Raw material price increases are an unavoidable part of sourcing in categories exposed to commodities, energy, freight, foreign exchange and geopolitical disruption. The difficulty for procurement is not simply that input costs have increased. It is determining how much of that increase has actually affected the supplier’s cost base and how much should be reflected in the price paid by the buyer.
A supplier may present a 10 or 15 percent price increase following a significant movement in steel, aluminium, resin, copper or another input. That percentage cannot be evaluated in isolation. The material may account for only part of the supplier’s total cost, the supplier may have purchased inventory before the market moved, or other elements of the cost structure may have moved in the opposite direction.
This is why an unexpected supplier increase should begin with cost analysis rather than an immediate negotiation over the revised unit price.
Raw material prices can change because of supply constraints, changes in production capacity, energy costs, freight rates, currency movements, tariffs, geopolitical events and changes in global demand.
The effect on a finished product depends on how much exposure the supplier has to the affected input. A 20 percent increase in the price of steel does not translate into a 20 percent increase in the cost of a finished component if steel represents only part of the component’s total manufacturing cost.
For a manufactured product, the supplier’s cost structure may include raw materials, direct labor, energy, conversion costs, logistics, overhead and margin. Procurement therefore needs to establish where the increase has occurred within that structure before assessing the supplier’s proposed adjustment.
The timing of the increase also matters. A supplier may be purchasing material under annual agreements, holding inventory purchased at an earlier price or operating under contracts that already provide some protection against commodity movements. The market price observed today does not necessarily represent the supplier’s current cost.
Why Should Procurement Analyze the Increase?
A supplier’s request for a price increase is a commercial claim that needs to be supported by an appropriate cost basis.
This does not mean that procurement should automatically reject increases. Where a commodity has risen significantly and represents a substantial proportion of the supplier’s cost, some adjustment may be entirely reasonable. The procurement responsibility is to establish the relationship between the market movement and the price being requested.
Consider a component where raw material represents 45 percent of the supplier’s cost and the price of that material increases by 20 percent. Assuming the material exposure is accurate and all other costs remain unchanged, the direct cost impact would be approximately 9 percent. A 20 percent increase in the finished component would therefore require considerably more justification.
The calculation will differ by category and supplier, but the principle remains the same. Procurement should understand the cost driver, its weight within the product cost and the timing of the movement before agreeing to a revised price.
How Do You Respond to an Unexpected Raw Material Price Increase?
Start with the contract. Before assessing the supplier’s figures, confirm whether the existing agreement permits a price change during its term, what notice period applies, and whether any price review or indexation terms already govern the adjustment. Ask for the request and its supporting calculation in writing and avoid agreeing to a revised price in conversation before the analysis is complete.
The next step is to establish what has actually changed. The supplier should identify the specific raw material or cost component responsible for the increase, the previous and current cost, the period over which the movement occurred and the basis used to calculate the requested adjustment. For significant categories, this may require supporting purchase data, commodity benchmarks, agreed indices or an open-book cost analysis.
The relevant market reference will depend on the category. Metals may be assessed against recognized commodity indices, while chemicals, plastics, agricultural products and energy-intensive inputs may require different benchmarks. The purpose is not to identify a single market price and apply it mechanically, but to establish an objective reference against which the supplier’s claim can be assessed.
The next consideration is the supplier’s actual cost exposure and when that cost actually changed. The direct impact calculation shown earlier is only a starting point. It then needs to account for inventory purchased before the market moved, contractual purchase arrangements, material yield, productivity, freight, currency and other relevant cost movements.
This analysis often changes the negotiation considerably. A supplier may have a legitimate reason for requesting an increase, while the proposed percentage may still exceed the demonstrable cost impact.
The next stage is to quantify the effect on the finished product. A should-cost model can be useful for strategic categories because it provides procurement with an independent view of the likely cost impact rather than relying entirely on supplier-provided calculations.
The analysis should also consider movements in other cost components. A supplier may be experiencing higher raw material costs while benefiting from lower freight, energy or currency costs. Similarly, productivity improvements or higher production volumes may offset part of the increase.
Looking at the entire cost structure prevents a single commodity movement from becoming a justification for a broader margin increase.
How Should Procurement Negotiate the Increase?
Once the cost impact has been established, the negotiation should consider the wider commercial relationship rather than focusing exclusively on the revised unit price.
Where the increase is justified, procurement may negotiate the timing of the adjustment, a partial pass-through, volume commitments, longer contract duration, payment terms or other commercial conditions. A supplier seeking greater price certainty may, for example, be willing to offer improved commercial terms in exchange for a longer-term commitment.
For categories with significant commodity exposure, the negotiation may also result in a formal price-adjustment mechanism rather than a permanent change to the base price.
This distinction is important. A temporary increase in an underlying commodity does not necessarily justify permanently increasing the supplier’s price. Where the market movement is expected to reverse, a temporary surcharge or indexed adjustment may be more appropriate.
What If the Supplier Cannot Absorb the Increase?
There will be circumstances in which a supplier has limited ability to absorb an increase. If the underlying commodity represents a substantial proportion of the product cost and the movement is supported by reliable market data, continued resistance may create greater supply risk than accepting a reasonable adjustment.
