Purchasing organizations and individual buyers (I’ll refer to them as buyers) need to develop strategies to claw back price increases that were granted to suppliers in the past three years.
An economist once said that the best solution for high prices is high prices. Meaning that high prices themselves would self-correct as market forces of supply and demand, alternative materials, etc. come into play.
For the past three years buyers have been inundated with negotiating and settling supplier requests for price increases. The combined breadth (cost areas impacted) and percentage increases are higher than I can remember in my almost 40 years in purchasing. You must go back to the 1970’s to see inflationary pressures that buyers have been enduring for the past 3 years.
However, as the economist foretold the market has reacted and in 2022, we started seeing relief in raw materials (steel, plastics and wood-based materials), oil-based commodities and transportation.
However, as prices decline, few suppliers will be knocking on buyers’ doors offering to reduce prices. Instead, buyers need to develop systematic approaches to claw back the price increases. Here is a summary of the approach we recommend:
- If you don’t have a data set of all the increases granted to suppliers over the past three years – develop one. Include dates, supplier rationale for increases and supporting calculations and documents.
- Identify commodity-based cost indices that correlate best to the induvial cost increases. Compare current index values to the values from the price increases to identify category groups (like stampings, injection mold) with opportunities.
- If a category seems to have opportunity for price reduction do some detailed math to determine the scope of the opportunity by part/SKU and by supplier.
- Assess the relative negotiation strength and weakness of each supplier in the category. Develop a strategy to approach and negotiate with the weakest first to set a favorable negotiation pattern that can be used with the other supplier. Preparation including the identification of negotiation carrots and sticks is key.
- Settle with the first suppliers and then progress through your supplier list working from the weakest to strongest suppliers.
Finally, make sure and keep a lessons learned of what worked and what did not work by commodity and supplier. The indices/prices will not all come down at once You will want to get smarter and more efficient in your process as the year progresses.
Buyers in our Strategic Negotiations Program learn negotiation strategies designed to clawback economic increases.