PREPARING FOR THE FORESEEABLE – A NEW ERA OF INTERESTING TIMES OR NOTHING NEW UNDER THE SUN?

“Those who cannot remember the past are condemned to repeat it.”. What have the words of George Santayana got to do with supplier relationships.? Well interest rate raises, Brexit, currency turbulence, falling productivity, the continuing ripples of the 2007/8 banking crisis and quantitative easing – not to mention the specter of nuclear conflict as the US and North Korea exchange diplomatic insults. We are experiencing interesting times. But isn’t there more than just a faint echo of past experiences?

There’s no doubt that “interesting times” is beginning to affect prices paid. This will inevitably lead to suppliers revisiting the prices they charge. Are we prepared?

For those of us old enough to remember previous inflationary periods, every contract signed with suppliers would have an inflation clause built into it. But for the last 20 years, we’ve have been lucky enough to enjoy relative price stability, even deflation. This has lulled many businesses into the arms of “inflation complacency” and these clauses have often disappeared.

The danger now, is that that the turbulence of the past is on its way back in, and suppliers are beginning to shift their own economic uncertainty onto their customers.

The world economic situation is less than secure and events ranging from Catalonian independence demands to Donald Trump’s “America First” economic proclamations, are having real impacts both on the markets and currency values.

With such market volatility and uncertainty on hand, businesses are facing commodity and raw material price rises and an end to the price stability enjoyed for the last two decades.

“Changing external conditions are having and will continue to have an impact on costs and prices,” comments Jonny Michael, of JMCL. “But what businesses need to remember, is that overall economic instability requires pre-emption and does not equate to batting away with a blunt instrument whatever your suppliers decide to throw your way! With a clear understanding of your supplier, their business model, their cost components and their exposure to foreseeable events you can be well prepared and ready to deal-with, even pre-empt, price rise messages when they come through.”

“Preparing for the foreseeable requires a deep understanding of your own business needs and value proposition, along with a clear understanding of your supplier’s business, and the impact their supply has on your business.” says Jonny.

A good example of this can be seen in those suppliers who import as part of their essential supplier input. Currency fluctuations can adversely affect their costs and margins. Many suppliers routinely pass on any loss of margin to their customers. But, according to Jonny, this should not always be the automatic result.

“Where shipping costs and currency rates are volatile and can fluctuate dramatically it’s not unusual for a supplier to use this as the basis for an increase in the price they charge. But with a more detailed understanding your supplier’s business, discussion can establish the principle that their whole cost base is not determined by import costs and deliver a fairer price.”

It’s also important to note that in volatile situations prices go up as well as down. If a supplier is desperate to pass on the increases then the opposite should also be true, a price linked to the rate in question should pass on favourable changes.

The key to this approach is an in-depth understanding of a supplier’s business and the closer relationship that procurement needs with suppliers to be able to predict the economic factors that will impact them. Businesses’ won’t be able to do this with every supplier but concentrate on those that represent most value and most risk to your business.

“We’ve entered a new period of change, but not one we haven’t seen before” says Jonny. “If we are to forestall the detrimental impact of volatility and inflation, we need to learn from the old methods of managing them. So, let’s not forget nor repeat the lessons of the past”