What to Do When Your Suppliers Raise Prices
By Vistage member Herb Shields
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.