7 Minute Quiz

“Refusing to pay” might be a good move, but can also backfire, especially if the supplier’s costs have truly risen and he needs an increase in order to make a reasonable profit. In the long run, denying a reasonable profit is bad for both parties. It forces the supplier to cut corners which can undermine quality and/or service, which can compromise your supply chain.

The correct answer is #3. “Independently verifying his claims” of a cost increase provides both the information and perspective needed to determine if an increase is truly justified. Objective, independent information allows you to accurately assess the situation and make the best long-term decision for your organization.

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Asking him to “prove his costs are truly higher” is a good idea but it still leaves the Supplier in the driver’s seat.  He gets to choose the data sources as well as the ‘time period’ for measuring the increase.  Both (especially the time period) can be easily manipulated to make his numbers appear reasonable.

The correct answer is #3.  “Independently verifying how much his costs have risen” provides both the information and perspective needed to determine if an increase is truly justified.  Objective, independent information allows you to accurately assess the situation and make the best long-term decision for your organization.

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“Never accept the first offer” is a common rule of thumb and certainly not a bad idea.  But most suppliers anticipate this tactic and tend to open by asking for more than they are willing to settle for.

The correct answer is #2.  “Knowing what has happened to your supplier’s costs before entering a negotiation” puts you in the driver’s seat.  Before meeting, you can easily determine what a fair price range is. Using this knowledge, you can gauge if your supplier’s offer is reasonable.  If it is, good to know.  If it isn’t, you are in a great position to push back, because your argument is now supported by objective data and sound logic that clearly demonstrates his price is too high.

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“Insisting the supplier make the opening proposal” is also a common rule of thumb and certainly not a bad idea.  But most suppliers, when confronted with this request, put on their “game theory” hat. They counter with an opening price that is more than they are actually willing to settle for.

The correct answer is #2.  “Knowing what has happened to your supplier’s costs before entering a negotiation” puts you in the driver’s seat.  Before meeting, you can easily determine what a fair price range is. Using this knowledge, you can gauge if your supplier’s offer is reasonable.  If it is, good to know.  If it isn’t, you are in a great position to push back, because your argument is now supported by objective data and sound logic that clearly demonstrates his price is too high.

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Your answer is not incorrect:  It’s just not the most important reason to continually track. “As needed” data are used defensively: to push back when suppliers approach you for unjustifiable price increases. Continual data empowers you to make the initial approach.

The answer is #1.  “Continual tracking” alerts you to not only unjustifiable increases but also to opportunities for price reductions you wouldn’t otherwise know about. When you see suppliers’ costs falling, you can proactively approach them for decreases. If you depend on suppliers to tell you when their costs are falling, you might wait a long time.

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Your answer is not incorrect: it’s just not the most important reason to continually track.  Suppliers may indeed stop asking for unjustified increases, but they won’t offer decreases either, when their costs fall.

The answer is #1.  “Continual tracking” alerts you to not only unjustifiable increases but also to opportunities for price reductions you wouldn’t otherwise know about. When you see suppliers’ costs falling, you can proactively approach them for decreases. If you depend on suppliers to tell you when their costs are falling, you might wait a long time.

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Not necessarily true. The trick is to build models that focus on cost trends (not cost precision). Cost-trend models are actually easy to build and surprisingly useful. And most importantly, trends are really what you focus on when negotiating prices with suppliers (should prices go up or down; by how much?). More good news: models based on trends often take less than 10 minutes to build.

The correct answer is #3.“And in practice too” Models that are based on cost trends are easy to build, welcomed by competent suppliers, and effective at controlling costs. Most importantly,cost trends are the main area of focus when negotiating prices with suppliers (should prices go up or down, and by how much?). More good news: models based on cost trends often take less than 10 minutes to build.

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It is true that if you “impose” a Should-Cost model on a supplier he is likely to reject it.  The best approach is to elicit your supplier’s help in building it, which is surprisingly easy to do, especially with competent, low-cost producers.  The result is a model “owned” by both parties, which not only encourages productive working relationships, but also helps you create a robust, sustainable, low-cost supply chain.

