If you don’t know where you are going, any road can take you there.”
– Cheshire Cat, Alice in Wonderland.
Retailers are pushing their merchants down a rabbit hole by requiring them to fully “validate” cost increases. Although some supplier accountability is always necessary, the validation pendulum has swung too far. The new found obsession with understanding every detail of a cost increase only ends up creating a burdensome checklist on already-strained merchant workloads, and often results in little or no gain. In the case of validating cost increases, perfect is the enemy of the good.
We’ve developed a simple, four-step approach for dealing with cost increases that has yielded significant results: (1) are you sure? (initial pushback), (2) legitimize and minimize, (3) assess your leverage, and (4) negotiate. Right now, we see too many retailers spending most of their time on Step 2 – validation, and not enough time understanding their leverage and negotiating an outcome. Validation exercises too quickly become the proverbial rabbit hole by requiring merchants to analyze commodity indices, inflation adjustments, invoices from a supplier’s supplier, product cost break downs and more. ENOUGH ALREADY!
You cannot drive value by nitpicking a commodity index nor by asking suppliers for a “clean sheet” breakdown. For a retailer to believe that they will someday receive full product cost transparency – and understanding – is completely naïve. It will never happen. Our experience shows suppliers will either ignore you (“that’s proprietary information we cannot share!”) or provide just enough validation to appease, but not enough to fully understand or offset the impacts.
However, value can be created by understanding your leverage in order to negotiate a good outcome – Steps 3 and 4 of our process. Sometimes a good outcome is not a reduction in the cost increase because the cost increase is valid – it’s true! But even when a cost increase can be 100% validated, a good process (Steps 3 & 4) will still get something in exchange for accepting the cost increase. It is critical that retailers understand that every cost increase is a negotiation – not a validation exercise.
Cost increases have always been a fact of business, but their increased frequency in today’s environment has created a lot of stress, unease and skepticism. Executives have turned to the promise by large consultants that spending a lot of time and money to validate increases will provide value. This is a game retailers cannot win. Instead, merchants must focus their efforts on building leverage and negotiating something of value in return for any cost increase concession. The best way to avoid getting lost down the rabbit hole is to avoid going down the rabbit hole in the first place.
