Sourcing and Procurement Focus: Our Weekly Feature Article on Topics of Interest to Sourcing and Procurement Professionals or Related Supply Chain Functions  

- July 14, 2010 -

Supply Chain News: Tried and True Strategies for Combating Supply Price Increases

From E-Auctions to Unbundling, Procurement Managers Need to have Many Tools Available



SCDigest Editorial Staff

SCDigest Says:
Not nearly enough companies benchmark spend and price levels with other non-competing companies that purchase similar goods and materials.

Though the global economic recovery is wobbling a bit, and there seems to be as much overall worry about deflation as there is inflation, clearly supplier prices have risen from the depths of the recession, and some materials and components have seen strong price increases in 2010 at a time when most companies are still having a hard time passing on those cost increases to their customers.


What to do when a supplier comes in with a price increase announcement? Below are nine tried and true strategies. 

  • Simply Refuse the Price Increase: Too often, companies mostly cave on the announcement. If suppliers insist on a price increase negotiate back just as hard, but warn the supplier that any price increase will force you to look for cost reduction alternatives, which usually mean re-sourcing.  
  • Re-source Suppliers: If you think the price increase really is not justified, and cannot negotiate the increase back down, then a company may have to end relationships and re-entering the marketplace for new sources. A key factor: is a supplier passing on reasonable cost increases or trying to grab whatever the market will bear? These latter suppliers are the ones that might need to be dumped. 
  • Conduct an e-Auction: e-Auctions are being used by a growing number of companies in an equally growing number of supply categories. Not only can e-auctions reduce the cost of a material or component by as much as 25% on the high end, the potential for such savings is especially powerful when factory utilization levels are low, as they remain now in the US. Of course, the threat of an e-auction may itself temper the enthusiasm for the proposed price increase – and often, a current supplier will bid for the business at lower prices than the proposed new higher pricing. 
  • Share Cost Information: Not nearly enough companies benchmark spend and price levels with other non-competing companies that purchase similar goods and materials. Such conversations and data sharing can really help companies get a feel whether proposed price increases are really sticking and the range of what companies are really paying. Supplier relations can also be constructed with more transparency so that a supplier’s true production costs can be better understood, helping to assess the supplier’s real need for a price increase. Often a price increase is justified, but at a lower level than proposed.  
  • Improve Market Intelligence: A growing number of purchasing and supply management professionals are attempting to stay better informed of true market pricing data, both in their direct purchasing categories and in their supplier’s underlying cost drivers, such as commodity prices. That includes subscribing to relevant commodity reports, which can provide an information foundation to negotiate with and challenge suppliers. Being better informed than the supplier’s account manager can be a huge weapon to negotiate the proposed increase.


(Sourcing and Procurement Article - Continued Below)




  • Build Inventories: While the pressure to keep inventory levels low is high at nearly every company, in an era where interest rates and hence inventory carrying costs are low, the right economic decision can sometimes be to bulk up on inventories when a company believes supply costs really are going to head up. This is especially true for pure commodities or commodity=like items that have little or no risk of obsolescence. 
  • Seek Alternate Materials: Are there alternative materials that might be used that can serve as a counterweight to price increases proposed by current suppliers? Of course, doing this from scratch is a tough effort that may not be in the cards. Much better to have worked with engineering and manufacturing on these alternative materials before there is price pressure in a specific category. 
  • Force the Supplier to Unbundle Pricing: In many cases, suppliers combine multiple products into a single agreement. While that can often result in lower total costs initially, it can also allow the vendor to play some games, such as raising pricing on all products being supplied, where in reality there are different cost drivers and underlying cost increases across supplier items. Similarly, while “delivered pricing” may be convenient, in a time of rising costs forcing suppliers to unbundle product price from transportation may enable a company to find ways to mitigate the impact to the company from unit cost increases. 
  • Negotiate Terms: If you have to accept a higher price for the material or component, perhaps the supplier will be willing to make the terms more favorable. That could include a higher discount for quick paying, extending the payment term, reducing lead times, or other contract elements. Remember that these factors rarely impact a salesperson’s commission, so he or she may be quite willing to push for them back to headquarters as a way to get the higher product price, which does impact their commission.


What would you add to our list of strategies for combating proposed supplier price increases? Let us know your thoughts at the Feedback button below.

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