The correct answer is #3.“And in practice too” Models that are based on cost trends are easy to build, welcomed by competent suppliers, and effective at controlling costs. Most importantly,cost trends are the main area of focus when negotiating prices with suppliers (should prices go up or down, and by how much?). More good news: models based on cost trends often take less than 10 minutes to build.

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This is a certainly good idea when trying to identify new joint-savings projects.

The correct answer is c) – Cost Transparency is a practice employed by buyers when prices are being re-negotiated. While fair to both parties, this practice usually favors the buyer, while making the negotiating process less confrontational.

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This is certainly not a bad idea, but a) depends on the supplier’s providing accurate data; and b) fails to identify opportunities for price decreaseswhenever a supplier’s cost fall. The correct answer is c) – The correct answer is c) – Cost Transparency is a practice employed by buyers when prices are being re-negotiated. While fair to both parties, this practice usually favors the buyer, while making the negotiating process less confrontational.

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These are all good ideas, however only two of them eliminate stress (i.e. the first and fourth do not). The correct answer is a).

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These are all good ideas, however only the third one is an actual stress reducer. The correct answer is a).

This is a similar idea (and a good one). The correct answer is c). An anti-foo-foo letter insists suppliers show how changes to their input costs support their request for higher prices.

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This certainly can be a good negotiating tactic but is not the anti-foo-foo letter. The correct answer is c). An anti-foo-foo letter insists suppliers show how changes to their input costs support their request for higher prices.

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This is a good idea but may not give you enough time analysis time before making a decision. There are two correct answers to this question: a) and b).

This is certainly a good idea but not the best idea.

The correct answer is c). The best cost-savings ideas are usually found inside the heads of your suppliers’ operations, planning, and engineering staff. First, they have deep technical knowledge of their products and can often suggest improvements to specifications that will save money. Also, they have the advantage of seeing how their products are processed by other customers and can share the best ideas.

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b) This is certainly a good idea but not the best idea. c). The best cost-savings ideas are usually found inside the heads of your suppliers’ operations, planning, and engineering staff. First, they have deep technical knowledge of their products and can often suggest improvements to specifications that will save money. Also, they have the advantage of seeing how their products are processed by other customers and can share the best ideas.

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b) It’s most important to choose projects that are likely to succeed. That said, if two projects have similar odds of success, choosing the one with the bigger payback is clearly best. Also, if you try to get everyone committed to specific amounts of time, before a project begins, you may never get out of the planning stage. The good news is that, once a project starts to gain momentum and enthusiasm, people naturally want to contribute and will figure out, on their own, how to make the time needed.

The correct answer is a)

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c) Some planning is needed of course, but detailed plans usually don’t work because of the many variables involved. Project participants all have full-time jobs, which can exert unpredictable pressures and priorities. Also, if you try to get everyone to commit to specific amounts of time before a project begins, you may never leave the planning. The good news is that, once a project starts to gain momentum and enthusiasm, people naturally want to contribute and will figure out, on their own, how to make the time needed.
The correct answer is a)

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a) Maximizing financial returns is certainly important, but the most important criterion is cultural: a propensity to be open and fair with their customers. This fosters trust and enthusiasm amongst team members that, in turn, nurtures innovation and success. And the best test for openness and fairness is a supplier’s willingness to embrace cost transparency.

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b) It is clearly important to have seasoned participants from your supplier’s side, but unless they are willing to make the time and openly their share ideas, the knowledge they have will likely not be shared. The most important criterion is cultural: a propensity to be open and fair with their customers. This fosters trust and enthusiasm amongst team members that, in turn, nurtures innovation and success. And the best test for openness and fairness is a supplier’s willingness to embrace cost transparency.

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a) While this is a natural response when being bullied, delaying a confrontation does not solve the problem. The correct answer is c) The sales rep’s superior will be upset because, not only is the sales rep’s behavior tarnishing the company’s image, they are clearly not doing their job because you are not buying.

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b) Taking the high road is always a good idea and is a good tactic, if you can, indeed, make a good deal at a fair price with a bully. But, if you can’t (or you just want to stop the bad behavior) then option c) is the best approach.

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