According to the UK government's
Consumer Price Index (CPI), the current UK inflation rate reached 10.1% in
March 2023. Most supply contracts, especially within the public sector, allow
suppliers to increase their costs by the annual CPI rate, adding £5.9B in yearly
costs for UK taxpayers. The CPI rate measures the costs of products and
services paid by consumers and is published monthly by the UK government.
Suppliers will justify increasing their
prices annually by stating that their costs have increased by this amount, even
though this might not be true. Average industrial prices have increased across
the UK by the following:
- Salaries – 7.1%
- Materials – 4.1%
- Energy – 29.4%
- Transport – 6.8%
- Land/Building – 2.9%
Internal organisational price inflation
rates will vary between industry sectors and the location of customers served,
but will invariably be lower than the government’s annual CPI rate in most
circumstances. To demonstrate the impact of the average UK cost increases
mentioned above, an average supplier with a turnover of £40M will see their
costs increase as follows:
- Salaries – assuming 29% of all costs = £823,600.00
- Materials – assuming 21% of all costs = £344,400.00
- Energy – assuming 3.3% of all costs = £388,080.00
- Transport – assuming 4.1% of all costs = £111,520.00
- Land/Building Leases – 7.9% of all costs = £91,640.00
The total cost increase of this supplier
amounts to £1,759,240.00 or an internal price inflation rate of 4.3%, far from
the UK Government’s 10.1% CPI rate. Allowing this supplier to increase
their prices by the current CPI rate of 10.1% would see their customers paying
additional costs of £4,040,000.00 instead of the supplier’s actual cost
increase of 4.3%. The difference is £2,280,760.00, or 5.7% of turnover, allowing
suppliers to increase their profitability directly at the expense of the UK
taxpayer.
Permitting suppliers to increase their
prices by the CPI rate does not add value to the products or services
organisations purchase. Purchasing organisations can protect themselves from
the ravages of price inflation by adopting a commercial policy that:
- Utilises open tendering to secure the best pricing
- Sharing cost inflation risks through contractual
pricing clauses
- Robustly ensuring that all purchases are justified
- Reducing non-value-adding spending
Instigating category management and
commercial pricing policies across the UK public sector would decrease UK
spending by up to £5.9B annually, effectively decreasing the rate of CPI from
the current 10.1% to just 8.4%, benefitting the UK consumer from spiralling
inflationary annual cost increases.
B3Living has adopted category management
practices to give budget managers accurate cost data upon which they can base
tendering options. Pricing clauses have been adopted within its Framework
Agreements that allow suppliers to increase prices once every four years,
contributing to an internal price inflation rate of just 7.3%.
Additional articles can be found at Procurement Made Easy. This site looks at procurement issues to assist organisations and people in increasing the quality, efficiency, and effectiveness of their product and service supply to the customers' delight. ©️ Procurement Made Easy. All rights reserved.
