Understand Why Supplier Increase Cost

Imagine, one day, you receive an email from a major supplier, with the most important sentence in the email which wrote...... "We have no choice but to increase the selling unit price to you at the end of the year."

When there is a price rise request, procurement responsibility is to investigate those increase and if it is within the margin acceptable compare to the actual cost of material rise. By the standard rule, the portion of the increase should the actual / formulated raw material required per part of produce produce. Nothing else should be inside those price rise, unless there is a  demand for overhead cost absorption as well.

But if there is a unilateral price increase request from supplier, the role of procurement is to investigate this and look for alternative way of resolving this conflict.

Questions which need to be asked as a procurement person;

a) Is there anything we can do to halt this demand for price rise?
b) If yes, what the action plan required?
c) If no, what is the reason for these request?
d) Is there a concern that supplier is putting pressure onto the company due to position of strength?
e) What is wrong with the procurement strategy when this happen?

Understand Reason for Price Increase

In a business environment, the pattern of supply and demand play an important role toward determining the cost of acquisition. The greater the demand compare to supply, material available will be scare and need to be share among all users. This will definitely drive up prices, as in any free flowing economy system.

There is also time, when a supplier can decide to choose which customer they preferred to deal with. This could be due to payment term, quantity and quality of supply, or a private offer from a major customer to secure greater capacity of the supplier output.

And there is times as well, due to a particular customer issues which can drive up the cost of production and shipment.

Very often, the cost of commodity or material involve in the product increase drastically which causes price to be adjusted by suppliers to their customers.

Limiting the Impact

Remember, when the position of the supplier is stronger then the customer based on SWOT analysis, it is always good to ensure as a buyer relying on those supplies, to strengthen the position when compare to the supplier position.

Porter 5 forces principal is always an important guiding light for all businesses to understand the true strength of the competition.

a) What is the buying power of customer?
b) Is there any substitutes material able to be utilize to offset the price increase?
c) Is the entry barrier to the industry easy or difficult?
d)  What is the bargaining power of the suppliers?


The ability of the procurement department to halt or reduced the impact of price increase always fall back to past action and commitment to correct any weaknesses with current action (suppliers has to be convinced). Future action will be a forward looking plan to ensure the position of the buying company is strengthened.


Putting the egg into one basket, of course, as matter of fact, a very risky move and weakened a buyer position. The alternative option is the best, i.e. ensuring all supplies are not controlled by one entity.

Beautiful statement has been said before. Partnering your best supplier to ensure success of any businesses is one of them. But all partnership or co operation, an expiry date will arrive, more often due to competition issue and directly pushed from external forces.

Company lost it competitiveness very often due to loyalty to one supplier or business partnership and the leader lost forecast on the reality of the competition until it is too late to focus.

At times, price rise can be completely halted by looking at issues beyond the selling price of the part. Focusing on what can be done to eliminate the needs to have a price rise. Can the any improvement be made from the supplier or even from a customer point of view.

Improving forecast and reduce the inventory level at supplier warehouse may bring cost down. Very often, supplier has no choice but has to react to last minute demand from a customer and this increase cost of shipment and production. On the other hand, a inaccurate forecast resulted in supplier stock becoming redundant and they maybe unsaid frustration which lead to future price increase to recover losses.

Long term strategy

A forward looking strategy which  constantly review supply base is one of the way to handle and limit price increase. Review not only weaknesses at supplier factories , but it is equally important to review internal weaknesses.

Anticipate the next move in the market place, even though this are only forecasts to reduce surprises.