June 3, 2022 Strategic Cost Reduction Roundtable
The roundtable theme was actions purchasing teams are taking now to ensure they are able to quickly recover cost increases when commodity prices decrease. APD shared a short presentation “5 Integral Steps to a Hack Back Strategy”. Highlights of the roundtable discussion are summarized below.
- Sr. Director of Strategic Sourcing for an aluminum products manufacturer shared that they have been able to pass on supplier cost increases to customers, but with a 3-7 month lag, depending on the customer contract, but utilizing index-based pricing agreements for metals and paper. They are going to begin hedging metals pricing to further protect against the lag time before they can begin recovering price increases from suppliers.
- Director of Procurement for propane supplier of propane gas shared that they have financial and physical hedges. The purchasing group works closely with sales to pass price increases on to customers and maintain margins during times of increasing prices. They’ve found it important to align timing of price increase impacts for customer contracts and supplier contracts.
- Global Purchasing Director for a tier 1 automotive supplier shared that when accepting supplier price increases, they get suppliers to move to index-based pricing agreements. They have not been able to pass cost increases on to their customers, but are preparing a request to their biggest customer and are in the process of organizing all supplier price increase provided to date. They commented that these were initially focused on raw materials costs, then added purchased components, and now contain increases for freight, energy, and labor. Tactics they use to minimize the impact of supplier price increases:
- Litigate non-strategic suppliers using Terms and Conditions as a basis for not accepting cost increases
- Ask for cost details to justify the price increase request
- Use new business awards as leverage to get suppliers to withdraw price increase requests
- Grant “temporary” price increases with specific end dates
- Vice President of Purchasing and Supplier Quality for a tier 1 automotive supplier shared that an attorney informed them that a tier 3 automotive supplier was able to get cost increases awarded from their tier 2 customer despite the contract language, with the judge citing “unprecedented times”. They shared that they are not accepting supplier price increases for inflation (e.g. labor, energy), they buy steel based on index pricing, and have half their resins purchase on a pool program where they buy the resins and sell them to their suppliers. They expect supplier insolvencies and consolidations to be a big challenge in 2023.
- Vice President of Global Procurement for a hand tool manufacturer shared that they are new to the company and are introducing index-based pricing agreements for stee purchases. They can’t pass cost increase on to their largest customer. They are requiring suppliers to provide cost breakdowns to consider any cost increase requests.