Inflation or padded profits? As suppliers levy excessive price increases, defend your bottom line
In a compelling post, Matt Stoller of the American Economic Liberties Project effectively argues that since the arrival of the pandemic, “60% of the increase in inflation is going to corporate profits.”
Stoller notes that in 2019, non-financial corporations made a little over $3K in profits for every man, woman and child in the US, whereas today, that number has jumped north of $5.2K.
From Fine Tune’s ground-level vantage point in the indirect services arena, Stoller’s argument rings true, with supporting anecdotes rolling in on a near-daily basis.
It is unmistakably correct that indirect suppliers are viewing real inflation as a margin-grabbing opportunity.
Here are just a handful of examples (among dozens) we’ve observed in recent months:
- Security guard services provider tells the customer that a $1MM raise will be required in order to retain the guard force. However, when the dust settles on the matter, it turns out that less than half the requested raise was truly needed to cover the effects of inflation.
- Uniform rental supplier demands an 11% price increase. Within weeks, the same vendor is executing a new agreement representing a significant cost decrease. The vendor had already been enjoying robust margins prior to the increase demand and was simply using the broader reality of inflation to increase profitability in this account—and the subsequent negotiation proved as much.
- Waste haulers already imposing CPI increases are also increasing base rates and fuel surcharges (a consideration already baked into CPI increases)—even as service performance has steadily been worsening.
Category managers should be on high alert for indirect suppliers using legitimate inflation to grab added margins.
Of course, overburdened and understaffed procurement departments just aren’t equipped to drop everything and perform deep-dive category analyses every time a supplier asks for an increase.
What, then, can vulnerable buyers do to defend their bottom lines in these times?
- A suspicious eye should be cast at all cost increases. This one probably goes without saying, as buyers are already wired this way—but all practitioners should have a heightened sense of awareness that margin-grabbing is a huge part of the inflation story.
- Make sure to optimize the timing of your marketplace activities. Indirect suppliers are generally emboldened in 2022, seeing leaned-out procurement departments and doubting they’ll dedicate the time and resources to cumbersome supplier transitions. Without the threat of lost business, the buyer loses nearly all leverage.
- Don’t leave any category unguarded. Assess your bandwidth and priorities, and then put strategies in place to guard against unchecked increases in categories you don’t have the time to manage. If you’re not engaged in the joust with your indirect suppliers, you’re losing.
The smart golfer knows when to “minimize the damage” by chipping out of the trees and back into play. Likewise, smart buyers will need to minimize the damage of this inflationary period by incurring only truly necessary and warranted increases and fending off margin-grabbing efforts by indirect suppliers. With the right strategies in place, they’ll even find surprising cost savings opportunities along the way.