Costs keep rising. Margins aren't recovering.
Procurement reports the target met. Finance reports costs up. Both numbers are right.
Signs it is already happening.
- A 2022 increase is still in the price, though its index has since fallen
- Nobody can say what an item should cost, only what it cost last year
- Your largest supplier knows how long it would take you to qualify a replacement
Where the 3.8 comes from.
Per 100 of spend, one year, illustrative. Price only; volume and mix held flat.
- Suppliers' increases across the whole basket
- +5.0
- Negotiated on 40 of the 100: increase cut from 5% to 1%
- −1.6
- Premium paid on spot buys and expedites
- +0.4
- Finance: cost versus last year
- +3.8
Procurement's 1.6 is real: it lowered the increase, not the cost. Finance's 3.8 is real too, and 3.0 of it is increases on the 60 nobody negotiated. Your basket will split differently.
Not every increase is inflation.
01 · Market
The input really moved. On a cable where copper is 40% of the price, copper up 20% explains 8 points of a 12% increase, not 12.
Fix Pay the index on the copper content, in both directions.
02 · Ratchet
Passed on when the index rose, kept when it fell. In over two-thirds of the markets studied, prices responded faster to cost rises than to falls.¹
Fix Test every past increase against its index.
03 · Leverage
The supplier knows you can't leave: in regulated manufacturing, qualifying a second source often takes a year or more.
Fix Should-cost now, and a second source started early.
04 · Complexity
Your own variants, small lots and expedites, billed back as “cost increases”.
Fix Cost each one, then decide with engineering and planning which to keep.
Only the first is inflation. A discount off the asking price leaves the other three in place.
How we move on it.
First month
One number with finance
A cost bridge on finance's baseline. A saving counts when it reaches the budget.
First quarter
Recover the ratchet
Past increases tested against their index; clauses rewritten to move both ways.
Quarters two to four
Negotiate from should-cost
Clean-sheet models where price is furthest from cost.
Year two
Change what you buy
Fewer grades and variants, through your change control. A second source where one supplier sets the price.
Questions we hear about this.
- Why not a large firm's procurement practice?
- Because we count a saving only when it reaches your budget, on finance's baseline. And in a regulated plant a second source is a validation project, not a sourcing event. We have run those plants, so the should-cost and the qualification plan arrive together. In API cost-reduction work, part of our fee is linked to the savings finance signs.
- Do we have to change suppliers?
- Usually not first. Most early recovery comes from the suppliers you already have: past increases tested against their index, clauses rewritten to move both ways, and should-cost models where price is furthest from cost. A second source starts only where one supplier sets the price, and in regulated manufacturing qualifying one often takes a year or more.
Tell us which increases hurt most.
Describe the increases you have accepted and what you have tried. In 15 minutes we'll say whether we have seen the pattern before, and what testing them against their index would take.
Nothing to prepare. If sharing material would help after the call, we sign an NDA first.
The senior person who would do the work gives you a straight answer. Our people →
¹ Sam Peltzman, “Prices Rise Faster than They Fall,” Journal of Political Economy 108(3), 2000.