For the past 12 months or so, the world has seen record level inflation, where prices of key commodities like energy, fuel, steel, plastics, aluminum, paper and cellulose have been rising steadily at alarming rates. If not managed properly, this can have a devastating effect on the bottom line for companies that are not prepared.

Here we will discuss 7 strategies that businesses can use to effectively tackle cost inflation.

1 – Negotiate

When a supplier comes up with a request for price increase, the most common immediate response is for Procurement to engage in negotiation, and rightly so.
However negotiations do not have to be done only after suppliers have approached for price increase; it can also be done ahead in anticipation, once you become aware of forces in the market that will potentially drive price increase, that suppliers are more likely to come for the increase. Negotiate pricing and lock them in over a period of time, ideally until uncertainties in the market settle down.

On the other hand, there are other areas apart from the obvious cost increase that can be negotiated. Improved terms and conditions, delivery performance, collaboration are only a few things that could be aligned which could ultimately keep overall costs at competitive level in the contract

2 – Explore Alternatives

One way to mitigate the effects of rising prices is to look for alternatives, which may include a new supplier, an alternative material, or a different way of delivering the required service.

Shop around for alternate suppliers. If you are unable to reach an agreement with your current supplier, and where there is no commitment to stick with the same supplier explore other options and compare pricing. There may be another supplier who is willing to work with you on price increases or who can offer a better deal.

On the other hand identifying an alternative material to use that doesn’t affect the quality or performance of a product may be an option. In the case of a service that is labour intensive for example, explore the possibility of automating the process by using a machine.

3 – Partner & Collaborate

Where the alliance with the supplier is more strategic in nature, it is best to maintain a positive relationship and keep the line of communication open and respectful when discussing price increase. Engage in a cooperative discussion and a plan of action to identify ways to keep the cost down and agree on a fair and equitable scenario. Sharing the burden of the price increase as well as any gains derived from the collaborative discussions and the initiatives implemented that follow will be a win-win for both parties..

4 – Limit spending or consumption

Reducing the level of spend or consumption is one way to save money in times of high inflation and steep price increases. For instance, as fuel prices and travel cost remain high, instead asking consultants to travel to the offices or sites, virtual meetings may be considered. In this example, if the total cost agreed included a certain amount for travel, then to offset consultant fee increases, reduce the cost of travel to remain cost neutral

Another way to reduce consumption is to improve efficiency and reduce or eliminate altogether wastage. For instance where water or elictricity are being used a lot, find ways to conserve the use of these utilities.

5 – Strategic stockpiling

If the forecast is that prices will remain high for the foreseeable future, then it may be worthwhile to consider stockpiling on commodities while prices are still competitive. Ensure that enough inventory has been secured that will last until the prices stabilize, if not until the impact of inflation is fully accounted into the budget. Now this of course requires a certain level of foresight and a level of understanding of what is happening in the market to be able to predict the price going up, and take the necessary action before the new prices take effect.

6 – Delay

Now if the price increase is inevitable and beyond negotiating with the supplier, one other thing that can be done is to align with the supplier to at least implement the the price hikes gradually. Similar to purpose of #5 above, the delaying the effectivity of the increase allows the business time to adjust until the full impact hits.

7 – Recover

Now, when all else fails, consider passing on the price increase, partially or fully, to your customers. It’s no secret that a widespread inflation has domino effects down the line in the supply chain. It could hurt the customers, who may react by reducing it’s own spending. That of course will then affect demand for products, which ultimately, will have an upstream impact into the supply chain creating an imbalance between supply and demand.

Inflation is not purely a bad thing. It is in fact a sign that economy is growing, if not accelerating. However, when it rises dramatically at an extra ordinary pace, those that are unprepared to manage the rising cost will suffer.

I hope the 7 tips that I have shared will be useful and handy for you to tackle your inflation discussions with your supply chain partners. Do you have any other ideas how we can manage supplier inflation ? I would love to hear your suggestions. Drop your comments below.