As minimum wages rise, procurement must be ready to respond

Twenty-one states are raising their minimum wage in 2017. Hearing the news at the beginning of the year got me thinking: Since some businesses—especially smaller businesses—say the move will increase their costs, could the higher wages have an effect on the supply chain? Will suppliers ask procurement to accept price hikes? How will procurement react?

According to an article on United Press International's website, UPI.com, the raises affect 4.4 million workers nationally. Beginning on January 1, low-wage workers in 19 of 21 states saw bigger paychecks. (The others will raise wages later in 2017.) For example, Massachusetts raised its rate from $10 to $11. In Arizona, the hourly wage grew from $7.50 to $9.00. Meanwhile, the federal rate remains at $7.25. (States can require businesses to pay workers more.)

The new rules may have a wider effect than some U.S. procurement professionals realize. Some may be thinking that their company does not purchase many goods and services from suppliers that employ workers earning minimum wage. If their company's products are highly technical, they could be doing business with U.S.-based suppliers that employ highly skilled workers who earn more. Or their company buys products from manufacturers in other regions of the world where labor costs are lower. While those scenarios may be the case for some, they probably won't apply to most companies. That's because most companies buy at least some products and services, such as maintenance or food, from local suppliers. These providers, which may be small businesses, often employ workers who are less skilled and may work for the minimum wage. If a company has facilities or suppliers in any of the 21 affected states, then it could well be affected by wage hikes.

So, has your procurement team received notice from any suppliers that they have to raise prices to keep up with the costs of paying higher wages? If they haven't yet, they might soon. Procurement, however, can manage this and should be ready to negotiate with suppliers that try to pass on the costs of higher wages.

Smart procurement leaders know—or have a good idea of—their suppliers' costs, even before they do business with a supplier. When sending requests for proposal (RFPs) to suppliers, they ask for a cost estimate. While not all suppliers are willing to share their own costs with their customers those that do often provide a breakdown of the cost components, usually in percentages. Procurement leaders can also use outside sources, such as price data generated by companies like ProPurchaser and others, to estimate the cost to produce a product or provide a service. Labor makes up a small portion of most manufactured products; it is higher for services.

Presented with a price increase, procurement can negotiate using this information. If the supplier isn't budging and has been performing well, the procurement team could offer some additional business in exchange for a volume discount. Procurement could also work with the supplier to try to lower costs in other areas, perhaps by helping to streamline ordering and payment processes. Procurement leaders also can ask whether there are ways their own organization could improve that would help the supplier to reduce its cost of doing business.

Keep in mind, though, that the wage hikes could actually prove beneficial to the supply chain. Some businesses that employ low-skilled workers already pay them more than the minimum, believing that investing in employees is good business. Paying more helps to retain workers, which can improve customer service and, in turn, provide a competitive advantage that helps to grow the business.

Motivated employees. Good customer service. More efficiency. Lower cost. All of these result from higher wages and can in the end be good for the supply chain.