Many price increases are announced by e-mail and may be implemented automatically through the procurement system in your company. It is important to have a procedure in place so that all increases are reviewed and appropriate action taken. Never accept an increase at face value. Even if the supplier quotes The Wall Street Journal, Business Week, etc., your buyers have a duty to try to reduce and delay the impact of any increase to your company.

• Do not accept increases based on “dear customer” form letters or e-mails. You should require a face to face discussion regarding any proposed increase, before it takes effect. 
• For commodities that are significant to your product cost, involve everyone who can help in preparing for a negotiation. Can engineering offer a substitute? Are requirements going to be up or down for the balance of the year? What can we ask the supplier for in return for accepting an increase? 
• Delay is a good tactic. Can the supplier hold off until all materials that are in the pipeline are used up? Can we wait until our new standards are in place? Can we have 60 days to notify customers? Any queries that need to be answered work in your favor, so be creative. 
• Ask for a fixed period of time for any new pricing, even if it is as little as 30 days, that’s better than no guarantee.
• Reconsider those suppliers who had been trying to get some business in the past. They are more willing to negotiate than the incumbents. 
• Management must get involved for two reasons – first, your purchasing people are feeling pretty lonely on the front line. Second, it’s harder for the salesperson to face the company president or owner than his or her usual contact. 
• Can you purchase any material at the old price? Will the supplier honor the current price on open purchase orders? 
• Retroactive increases should be refused, your customers would be offended, you should be also. 
• If the proposed increase is based on a raw material or energy price change that is part of the supplier’s cost of goods, make them work through the usage content calculation for your specific items. Here is an example: Escalation/De-escalation – Volatile commodity prices usually lead sellers to add escalation clauses to contracts and individual order acknowledgements. Any escalation clause or wording should refer to de-escalation as well. The amount and timing should be the same going up or down, but if you do not explicitly include the de-escalation piece, it may not happen as quickly as it should. The contract language should specify the base price and the specific terms and timing for price adjustments. I.e. – “The base price of oil is $130.00/ 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.

A word of caution, your response to an increase needs to be consistent with your organization’s history with the supplier and it should be realistic. Denying the obvious (i.e. – currently steel prices are increasing for everyone) will aggravate the supplier and could lead to retaliation. Do not threaten to take business away unless you are prepared to follow through.

Tactics can help to mitigate the impact of current inflation. But the best results are achieved by companies that have a strategic sourcing plan in place. The plan should answer these questions for each commodity that you purchase: 

• How many suppliers do we have? How many do we really need?
• Is the pricing for this commodity based on cost or market? 
• What is the supply vs. demand relationship currently and what is it likely to be in the next 5 years? 
• How much do we know about the cost breakdown for the products we buy? 
• Is there a hedging option available for the commodity or raw materials that impact the price of the commodity? 
• Is there an opportunity to insource or outsource that would improve our negotiating position?

In my 40+ years of purchasing experience, I have developed and implemented tactics and strategies for many companies in a variety of industries. If you are concerned about your organization’s capability to deal with these price increases and inflation, give me a call. I am happy to discuss your specific issues.

Herb Shields, CMC
HCS Consulting - Delivering results, not just reports
847-498-9510
www.hshieldsconsulting.com