announced a wage increase for a half-million employees up to $9/hour by April and $10/hour by next February. How will this wage growth affect your suppliers' cost and pricing structures, and what is the best way to combat the all-but-certain price increases that they are gearing up to pass on to you? How do you counter the Walmart wage growth effect?
First, take heart that you don't need to scramble to establish a new best-in-class procurement strategy related to low-wage produced items in the next few days. Costs tend to rise after a new wage floor is introduced, not in immediate anticipation of wage growth, so the wave of increases may be months off. However, it is never too early to enact strategies & processes that will allow your company to weather the storm and come out of the other end with your pricing still intact and your supplier relationships positive. So, what can you do today to plan for a better pricing impact tomorrow?
Surveying the market is always a good first step, as is taking a look at your internal spending metrics, to determine which of your suppliers provides low-wage produced products or services, and will therefore be affected by these wage changes. These may include your office suppliers, packaging suppliers, or MRO suppliers, to name just a few. Aim to get long term contracts in place with these suppliers as soon as possible, and make sure these agreements include pricing that is fixed for an extended period of time. Tying pricing to appropriate industry or commodity indexes, utilizing a trailing average increase methodology, and putting in place caps on frequency and percentage of increases are potentially useful options. A preemptive benchmark may be your best option in terms of providing the most insightful metrics to inform your pricing agreement creation process. And last but not least, try to avoid cost or margin floor pricing, and always remember to work price-increase validation documentation into your supplier contracts.
Utilization of these strategic sourcing and procurement best practices will position your organization very favorably for future pricing impacts, however it is also important to remember the relationship aspect of these supplier transactions. Many of these suppliers are your long-term partners, and some of them may be running at razor-thin margins that cut very close to cost. Now is the right time to address these concerns with your supplier partners. Beginning an open and transparent conversation today about pricing and agreement structures can yield ample fruit in the future. However, your conversations should not just focus on price increases. Today is the day to start a dialogue about other service offerings, under-served needs, enhanced capabilities, innovation, efficiency, and potential for mutual and lean business growth. Creating a communicative, adaptive, and mutually supportive environment will allow for win-win scenarios when they are most needed. Building these values into agreements and daily procurement processes enhance your position even further. Establish and document regularly scheduled touch-points that focus on these areas, and build Key Performance Indicators around the achievement of goals based off of these ideas.
The Walmart wage-growth effect isn't just coming, it's already here. Are you prepared to counter it?
For help with innovative & effective approaches to strategic-sourcing focused procurement planning, please reach out to Source One Management Services, LLC or visit www.sourceoneinc.com