Responding to Supplier Price Increase Requests

HCS Consulting Newsletters

May 2004

My December '03 newsletter had suggested that we focus on "upside" risk of inflation and supply this year. Upside risk continues to be a hot topic. Here are the titles of some current articles posted on Purchasing .com, the on-line version of Purchasing magazine:

"Petrochemical demand stronger"
"Crude oil at 14 year high"
"Energy costs hassle chemical firms"
And my personal favorite - "Steel pricing stinks!"

This edition includes some tactics that your purchasing and inventory management people can use right now.

Responding to Price Increases

The key word here is "respond". Never accept an increase at face value. Even if the supplier quotes Purchasing, The Wall Street Journal, etc., you and 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. 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 that 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.
  • Don't forget 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 strongly resisted, your customers would be offended, you should be also.
  • If your supplier's increase is based on a raw material or energy increase that is part of their cost of goods, make them work through the usage content calculation for your specific items. (i.e.- if the steel content of the item that your company purchases is 20% of the total weight, the increase should take that into consideration)
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.

Product Supply/Inventory Policy

Good communication and visibility of information are fundamental to working through tight supply situations. So review the linkages from your customers to your organization and then to your suppliers. I have spoken with several companies recently who report that their schedules are in part controlled by the availability of steel and aluminum products. Here again are some suggested tactics:

  • Review and update all your system lead times based on current reality. If you want to get orders placed sooner, adjust your lead times.
  • Use safety stock and targeted weeks of supply to adjust inventory levels.
  • Do not use both of the preceding actions concurrently for the same items, the result will be too much inventory.
  • If you have to increase inventory levels, the least expensive category is raw material, work-in-process next, and lastly finished goods. That same progression gives you the most flexibility as well.
  • If you are increasing the amount of customer-specific inventory, make your customer aware of the plan and ask if they will help mitigate the risk or the cost.
  • Now is a great time to try and find a way to substitute some of your excess and obsolete material for the unavailable and more expensive item that is currently specified.
  • If your regular source for product is an OEM, there may be quantities available from distributors. It's worth a try.
  • If products are on allocation, understand how the allocation formula works and verify what the supplier tells you in terms of historical usage, etc.
  • Ask your customers and sales people for monthly updates of forecasts and for a specific notice of unusually large or unplanned orders. The more you know the better you will be able to respond.
Some great people whom I worked with helped to create these ideas. But there is always room for more. If you have a tactic that you are willing to share, please reply and I'll pass it on to the rest of my readers. Collectively, the better we can control total cost and reduce cumulative lead time, everyone wins.

If you are concerned about your organization's capability to deal with these challenges, give me a call. I am happy to discuss your specific issues.

I had an article published recently titled "Business to Business Buying and Selling." It will be on my web site soon or if you want a copy, let me know. Thanks for passing this on to others in or out of your company who might find it interesting. If you do not want to receive future newsletters, reply accordingly. All rights reserved.