Under what circumstances can a price increase genuinely lead to cost savings?
During earlier inflationary cycles, many purchasing managers prided themselves on mitigating price escalations when suppliers sought higher rates. These 'savings' were benchmarked against the prevailing inflation rate, and a significant number received bonuses for this presumed outstanding performance.
The issue was that a substantial proportion of these 'savings' were entirely notional. It has consistently been considered sound procurement practice to possess a comprehensive breakdown of supplier costs. This enables the buyer to adopt a zero-based perspective on the supplier's cost structure and profit margins.
Within the current economic climate, this aspect gains particular significance as numerous suppliers are pursuing price increases, citing the impact of inflation on their supply chains. Such costs may pertain to fuel, freight, raw materials, or supply bottlenecks. However, these may also be transient. This precisely explains why the principle of open pricing gained such widespread acceptance decades ago.
Regrettably, many purchasing managers have never conducted a thorough breakdown of their suppliers' pricing and have benefited from favourable conditions in recent decades, when the relocation of manufacturing to lower-cost economies significantly simplified cost reduction efforts. All indicators suggest that this era has concluded, implying that procurement departments globally will need to ensure they have diligently prepared.
We anticipate numerous conflicts between the procurement department, which will highlight its achieved savings, and the finance department, which will question whether these savings are reflected in the income statement. The positive aspect is that data ought to be the solution. Nevertheless, the capacity of many procurement functions to extract pertinent data from suppliers and invoices will necessitate substantial enhancement.
How may we assist 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.
