Best Practices

Would your hand still be in the air?

ProPurchaser President Rod Sherkin has been presenting at supply-chain conferences for years. At ISM2019 in Houston, Texas he spoke about the importance of cost transparency – a topic that is especially critical in today’s complex environment of tariffs and extended global supply chains.

His breakout session audience asked some very good questions…

  • How often should I check my suppliers’ prices to see if it is time to renegotiate? Answer: Every 3 months if procurement isn’t following commodity/material prices on a daily basis.
  • Should I be tracking my suppliers’ profit margins? Answer: Procurement should actually focus on gross margin, which includes overhead as well as ‘unknowns’.
  • What if a supplier says ‘no’ when I present them with a cost model that indicates their prices are moving in the wrong direction when compared to their costs? Answer: If they have direct competitors, procurement should learn about them. If they don’t, start looking elsewhere for potential replacement materials or suppliers.

But it was actually a question he asked the audience – and their answer – that was the most memorable.

He asked the group of several hundred purchasing professionals in his breakout session how many of them bought products made from steel, and about ¼ of them raised their hands.

He asked those steel buyers how many of them had experienced price increases when tariffs were first put in place about 10 months ago. All of them kept their hands up.

Finally, he asked how many of them had seen steel-product prices go down again because steel costs had fallen significantly over the past 6 months, and only two hands remained in the air. These two young professionals followed their suppliers’ costs and had been able to negotiate prices back down in alignment with supplier cost trends.

Procurement can’t affect suppliers’ input costs, but they can absolutely avoid paying unnecessarily high prices when these costs fall. If procurement waits for suppliers to tell them when their cost fall, they will likely wait a very long time.

Call to Action:

If you’re interested in judging for yourself if cost transparency really works, join thousands of other procurement professionals and take out a free trial to ProPurchaser (no credit card required).long-shot

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