Businesses now understand, probably better then at any time in recent history, how market forces, geopolitical risk, inflation, and the fragility of the supply chain can all produce fast and negative impacts on margins.
In response to rising costs, some businesses have successfully passed along steep price increases to customers. Some have also used the opportunity to grow margins. The emerging trend was highlighted in a recent New York Times articlei written by Jeanna Smialek. The current context has, unfortunately, created an incentive for some organizations to act opportunistically.
However, companies that simply impose price increases without looking to improve their cost structures risk alienating customers.
Another recent case was Rivian Automotive Inc’s failed attempt to pass a retroactive price increaseii. According to Rivian’s CEO, the increase was aimed at coping with rising costs. The poorly executed plan received immediate and swift customer condemnation. The manufacturers stock slipped about 18% and the company was forced to walk back the retroactive increase. The negative impact on the business is notable.
The beginning of 2022 is rife with stories of poorly executed price increases. Evidently, businesses now find themselves in unchartered territory.
Procurement teams must have access to reliable data
Uncertain of how to cope with rising costs, businesses are increasingly turning towards procurement teams to protect margins. But are they equipped to deliver value? Do they have the necessary tools and resources to work in this dynamic setting? Are they able to mitigate cost increases, to protect margins and ultimately protect or even build client relationships?
Typically, businesses have expected procurement teams to negotiate harder to limit cost increases. However, negotiating without data is an impossible task. Buyers, quite often, find themselves unable to leverage any meaningful information to limit cost increases.
To fend off increases, teams need access to data that is both readily available and meaningful in its capacity to infer trends and draw conclusions.
Looking back to 2018-2019, anything above a 2% or 3% annual cost increase would be viewed with skepticism. The impact of a poorly executed negotiation was limited. In the last 24 months, increases above 10% have sometimes been deemed as fair notwithstanding the compensation for inflation that is currently at the highest rate since 1991.
Plainly stated, the stakes are now higher, and the possibility of drastic margin erosion and the loss of market share is business-as-usual.
Without access to accurate historical data, procurement teams risk taking unnecessary cost increases. If a business does not have a Spend Visibility tool, margins are inevitably being eroded. Adding such a tool should be a high priority action for any organization that is lacking in this area.
Transforming costs increases into opportunities
Although cost increases are negative, they can also represent an opportunity to create a positive impact. The current pricing landscape can be used as a means of differentiation. With the appropriate tools such as Spend Mapping and Spend Segmentation, procurement teams can think creatively about complex supply chain issues. To act decisively, teams must first understand!
Thoughtful analysis can yield savings and deliver customer value that, otherwise, would have remained hidden. For example, significant cost increases may push an organization to redesign certain product features. These initiatives can protect margins, maintain customer pricing, and build customer relationships.
A thorough spend analysis will often result in the drafting of an action plan to rationalize the supplier base. When properly executed, this will generate productivity gains and substantial cost savings.
Procurement professionals who use spend analysis tools will be equipped to meet today’s challenges and will allow their businesses to preserve hard earned market share.
Fynlam, your strategic partner
Fynlam helps transform your purchasing team into a strategic asset.
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- Our Spend Analysis tools provide meaningful and accurate data.
- Our expert guided solutions aim to increase the effectiveness of your processes making the procurement function agile and robust.
- Finally, our training programs equip procurement professionals to be creative and strategic decision makers
i https://www.nytimes.com/2022/02/27/business/economy/price-increases-inflation.html
ii https://www.wsj.com/articles/electric-vehicle-startup-rivian-walks-back-price-increase-apologizes-to-customers-11646321716?campaign_id=4
