Supplier Costs Are Rising: How Much Should Manufacturers Pass On?

Manufacturers should not automatically pass every supplier increase directly to customers, but nor should they routinely absorb increases without understanding the effect on margin. The right response depends on how much the cost change affects the product, current margin, customer economics, competitive position and whether other commercial levers can recover the impact.

The key question is not:

"Our supplier increased prices by 10%, so should we increase ours by 10%?"

It is:

What increase is required to protect the commercial return of the work?

Why is a 10% supplier increase not necessarily a 10% customer increase?

A supplier cost rarely represents 100% of the selling price.

Consider a product sold for £100.

Suppose the relevant bought-in material costs £30.

A 10% supplier increase raises that cost by £3.

The new material cost is £33.

If every other cost remains unchanged, a 10% increase in that component does not automatically require the selling price to rise from £100 to £110.

The first step is therefore understanding where the cost increase actually enters the economics of the product.

Should manufacturers calculate the impact by product?

Where possible, yes.

Blanket price increases are simple to communicate but can distort pricing where cost exposure differs significantly between products.

For example:

• Product A may contain a large proportion of the affected material
• Product B may contain very little
• Product C may already generate weak margin
• Product D may have been recently repriced
• Product E may be contractually fixed

Applying the same percentage to every product can overcorrect some lines while leaving others commercially weak.

The appropriate level of analysis depends on product complexity and data availability, but management should understand the broad exposure before deciding.

Why does margin percentage matter?

Suppose a product sells for £100 and costs £70, creating £30 gross profit.

Gross margin is 30%.

If costs rise by £5 and the selling price remains unchanged:

• Selling price = £100
• Cost = £75
• Gross profit = £25
• Gross margin = 25%

The business has not simply lost £5.

The economics of the work have changed.

If the objective is to maintain the original cash contribution, one price is required.

If the objective is to maintain the original margin percentage, a different price may be required.

Management should decide which commercial outcome it is trying to protect.

Should every cost increase be passed on?

Not necessarily.

There may be legitimate reasons to absorb part of an increase temporarily.

Examples include:

• A strategically important customer relationship
• A fixed-price agreement
• A short-term cost spike
• Significant spare capacity
• A highly competitive product
• An upcoming wider commercial renegotiation
• Other improvements offsetting the cost

But absorption should be a deliberate commercial decision.

The danger occurs when cost increases are absorbed by default because nobody owns the pricing response.

A collection of individually small unrecovered increases can materially weaken margin over time.

What else should be reviewed when supplier costs rise?

A supplier increase is a useful trigger to review the wider economics of the account or product.

Consider:

• Freight
• Packaging
• Minimum order quantities
• Batch sizes
• Setup costs
• Tooling
• Payment terms
• Call-off arrangements
• Expedited deliveries
• Customer-specific administration
• Discount structures

Sometimes the material increase is not the largest commercial problem.

It merely exposes pricing that was already weak.

Should you use a blanket price increase?

Blanket increases have advantages.

They are relatively easy to implement and communicate.

They may be appropriate where:

• Cost exposure is broadly similar
• Customer arrangements are simple
• The existing price base is consistent
• Detailed product-level analysis would create disproportionate work

But they also carry risks.

A blanket increase can:

• Overprice already strong-margin products
• Under-recover heavily affected products
• Ignore customer-specific economics
• Preserve historic inconsistencies
• Create unnecessary customer resistance

A more segmented approach may therefore provide better commercial control.

Which customers should be reviewed first?

Prioritise where the financial exposure or commercial risk is greatest.

Useful factors include:

Revenue

How much business is affected?

Current margin

How much room exists to absorb cost?

Cost increase exposure

How heavily does the relevant supplier cost affect the work?

Strategic value

What is the wider importance of the relationship?

Competitive position

How easily could the customer switch?

Capacity

Is the work consuming scarce resources?

History

When was the account last commercially reviewed?

These factors give management a stronger basis for action than customer size alone.

This is closely related to the question of whether your biggest customer is actually your most valuable customer.

How should manufacturers communicate a price increase?

The communication should be clear enough to explain that pricing is being reviewed for a legitimate commercial reason without unnecessarily exposing internal costing.

Avoid vague messages where possible.

Customers are more likely to challenge increases when:

• The rationale is unclear
• The timing appears arbitrary
• Similar products move inconsistently without explanation
• Previous agreements are ignored
• Salespeople appear uncertain about the decision

Internal preparation therefore matters as much as the customer letter.

Commercial teams should understand:

• What is changing
• Why
• When
• Which products or services are affected
• What authority they have to negotiate
• What requires escalation

Without this, a planned increase can quickly turn into inconsistent individual discounts.

Should salespeople be allowed to negotiate?

Usually within defined boundaries.

A completely inflexible approach may unnecessarily damage valuable relationships.

Unlimited discretion, however, can undermine the whole pricing exercise.

A practical structure might include:

• Standard increase
• Defined acceptable range
• Escalation point
• Exceptions requiring approval
• Alternative commercial terms that may be offered

For example, a lower increase might be acceptable in return for:

• Higher volume commitment
• Larger batch quantities
• Improved payment terms
• Reduced service requirements
• Longer commitment

The negotiation should preserve commercial value rather than simply reduce the increase.

What if the customer refuses?

A refusal should trigger a commercial decision rather than an automatic retreat.

Management should understand:

• Current account contribution
• Likely future value
• Capacity consumed
• Competitive alternatives
• Consequence of losing the work
• Cost of maintaining the existing price

Sometimes retaining the price is rational.

Sometimes accepting a reduced increase is rational.

Sometimes walking away is rational.

Fox Healey's article on low-margin work and constrained capacity explains why an apparently profitable order can become less attractive when it consumes capacity that could be used elsewhere.

How frequently should manufacturers review pricing?

Pricing should not depend entirely on an annual price-increase exercise.

A stronger process combines:

• Periodic structured reviews
• Event-driven reviews when important costs change
• Controls around new quotations
• Defined discount authority
• Customer/product profitability analysis

The objective is to prevent a significant gap developing between cost changes and commercial response.

If pricing is only reviewed after margin has already deteriorated materially, management is reacting late.

What should you do next?

When a supplier announces an increase:

1. Quantify the actual cost impact
2. Identify affected products and customers
3. Review current commercial return
4. Decide what outcome needs protecting
5. Consider other commercial terms
6. Define negotiation boundaries
7. Prioritise the highest-value exposures
8. Measure whether the intended recovery is achieved

The answer does not have to be a blanket price increase.

But it should be a deliberate commercial decision.

Pricing and margin performance depend not simply on what suppliers charge, but on how effectively the business converts cost changes into sustainable customer economics.