they are seeing savings come through on the profit and loss account.
The good news is that data should be the saviour. But there will need to be a serious upgrade for many procurement functions capability to mine supplier and invoice data.
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About the Author: Harvinder Rattan, is an energetic business leader with more than 20 years’ experience in finance and business transformation, having joined Expense Reduction Analysts (ERA) in 2017, after a 10-year career in global finance with HSBC.