When can a price increase actually lead to cost savings?
In previous periods of inflation; many purchasing managers congratulated themselves on mitigating price increases when suppliers wanted more. These "savings" were compared to the general inflation rate; and many received bonuses for this supposed exceptional performance.
The problem was that many of these "savings" were completely fictitious. It has always been good purchasing practice to have a proper breakdown of supplier costs. This allows the buyer to take a zero-based view of the supplier's costs and profit margins.
In the current environment; this becomes especially important as many suppliers seek price increases based on their claim about the impact inflation is having on their supply chain. These costs may be related to fuel; shipping; raw materials; or bottlenecks. But they may also be temporary. This is why the concept of open pricing became so popular decades ago.
Unfortunately; many purchasing managers have never carried out a proper breakdown of their suppliers' prices and have been lucky in recent decades; when the migration of manufacturing to low-cost countries made savings much easier. All signs indicate that this era is over; which means that purchasing departments around the world will have to make sure they have done their homework.
We can expect many battles between the procurement department; which boasts of the savings achieved; and the finance department; which will wonder whether they are seeing the savings in the income statement. The good news is that data should be the saviour. However; the ability of many procurement functions to extract data from suppliers and invoices will need to be significantly upgraded.
How can we help you?
At ERA Group; we have worked with many major companies in recent months; helping them to increase their liquidity and quickly unlock significant amounts of working capital that were previously trapped in the supply chain.
