Last week during our inaugural Categorypalooza event, participants confirmed that they are currently being inundated with cost increase requests from suppliers of a broad range of products and services. This is a significant challenge for procurement right now; we’re still recovering from years of operational disruption and no one has room in the bottom line to accept surprise cost increases.
But what options does procurement have? When facing a cost increase request, the best approach is to start by validating the legitimacy of the request and determining whether the supplier is asking for an appropriate amount. To do this, procurement will have to understand the cost drivers of that product or service.
Let’s use trucking services as an example.
Eric Fuller is the CEO of U.S. Xpress (USX), one of the largest national truckload carriers in the U.S. He recently came out and made a statement about the shortage of drivers and what his company is doing to address it. His company has doled out 30% to 35% in total pay increases over the last 12 months — and he believes more may be necessary.
These increases in labor cost are leading to significant cost increases that have to be pushed to buyers of their services. But how much should buyers expect to see their truckload rates increase by?
Art of Procurement has recently added a series on cost breakdowns by category in collaboration with our friends at Procurement IQ. Just last week we looked at US trucking services. According to their breakdown, direct labor represents 29.2% of the carrier’s costs. Once the driver wage increase is factored in with the other costs and overhead, rates should only have increased by 8-9%, not the full 30% wage increase.
If you have managed to negotiate your truckload rate increase to be less than 8-9%, congratulations! You are beating the market! If your increase was higher, then either other factors were involved (e.g. you negotiated your price when fuel was lower than it is today), or you now have the data to go back and challenge the value of the increase request even if you accept that an increase is unavoidable.
One final tip: When accepting a cost increase, be sure to position it as a temporary surcharge rather than a permanent increase. Track ongoing input costs to a market index (where possible), or make the increase contingent upon your supplier providing monthly updates on the input cost in question. That way you can ensure that you don’t continue paying elevated rates after the drivers of those rates have gone back down – no pun intended.