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 annual 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 governments’ 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, an effective decrease in 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%.
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