Supply Chain Experts Say Costs are Falling
19th May 2023
Long-awaited price deflation is now happening, says international procurement and supply chain management consultancy INVERTO, part of Boston Consulting Group. Sushank Agarwal, Managing Director at INVERTO, says that businesses must now renegotiate with their suppliers to bring prices down – or lose out to their competitors as price competition heats up:
“The coming months are going to see significant price competition as costs come down, especially in certain commodities. Those businesses that are unable to cut prices in line with the rest of the market could lose out significantly. Some of the major supermarket groups are already starting to compete more heavily on price – milk is one product where we’re seeing price cuts. This trend is going to be repeated across a whole range of industries. There are sectors, like luxury goods, where pricing matters less but that’s a minority of the economy. A lot of businesses have fallen out of the habit of negotiating prices down over the last couple of years. They need to get back to doing that and quickly.”
Despite inflation in the overall Consumer Price Index only having fallen from 10.4% in February to 10.1% in March, INVERTO says that it has seen costs start to fall noticeably across a range of products, including:
– Milk (down 7% from peak price in December 2022)
– Construction materials, such as:
– Sawn wood (down 8% since November 2022 peak)
– Structural steel (down 5% since November 2022 peak)
– Steel rebar (down 7% since November 2022 peak)
These price decreases add to others that were already down substantially from their peaks, such as wholesale electricity, now down 71% from its peak in August 2022 and wholesale natural gas, down 77% over the same period.
Agarwal says that businesses must proactively engage with suppliers and put pressure on them to cut their prices, just as suppliers put upward pressure on prices when inflation was rising. More businesses should now be looking to renegotiate and structure their contracts in a way that allows prices to decrease as inflation falls, rather than only moving in one direction. “Every business in the UK will have seen its costs rise over the last 18 months, with suppliers blaming inflation for their own prices going up. Now that period is over, businesses have to push back in the other direction. Businesses can take a lot of the stress and time out of these price negotiations by agreeing transparent pricing mechanisms in their contracts with suppliers. These mechanisms can ensure that customers know they aren’t being taken advantage of in pricing, while suppliers know that they will get a fair margin even when prices start to come down.”
To help businesses to monitor their suppliers’ costs and negotiate pricing with them, INVERTO has created its Value Protector tool. This tool allows buyers to independently assess the costs of all their suppliers’ inputs across the locations in which they operate. This gives businesses the information they need to judge whether the price rises demanded by suppliers are genuine or to decide whether to negotiate price decreases.
Businesses can then use the insights provided by Value Protector during meetings with suppliers in order to base the negotiations on the true costs of their suppliers’ inputs. Agarwal adds, “few suppliers are likely to want to share their input costs. Bridging that information gap is the most effective way of reaching an agreement that works for both parties. Customers that can come to a negotiation armed with that data put themselves in the best position to bring their costs down.”