This blog post describes how purchasing departments can respond to suppliers‘ price increase demands in a structured and fact-based manner. Five specific arguments illustrate how price demands can be questioned, cost drivers made transparent and negotiations conducted in a targeted manner.

At the end and beginning of the year in particular, many purchasing departments receive various letters from suppliers announcing price increases at the touch of a button. These short letters usually cite general reasons and include a percentage and a date from which the new (naturally higher) prices will apply. Many purchasing departments have adapted to this and respond with a pre-formulated letter rejecting these increases. Ultimately, this leads to negotiations or discussions between sales and purchasing, which usually result in a compromise somewhere in the middle or below. Both sides see this as a success, but purchasing prices are still rising.

But how can you tackle this issue in a targeted manner, keeping your own goals in mind while still maintaining a long-term relationship? And how should purchasing departments generally respond to price increase demands?

• Price Increase Request (PIR)

General demands for price increases should be rejected. We know from experience that these are usually estimated or arbitrary. Request a transparent and detailed list of the relevant cost drivers, including verifiable price increases and their specific impact on the total price. As with a tender, it is advisable to submit a formal letter and a structured table in which the derivation of the price request is presented in a comprehensible manner.

• Cost structure analysis

Only a few suppliers will be able to provide you with the necessary justification for the price increase. However, a simple cost structure analysis of the supplier provides a good basis for a negotiation strategy. Use industry figures, for example, to understand the effects of energy, labour costs or raw materials. The supplier must first prove the opposite to you.

• Contract and pricing logic

A claim by the supplier is an ideal opportunity to discuss index prices, pricing logic, etc. with them. They have already taken the trouble to analyse their cost structure accordingly. This can then be transferred to a new contract with indexation. It gives purchasing more transparency, time and, ultimately, a well-founded statement about the cost structure.

• Increased efficiency during the adjustment period

Price reduction demands by suppliers are very rare. Although every company is constantly working to optimise its own costs, implement more automation in processes and production, learn from mistakes in terms of rejects, missing parts and material usage, and improve the predictability of sales volumes, prices remain the same. Use these arguments as a counterclaim or net price effect.

• Expected development of cost drivers

Demands for price increases relate to the past. Every sales department tries to push through higher prices when raw materials, inflation or energy costs are high. Look out for new laws, seasonal developments in raw materials and planned relocations of production facilities; it is usually worthwhile.

ADCONIA – Out of the ordinary.

Consulting for purchasing, supply and value chains with a focus on cost management, digitalisation, organisational development and sustainability. Feel free to contact us about this topic, we have the experience.