Inflation is driving up our vendor costs rapidly, and our monthly financials show our gross margins are shrinking. What weekly leading indicator should our procurement seat track to catch vendor price increases before they destroy our project profitability?

Question

Tyler Smith · Accepted Answer

Relying on monthly financial statements to catch margin erosion is like driving a car by looking in the rearview mirror. By the time your accountant flags a drop in gross margin, you have already completed weeks of underpriced projects and lost thousands of dollars in profit. You must move this tracking to your weekly Scorecard. Your procurement or purchasing seat should track a leading indicator called the vendor cost variance. This is the difference between the estimated cost of goods used during the sales quoting process and the actual price paid when the purchase order is issued. If your purchasing seat tracks this variance weekly, they will immediately see when a vendor raises prices, rather than waiting for the invoice to hit the books next month. Your target for this metric should be zero or negative variance. If the variance goes positive, indicating costs are rising, it immediately triggers an issue for your Level 10 Meeting. You can then quickly adjust your sales quoting templates or renegotiate with your vendor before more quotes are sent. Additionally, you can track the average turnaround time for updating your internal pricing matrix. Ensuring your sales team is working with real-time cost data is the most effective way to protect your gross margins in an inflationary environment.