Your supplier wants a price increase: how to assess it and put an agreement into practice

The supplier's email says prices are going up 6% next month. Sales wants to order early, finance wants to know what it will do to margin, and purchasing wants an explanation. Each is asking a reasonable question. The job is to turn them into one decision before different people start acting on different assumptions.

A sound price-review process begins with a named commercial owner, agreed approval limits and a record of the existing terms. Routine increases within an established agreement can follow its process. A change outside those terms needs an explicit commercial decision, with the appropriate approval, rather than an informal acceptance buried in an email chain.

First establish exactly what is changing

Ask for a usable schedule showing the affected product identifiers, current and proposed prices, currencies, units of measure and effective date. Clarify whether the change is to list price, net invoice price, a surcharge or a discount. A 6% increase in a list price does not necessarily produce a 6% increase in your net cost if the discount structure also changes.

Confirm the event that determines the new price. It might be the date an order is accepted, dispatched, delivered or invoiced. These are not interchangeable. An order placed before the change but shipped afterwards can become a dispute if the parties have not agreed which event matters.

Check the contract and accepted orders before deciding what the supplier can change. Where the interpretation is uncertain or commercially significant, obtain suitable advice. Do not assume a notice automatically overrides an existing agreement, or that an old quotation protects every future delivery.

Test the reason against the product's cost

A useful discussion starts with evidence relevant to the goods being purchased. The Institute for Supply Management's guidance on supplier increases recommends preparing contract information, cost trends, benchmarks and supplier-performance evidence before negotiating. Its article dates from 2021; the process is useful, but its contemporary market forecasts should not be treated as current.

Ask which inputs have changed, over what period and with what effect on this product. If packaging accounts for 10% of the agreed cost base and its cost rises 20%, the direct effect on that baseline is 2%, assuming everything else is unchanged. It does not by itself establish a 20% increase in the finished product's cost.

This is a simplified illustration, not a demand that every supplier reveal confidential accounts. The aim is a proportionate explanation. A commodity index may be relevant to one component and irrelevant to another. Currency movements may already be reflected in a separate adjustment. Check for double counting before accepting a combined increase.

The UK's Competition and Markets Authority described open-book arrangements, evidence-based reviews and commodity trackers in its 2023 groceries study. Those are examples of approaches used in that sector, not universal rights to a supplier's cost information.

Measure the consequence for your business

Rank the affected lines by realistic purchasing volume and total impact. A large percentage increase on an occasional item may matter less than a small increase on a staple bought every week. Use expected quantities, not an optimistic sales target chosen to make the negotiation sound more important.

Then calculate the impact on the orders you sell. Suppose you buy an item for 10 and sell it for 13, before tax and other costs. The gross profit is 3, or about 23.1% of sales. A 6% buying-price increase takes the cost to 10.60. With the selling price unchanged, gross profit falls to 2.40, approximately 18.5% of sales. The supplier's 6% increase has reduced gross profit per unit by 20%.

That arithmetic does not prove the increase is unreasonable. It shows why the response must consider selling prices, customer commitments and other costs. Finance should evaluate the margin effect; sales should identify customer prices that cannot immediately change; purchasing should lead the supplier discussion.

Negotiate a workable outcome

There may be several options between full acceptance and changing suppliers. Discuss a later start date, phased increases, protection for accepted orders, a temporary surcharge with a review date or a specification change that genuinely reduces cost. Confirm what each option costs elsewhere in the business.

A longer commitment can help a supplier plan, but it also creates obligations for the buyer. Do not exchange a small price concession for volumes you cannot reasonably sell. Likewise, an early bulk purchase should be assessed against storage, cash tied up, shelf life and the risk that demand changes.

A temporary exception may be justified to protect continuity while an alternative is qualified. Record its scope: named products, maximum quantity, price, approval and expiry. The purpose is to buy a defined period of continuity, not leave an exceptional price in place indefinitely.

Implement the agreement across open transactions

Once agreed, issue one written summary to the supplier and the relevant internal teams. It should identify the final prices, effective event and date, any protected orders, revised discounts and the next review point. Retain the old schedule so later invoices can be checked against the correct period.

Update purchasing records through the normal authorised process. Review open purchase orders individually where necessary; changing a master price does not necessarily amend every existing order. Ask the supplier to acknowledge any agreed order amendments.

Sales then updates quotations and customer price lists according to the business's own terms. Accounts payable receives the agreed treatment of invoices that cross the change date. A trial calculation on a few representative lines is worthwhile before the first large invoice arrives.

If an invoice uses the wrong price, handle it as a discrepancy against the agreement. Do not retrospectively change the purchase order simply to make the invoice pass. Correct the underlying error or obtain an authorised resolution, preserving what actually happened.

Put a date on the follow-up

After the first deliveries, check that the supplier is charging the agreed amounts and that the expected margin impact matches reality. Review any temporary surcharge when promised. If cost decreases are part of the agreed mechanism, apply the same attention in both directions.

A good outcome is not necessarily the smallest percentage increase. It is a price the business understands, a supply arrangement it can rely on and records that let purchasing, sales and finance execute the same agreement without having to renegotiate it on every order.

Related guidance: testing a backup supplier.

AI-generated editorial illustration.