Price Chain: an Effective Solution to Prevent Procurement Rising Prices?
Mobilization of Several Target Audiences
The Purchasing Department
Make the Purchasing Department aware of the proper execution of supplier review clauses, provided it is properly notified of increases or decreases (which is not always the case). We regularly observe changes in supplier prices for which the notice periods – often 1 to 2 months – are not applied. This is a simple and effective first step. In the event of a decrease, the impact on stocks will have to be assessed with management control and compensated by the supplier. Secondly, we can question the legitimacy of these increases (knowledge of raw material costs, implementation of indexation, etc.).
The Sales Department
Mobilize the Sales Department, which must take charge of renegotiating prices for their customers (2) (3), which means:
- Know the price revision clauses;
- Appropriate the assessment of price changes from suppliers involved in the commercial contract;
- Define a price revision strategy based on these elements;
- Engage in negotiation and report the results.
General or Financial Management
Buyers and salespeople must get involved in the “price chain” and be accountable as the financial issues can quickly become significant. Given the functional transversality of the subject and the implications in terms of change management, it is clear that it is up to the General or Financial Management, at least initially, to stimulate the management of this transformation of practices.
A Diagnosis in 4 Steps
Identification of the Relevant Turnover
Identify the share of turnover subject to contractual price revision clauses and identify the customers most at risk.
Evaluation of Supplier Contracts
Evaluate the purchasing contracts of active suppliers on this part of turnover by checking the alignment of the revision clauses with those of the sales contract:
- La renégociation des hausses tarifaires est-elle mentionnée ?
- Quelle est la durée du préavis ?
- etc…
Implementation of a Price-Chain
Measure the organization’s ability to synchronize purchasing and sales initiatives through adequate information sharing. The professionalization of these trades favors compartmentalisation; it is therefore a matter of building a “price chain” from purchases to stores to better coordinate communication, assessments and actions.
Definition of Economic Issues
The last phase of the diagnosis consists of a precise quantification of the issues:
- Mechanical margin erosion due to the time lag between increase in purchase prices and pass-through to customers
- Loss of turnover due to the delay in re-positioning a sale price
- Depreciation of the stock (in the event of a drop in the purchase price).
The diagnosis on these 4 dimensions is just as difficult to achieve as it is fundamental to assess the level of energy to be devoted to the transformation process.
KEPLER estimates that the loss related to the lag between the evolution of purchasing conditions and the repositioning of selling prices is 1 to 2 points of margin.
Information Sharing, A key Factor for Success
Guaranteeing the sharing of contractual information and the processing of tariff data is essential to synchronize actions driven by functions located at the opposite end of the “price chain” process. The digitization associated with the provision of a tool for mass data analysis is both necessary and accessible.
Among the information intended to be shared:
- Sharing of request dates and contractual application of supplier increases;
- Knowledge of customer renegotiation cycles;
- Evaluating the impact of tariff changes and the resulting pricing strategy.
The Legal Phase: Realization of an Optimization Process
Launching a substantive legal action by systematically verifying the mirror effect between commercial revision clauses and purchases becomes possible and makes the project a reality. This search for alignment of price revision mechanisms, although too often neglected, is a guarantee of optimization of the organization. The improvement of these clauses, based on experience feedback, can then be the subject of optimization for sustainable action.
A "Pricing" Function to Support the Action Over Time
Identifying a function capable of leading the process and producing analyzes over time to feed into Purchasing and Sales considerations will produce lasting effects on the optimized organization. A well-equipped pricing function (knowledge of purchase and sale data in real time, measurement of margin levels, ability to simulate prices) is undoubtedly the best placed to fulfill this role.
Sources
(1) Alex Abdelnour, Christopher Angevine, Jeremy Seeley: “The commercial response to cost volatility: How to protect margins against inflation and tariffs”. McKinsey. Juin 2019.
(2) Nina Scharwenka: “Price Increase? No Problem. Preparation Beats Price Pressure!”. Simon-Kucher. Février 2019.