Many suppliers have
increased their prices recently to accommodate the rising costs of
commodities.
In many cases, suppliers announce price increases by e-mail, then
implement them automatically through your company’s procurement
system.
Companies can take certain
actions to reduce or delay supply price increases. Here are tips for
handling possible price increases:
- Have a face-to-face
discussion with your supplier: Never accept
increases based on a “dear customer” form letter or
email. Have an in-person discussion regarding any proposed
increase before it takes effect.
- Prepare for a
negotiation: For commodities that are significant
to your product cost, involve everyone who can help and ask the
right questions. For example, determine if engineering can
recommend a lower cost substitute. Are requirements increasing or
decreasing? Plan to ask for something in return for accepting a
price increase.
- Use delay tactics: Ask if the
supplier can hold off until all materials in the pipeline are
expended and/or if you can wait until your new standards are in
place. Ask for 60 days to notify customers. Require a fixed period
of time for any new pricing, even as little as 30 days. That’s
better than no guarantee.
- Reconsider other
suppliers: Suppliers who had previously been
trying to get your business may be more willing to negotiate.
- Get management
involved: It’s harder for the
supplier’s salesperson to face the company president or
owner rather than his or her usual contact.
- Find a compromise: Ask if
purchasing any material at the old price is possible. Make sure
that the supplier will honor the current price on open purchase
orders. Retroactive increases should be refused; your customers
would be offended, and you should be, too.
- Get calculations in
writing: When a proposed increase is based
on a commodity with volatile prices, sellers typically add
escalation clauses to contracts. Any escalation clause or wording
should include a de-escalation clause as well. The amount and
timing should be the same going up or down, but if you don’t
explicitly include the de-escalation clause, it may not happen as
quickly as it should. Contract language should specify base price
and specific terms and timing for price adjustments. For example: The
base price of oil is $130 barrel on June 1. Your price for X will
be adjusted by $1.00 for every $5.00 change in the price of oil as
published in the Wall Street Journal.
Pricing will be adjusted monthly on the first of the month based
on the published price on that day. If the basis for adjustment is a
published price in a trade journal or newspaper, you should review
the history of that published price versus actual market
experience before agreeing to use it. Not all published prices
reflect reality, especially those not tied to a commodity that is
traded on a major exchange.
Your response to an increase
needs to be consistent with the history of your company’s
relationship with the supplier. It should also be realistic. Denying
the obvious will aggravate the supplier and could lead to retaliation.
Never threaten to take business away unless you’re prepared to
follow through and accept any consequences.
Vistage
member Herb Shields spent more than 30 years directing procurement
activities in several major corporations. Since 2000, Herb has assisted
many client companies in developing and implementing strategies to
reduce purchase material costs and mitigate the impact of price
increases. He can be reached by e-mail at hcsconsnb@aol.com,
by phone 847-498-9510, or visit his web site
www.hshieldsconsulting.com. |
