ProPurchaser Best Practices

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Know What You Should be Paying

The Dreaded Letter
(and what you can do about it)

You know the one I mean, it goes something like this:

”We regret to announce that our prices will increase by
3% effective immediately. Rest assured we have held off
as long possible, but our own costs for (raw materials,
energy, labor – pick one) have risen significantly, leaving
us no option but to pass along a portion of these
increases.”

While it’s likely your supplier’s costs have indeed risen, it’s even more likely by not by as much as he claims, especially when viewed in the appropriate ‘time-slot’. The proper time-slot starts when prices were last negotiated. The following example illustrates why picking the right time-slot is your best negotiating move in these situations.

The Dreaded Letter - Figure 1

Let’s suppose the supplier points to higher steel costs, claiming they are up 16% during the time-slot beginning last summer. He ‘announces’ an 8% price increase for the steel components he sells you, saying he needs that amount ‘just to remain whole’. The graph below confirms his claim: cold-rolled steel costs are indeed up about 16% since the time-slot beginning last June.

But the real question is how much steel costs have changed since the last time prices for steel components were negotiated. Checking the record, we find that prices were last negotiated in September, 2012.

The Dreaded Letter - Figure 2

Steel cost are only up about 4% during this time-slot (not 16%). Therefore, your supplier has a case for a 2% price increase; not an 8% one.

Proper time-slotting works to the Purchaser’s advantage because suppliers rarely lower prices when their costs fall. By including these falling periods in your time-slot, you reduce the size of his claimed cost increase and, therefore, the size of your price increase.

The real question is how
much steel costs have
changed since the last
time prices for steel
were negotiated.

Once suppliers realize you track their costs, they stop playing the price creep game. Even when their costs go up, knowing you are watching ensures price increases remain reasonable.

No one is surprised that suppliers favor time-slots that work to their advantage. All of us are in business to make all the money we can: it’s everyone’s job.

You can’t blame them for trying. But you can stop them from succeeding. You can make them play fair.

You can also turn the tables. By making a habit of tracking their costs, you’ll know when they fall. Nothing prevents you from calling a supplier to ‘announce’ a decrease. Something they will find very difficult to refute, since you are simply applying the logic they use.

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