Is this supplier price increase justified? A quick index test
A price increase is justified only to the extent that the supplier’s own cost drivers have moved. Weight each cost element by its share of the price, multiply by the change in its index, and add the results. The total is the increase the cost data supports. The gap between that figure and the requested increase is the part to negotiate.
Justified increase (%) = Σ (cost share of element × change in its index)
Index test for a requested price increase| Cost element | Share of price | Index used | Index change | Contribution |
|---|
| Raw material | 40% | Relevant commodity or producer price series | +6% | +2.4 pts |
| Energy | 15% | Industrial energy price index | +10% | +1.5 pts |
| Labour | 30% | Sector wage index | +4% | +1.2 pts |
| Overheads and margin | 15% | — | 0% | 0 pts |
| Total | 100% | | | +5.1% |
Illustrative figures
Supplier requests +12% on €2,000,000 annual spend.
The index test supports +5.1%.
Gap: 6.9 points = €138,000 per year.
Where this decision is actually made
The quick test shows whether to challenge an increase; it does not show what happens if you refuse. That requires modelling the alternatives: partial acceptance, a different contract length, a second source or a change in specification, each with its cost and risk. Modelling those options before replying to the supplier is the task of scenario-based procurement analytics.
Which index should be used, and for which period?
Match each cost element to a public series that tracks it: producer price indices for materials, national wage statistics for labour and exchange commodity prices where the input is traded. A general consumer price index rarely describes any single supplier’s costs.
Measure the change from the same base period as the last price setting, not from a start date the supplier has chosen. A different start date can turn a modest movement into a large one. Allow for lag as well: suppliers often buy materials months ahead, so their costs move later than the index, and a recent spike may not yet have reached their cost base.
What if the supplier will not share its cost structure?
Estimate the shares yourself. Published accounts, industry cost structures and a breakdown of the product itself — its materials, the energy needed to make it and the labour involved — give a workable first view of how the price is built.
A reasoned estimate is enough to start, because it moves the burden of proof to the supplier. Instead of asking for full disclosure, which is often refused, ask the supplier to correct the estimate. A supplier that disputes a weighting has to say which one is wrong and by how much, and that answer is itself information about its cost base.
Should margin rise with inflation?
No. Margin is not a cost driver. When an inflation rate is applied to the whole price, including margin, the supplier recovers more than its cost increase: the extra amount is profit, not cost recovery.
Keep the margin contribution at zero in the test unless the contract says otherwise. If the agreement does allow margin to be indexed, apply exactly the mechanism it describes and nothing more. This single line is often where an increase is inflated, so it is worth checking first when the requested figure sits well above the result of the index test.