April 26, 2023 Executive Roundtable
The roundtable theme was reversing economic price increases granted during the past two years, now that some commodity indexes are headed downward. APD shared an example one company that recently took advantage of a lower commodity index for paperboard and improved supply dynamics for corrugated packaging to implement $575k annual savings on their top 12 spend items in 90 days.
Highlights of the roundtable discussion are summarized below.
- VP Purchasing – North America for a sunroof manufacturer shared that have developed a playbook for reversing price increases – track price increases as they are granted along with the justification given by suppliers, then approach suppliers to negotiate cost downs as costs for factors such as energy, freight, commodity prices decrease. They noted that labor costs have not been useful as they have not decreased. Successful applications include overseas freight and unindexed raw materials including rubber, some plastics, and steel. They also shared that they’ve had to move some business when suppliers have not been willing to reverse economic price increases when the economics changed.
- Purchasing Director for a manufacturer of structural automotive components shared that they have not been able to reverse economic price increases yet but are engaging suppliers for flat rolled carbon steel, aluminum, fasteners, and extrusions. They shared they were able to negotiate improved payment terms when granting economic price increases over the past two years.
- VP of Operations and Supply Chain for a manufacturer of educational toys shared they are developing a playbook for reversing economic price increases. They are engaging suppliers for corrugated packaging, logistics, and select plastics. They also shared that they were able to push back on price increases over the past two years because their customers were buying in decreased volumes, and suppliers understood that increasing costs would result in volumes being impacted in the current year as well as the next.
- Head of Strategic Sourcing for a contract pharmaceutical manufacturer shared that they had 5X unplanned growth during Covid-19 because the molecules they manufacture go into vaccines. They had no supply agreements in place and divisions were siloed. Recently, they have negotiated Master Service Agreements with suppliers, leveraging multiple division, that contain index-based pricing. They are currently developing a playbook for reversing economic price increases and are targeting petrochemical raw materials suppliers.
- Director of Strategic Sourcing for a electronics control panel and enclosures manufacturer shared that they have not been able to leverage lower input costs to their suppliers because supply is still in short supply for the items they buy. They have had success reversing price increases for metal siding, referring to the decreases in indexes their suppliers used for justification during times of increasing prices.
- VP of Purchasing for a hatchery equipment manufacturer shared that they have had success reversing economic price increases for plastics, although some of these indexes are beginning to go back up. They have had success with alternative materials and make/buy studies, and are engaging suppliers of copper, steel, and aluminum. They shared that they are struggling to leverage lower input costs with some suppliers due to ongoing material shortages.
- VP of Purchasing for an automotive division of diversified manufacturer shared that they granted economic price increases for non-indexed materials as lump sum payments rather than price adjustments, so they automatically reverted to prior pricing. They shared that they are still getting some supplier requests for economic price increases (EU: labor and energy, NA: labor, none in China). They shared that they duel source key items and are able to play with market share to negotiate bonuses to index price agreements. They also shared that they are considering buying forward to lock in current pricing for materials in order to manager risks of further inflationary factors in the next six months.
- Director of Global Strategic Sourcing for an industrial food processing equipment manufacturer shared that their buying is currently siloed by region, and most suppliers are local machine shops with long term relationships. They are investigating consolidating tier 2 material volumes, and are analyzing their supply catalog to negotiate improved pricing for a core list of items.
- Global Purchasing Director for an automotive interiors supplier shared that they granted non-contractual price increases as temporary (6-12 months), with pricing reverting automatically to prior levels. Reversing economic price increases is a company Business Transformation Initiative, with each buyer identifying a top 10 hit list for temporary price increases. One success to date has been PP, where indexes have gone down, and they are pursuing index-based pricing on everything where raw materials make up more than 70% of the price, for example corrugated packaging. They also shared that it’s important that buyers validate supplier price decreases based on indexes movements – for example, they found a steel distributor with contractual pricing didn’t grant the appropriate price decrease.
- Supply Chain Director for a packaging distributor shared that they have had success leveraging supplier relationships, essentially asking for pricing concessions. They shared they’ve had to move business when suppliers won’t give concessions now that input prices are going down.
- Sr. Director of Technical Sourcing at a medical device manufacturer shared that their supply contracts provide for price adjustments due to index changes. Sometimes thresholds are identified, other times it is open-ended. They are pursuing negotiations with suppliers of metals and plastics, basing their “ask” on improvements to cost inputs based on the cost structure shared by suppliers. They shared that suppliers are pushing back because this knowledge-based negotiations approach is new to the medical device industry, but many suppliers serve other industries where it is more typical.
- Assoc. Director of Global Procurement at a pharmaceutical manufacturer shared that their high spend areas have heavy cost labor content and a lower contribution from materials. Consequently, they have focused contract negotiations on capping price increases (X% or CPI, whichever is lower, applied annually) rather than setting the stage for cost reductions. They shared that in one area (facility management – where labor is 80% of the costs), the supplier agreement requires the supplier to first mitigate any cost increases, then take the first 1%.
- Global Purchasing Director for an automotive components supplier shared that they have emphasized material indexes in their supply agreements, raising the portion of pricing tied to indexes from 50% pre-covid to 75% now. For non-indexed purchases, they have had some successes going after decreasing input costs such as labor, freight, and raw materials.
They also shared that electronics is an area where prices continue to rise (5-10% YOY). Lead times are decreasing slightly and allocations are improving somewhat.
- Managing Director of Indirect Procurement for a recreational marine products manufacturer shared that they contracts with biggest spend suppliers reference commodity indexes and CPI, as well as exchange rates, and have strong language to enable them to open up price negotiations when cost drivers decrease. They are vertically integrated, giving them a good understanding of supplier cost structures even with suppliers where cost transparency is lacking. They also shared that on the indirect side, they have caps on cost increase in place, tied to labor indexes and/or CPI. They are finding that indirect suppliers are hungrier for business in 2023 than they have been in the past few years. They are working on consolidating tail spend to leverage volume rebates from indirect suppliers.