Is There A Case For An Annual Price Decrease Letter?

Posted 06/01/2016

The Consumer Prices Index (CPI), the UK’s key measure of inflation for goods and services, was negative for two consecutive months in September and October 2015, and recorded a tiny increase of 0.1% in November 2015.

This is a world away from when I first walked into a purchasing department in 1982. Back then the inflation rate was 8.6% and older buyers could still tell war-stories about the eye-watering 24% inflation rate in 1975. As L. P. Hartley said in his novel The Go-Between “The past is a foreign country, they do things differently there”.  And, of course, suppliers and buyers did do things differently to deal with continually rising labour and raw material prices.

One of the main differences was that every supplier sent an annual price increase letter (and we were fortunate if they limited themselves to just one increase a year).  In the weeks leading up to the arrival of the letter there would be a phoney war of leaked information and rumour from the suppliers until the fateful day, usually just after the supplier had settled on a pay increase for their workers, when the post trolley would come rattling around the smoke-filled office and deliver the bad news to your in-tray. Typically there would be a couple of paragraphs highlighting major cost rises in raw materials, energy and labour, followed by an explanation of how the supplier had sought to minimise these increases before the sting in the tail: “therefore, we have no alternative other than to apply a price increase on all corrugated cases and trays of 6.5% to be effective in 4 weeks time”.

Both parties knew that the letter was simply a signal to let negotiations commence. For me it was also a signal to review volume allocations between suppliers, look for alternative sources and trial different specifications. Then, after a few rounds of negotiation, we would settle on the new, usually higher, price for the coming year.

The idea of an annual price increase has been consigned to history. But given the recent deflation statistics is there a case for an annual price decrease? Suppliers are still making capital investments in manufacturing plants, implementing quality programmes and achieving manufacturing efficiencies to reduce costs and increase margin, so why not?

These days, whenever buyer requests for a price decrease are reported in the media we invariably read about “strong-arm tactics” from “bully-boys” who have sent an “extraordinary letter”. But why is a price decrease so abhorrent when it was perfectly acceptable for suppliers in the past to demand price increases?  Is it simply that we have some long-held conviction that prices only increase over time? I know that when the more sophisticated suppliers receive price decrease letters today they view them as a call to the negotiating table (just as I did back in the eighties) and, perhaps, an opportunity to increase volumes or secure longer agreements.

There are less contentious ways of securing short-term price decreases and certainly better ways of securing long-term value improvements from suppliers but there is a little bit of me that wishes the annual price decrease letter was a more acceptable part of the toolkit - if only because I had to field so many of the annual price increase letters all those years ago “in a foreign country”.

We’d like to hear your views on the best ways to achieve short-term price savings without creating bad press.Let us know your thoughts in the comments below and share using the social media icons below.


Tagged by topic: Ingredients and Packaging

  by Paul Lee

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