Procurement should then evaluate the available alternatives.
These may include competitive re-sourcing, dual sourcing, alternative materials, specification changes, regional sourcing or changes to the manufacturing footprint. The feasibility of each option will depend on qualification requirements, switching costs, tooling, technical specifications, regulatory requirements and available supplier capacity.
The purpose of this assessment is not necessarily to replace the incumbent supplier. Establishing credible alternatives can improve negotiating leverage and provide protection if the cost increase develops into a longer-term supply issue.
When Should Procurement Use Indexed Pricing?
Indexed pricing can be appropriate where the supplier’s cost is closely linked to a recognized commodity or other external benchmark.
Rather than renegotiating the entire price whenever the market changes, the contract can define the relevant index, baseline value, material cost weighting, review frequency and adjustment formula.
For example, a contract may establish that only movements beyond an agreed threshold will trigger a price adjustment and that the adjustment will be calculated against a defined commodity index. The same mechanism can be applied when the index falls. This provides greater predictability for both parties and reduces the need to reopen commercial negotiations every time the underlying market changes.
The mechanism must, however, be designed carefully. An index that does not reflect the supplier’s actual cost exposure can produce inaccurate adjustments, while a mechanism that permits increases without corresponding reductions effectively transfers commodity risk entirely to the buyer.
What Should Be Included in a Raw Material Price Adjustment Clause?
A well-designed clause should establish the commercial rules before the market moves. It should identify the relevant commodity or benchmark, establish the baseline price and date, define the proportion of the product cost exposed to that commodity and specify how often the price will be reviewed.
The contract should also establish any thresholds, caps or floors, the effective date of adjustments and the documentation the supplier must provide to support a claim. The treatment of price decreases should be equally clear. If an increase is passed through when the index rises, the contract should establish how the buyer benefits when the index subsequently declines.
Without these provisions, procurement may find itself renegotiating the same commercial issue repeatedly throughout the contract term.
What Happens When Raw Material Prices Fall?
Price management should not stop when the supplier’s requested increase has been agreed.
Commodity markets are cyclical, and the same market movement that creates an increase can subsequently create an opportunity for reduction. Procurement should therefore continue monitoring the relevant indices and compare them with the assumptions used to establish the current supplier price.
Where an indexed mechanism is in place, the reduction should occur according to the agreed formula. Where no formal mechanism exists, falling input costs should still form part of the next commercial review.
This is particularly important in long-term manufacturing agreements, where the original cost assumptions can become disconnected from actual market conditions over time.
How Can Procurement Reduce Exposure to Future Raw Material Volatility?
Managing an individual price increase is only one part of the issue. Procurement should also consider how the category is structured and whether the business is unnecessarily exposed to future movements.
Supplier diversification can reduce dependence on a single source. Longer-term agreements can provide greater price visibility where supply continuity is more important than short-term market pricing. Alternative materials or specifications may reduce exposure to highly volatile inputs where technical requirements permit.
Spend and supplier data also play an important role. Procurement needs visibility into which products, suppliers and categories are exposed to particular commodities before a market movement occurs. A change in aluminum prices, for example, will not have the same financial effect across every product purchased by a manufacturer.
Understanding that exposure allows procurement to prioritize its response rather than treating every supplier increase as an isolated event.
How Should Procurement Evaluate a Supplier Price Increase?
Before approving an adjustment, procurement should be able to establish the following:
Area | Question |
Cost driver | Which raw material or input has increased? |
Market movement | What was the movement and over what period? |
Cost exposure | What proportion of the finished product cost does the input represent? |
Supplier baseline | What cost and date is the supplier using as its reference point? |
Inventory | Was the affected material purchased before or after the market movement? |
Offsetting factors | Have freight, energy, currency or productivity changes reduced other costs? |
Commercial impact | What portion of the requested increase is supported by the cost analysis? |
Alternatives | Are other suppliers, materials or sourcing regions commercially viable? |
Contract mechanism | Does the agreement provide for indexation or price review? |
Future exposure | How will subsequent increases and decreases be managed? |
If the supplier cannot provide sufficient information to support the requested adjustment, procurement has limited basis for accepting it. If the evidence supports the increase, the discussion can move towards determining the appropriate commercial mechanism and timing.
The Payoff
Raw material volatility cannot be eliminated through sourcing. What procurement can control is how that volatility enters the commercial relationship.
A supplier price increase should therefore be assessed against the underlying commodity movement, the supplier’s actual cost structure and the terms already agreed between the parties. Where the increase is justified, procurement can determine an appropriate adjustment without allowing unrelated costs or margin expansion to become part of the claim.
For future contracts, the same analysis should inform the commercial structure from the beginning. Clear indexation, defined review periods, transparent cost assumptions and appropriate adjustment thresholds can prevent commodity movements from becoming recurring pricing disputes.
The difficulty for many organizations is that the information required to make these decisions is spread across spend records, supplier data, contracts, market information and sourcing projects. Bringing those inputs together gives procurement a clearer view of where raw material exposure exists and how individual supplier changes affect the broader category.
That is where a sourcing platform such as MeRLIN can support the process, by connecting supplier information, sourcing activity, spend visibility and contract data within a single procurement workflow.
