What to do about inflation?
You think you have a stable supplier base and your costs under control, then you start hearing about the ghastly “I-word”, a word that sends shivers down the spines of Procurement, Finance and Sales teams alike.
While lesser people might try and run for the hills, take a timely sabbatical, or tactically move to a role “below the parapet” in another area of the company (I’m using hyperbole for amusement here) it’s the Procurement and Sales teams that feel the brunt of this dreaded inflation as they’re on the front-line in trying to protect the profit margin for their company.
That’s right, inflation is back. The world is several months into a new bout of inflation, after a decade or more of (generally) stable input prices, and with post-Covid supply chain bottlenecks still unwinding, as well as more recent oil price escalation, it’s likely that there will be few areas of the global economy that will remain untouched by inflation.
From a sales perspective, it’s all about trying to convince customers (some of whom may be long-standing, reliable and sensible) to pay more for the same service in what might be an incredibly competitive marketplace.
From a Procurement perspective, those good folks have to endeavour to “make the price increases go away” or find other creative ways to mitigate the effects of price inflation on their inputs (with suppliers with whom, hitherto, they’d had a stable, collaborative and mutually beneficial relationship).
It can be a frightening time for both sides of the buy/sell coin, but if inflation is going to stick around beyond the expiry of your contracts, and if outright rejection of the price increase is not practical or realistic, the best thing to do is address the topic head-on with your supplier and have an open and frank conversation.
Don’t get me wrong, these initial conversations are likely to be very difficult, and could result in increased tension, raise question marks over trust, and upset the relationship you’ve held so dear.
It is human nature to feel let down or threatened in these scenarios. But making a quick tactical change to an unproven supplier with the myriad additional risks that this may introduce, is one of the last options a buyer wants to consider. Equally on the sales side, a new customer of the profitability and business growth potential of the existing customer may be difficult to find, and so a quick exit is not the panacea here either.
Of course, there will be opportunistic sellers who will see this as an opportunity to try and grow their margin, and there will be aggressive buyers who refuse to recognise upwards price pressure irrespective of its veracity (thereby risking their suppliers walking away, or worse, going out of business).
But if there is an interest in retaining a trusted and long-term relationship, minimising the costs of change and supply chain risk for both sides, all parties should discuss and explore all options available to proceed as openly and transparently as possible.
As part of my Cost Reduction Fundamentals course, I cover an 8-step approach outlining a process through which buyers can navigate this challenge and mitigate the impact of inflation to the fullest extent possible.
If you think I can help your business with cost management, schedule a free call with me, HERE.
The best days lie ahead.
Martin
