The essence of indexation
Price indexation, once limited to specific sectors such as automotive and aerospace, is now widely used across various industries, including retail. This strategy enables rapid adjustment of prices to fluctuations in raw material costs, as regularly demonstrated by adjustments made by automotive manufacturers in response to variations in raw material prices based on long-term contracts.
Nuances and complexities
However, price indexation presents significant challenges. It relies on estimates and requires transparency in cost calculation, extending beyond direct variable costs to include fixed and indirect costs that are more difficult to quantify and allocate. It is indeed always complicated to allocate costs such as those of premises. Should they be allocated based on turnover through a simple markup, allocated based on the occupation of production means and their level of use of a product? There is no truth in the matter but rather policies.
Moreover, while laws like EGAlim2 in France, for example, represent progress for agricultural producers in France, their effectiveness depends on implementation and the ability to maintain a balance among market players. One cannot help but be struck by the fact that price indexation only guarantees the perpetuation of the margin on the price, not its improvement, and this may well be a tragedy for farmers.
Challenges of indexation
Transparency and adjustment to market indices pose a significant challenge. Production costs can be identified, but unpredictable fluctuations, such as recent energy price increases, make indexation based on a market index disconnected or even impractical given the economic reality of the company experiencing this increase. This raises questions about validating cost variations and negotiating commercial conditions, highlighting the complexity of business relationships in a context requiring transparency and doubt about its reality when indices no longer describe known facts to the customer who knows well that he will never know everything.
Towards a balance between producers and customers
The balance between protecting producers and the consequences of price increases for customers is at the heart of indexation strategies. While this practice provides some financial security for producers, it challenges customers, particularly distributors, to maintain their profit margins in the face of price elasticity phenomena recently amplified by purchasing power losses. This dynamic underscores the importance of balanced negotiation and adaptive market strategies. Shouldn’t we balance fair cost and commitment to cost reduction? How can one accept that raw materials price increases handicap your sales and your ability to secure a sufficient margin without a credible plan to improve the competitiveness of these burdensome costs?
Perspectives and recommendations
For price indexation to be successful, it is crucial to cultivate strong relationships based on mutual trust. This approach, combined with rigorous cost analysis, transparent communication of these costs, and balanced progress plans, can significantly improve the effectiveness of price indexation over the long term. However, one cannot help but be surprised by the belief that “Price indexation is a tool for creating harmony” when rather mutual trust allows it in the long term. This requires appropriate governance.
Negos Consulting, expert in purchase negotiation, advises you on your indexing strategy
In conclusion, price indexation remains a key strategy in adaptive cost management over time, but its success depends on judicious implementation, a deep understanding of market dynamics, and the ability to maintain constructive commercial relationships. Negos Consulting is at your disposal to assist you in optimizing your indexation strategies and building sustainable and balanced commercial relationships.
