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Manage price variance

How to Manage Price Variations as a Buyer?

One question nearly every buyer will ask at some point is, “Is this the best price I can get?” The return of inflation makes price negotiation a more demanding and strategically critical capability. However, often the right tools, capacity, or time to determine whether and when a supplier has effectively increased its pricesare missing. This is important information because, as a buyer, you would like to check if any price increases are warranted.

The history of price variations

For many years, in a great part of the world inflation rates remained low. Even in the 1970s during the “The Great Inflation” little concerned most procurement, supply-chain, and operations leaders. Specific commodities would experience sharp price increases, but those forces typically eased before they could trigger broad-based price pressures across swaths of the economy.

However, that has changed over time, and the merchants of today are planning and buying for their categories in one of the hardest inflationary environments the world has seen in decades. When a supplier announces a price increase to a buyer, especially in this economic environment, the buyer may not have the right tools, capacity, or time to determine what this effectively means for their business and whether these increases were warranted.

Market information

To deal with price variations, and in particular with price increasements, it is crucial to gather market information on prices. You can start with analysing  your own invoice data. Search for which suppliers and product groups prices increased over the last period and try to determine if this is expected behaviour given the current market conditions.

You can take a look at the commodity price index at IMF to discover the latest pricing trends. Normally, trends will, at some point, propagate through the products you buy.  

Contract management

How can an organisation know for sure that short-term price increases are fair and in line with expectations? How can companies prepare themselves to deal with the long-term consequences of inflationary markets? Although these questions are hard to answer, they are extremely important for good contract management.

For a buyer it all starts with monitoring existing supplier contracts. There is no easy way to monitor price variations in the business world. Prices are difficult to manage, especially with the variety of product items and deprecated catalogue data that exist. Analysing price variations for each commodity one-by-one would be a time-consuming task resulting in isolated insights and unrelated knowledge.

Aggregated approach

It is better to apply an aggregated approach where price variations are averaged over suppliers, brands or categories. This approach will provide you with the insights needed to manage your contracts. If you find any inconsistencies you have the right to ask your supplier(s) why their prices are not in line with the current market trends.  

The same logic can be applied when closing new deals. The better you can explain why a decreasing pricing trend of a relevant commodity correlates with the product you demand, the more chance you’ll have on getting better terms during contract negotiations.  

Don't take price increases for granted. Strengthen your position at the negotiating table!

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