February 24, 2022 Strategic Cost Reduction Roundtable: Resolving Supplier Cost Increases
The roundtable theme was minimizing, delaying, and recovering cost increases. Highlights of the roundtable discussion are summarized below.
- Director of Global Procurement for an automotive and power systems supplier shared that they have been somewhat successful in recovering cost increases from customers, with sales driving the process. They have engaged suppliers to provide cost savings and VAVE ideas (e.g. alternative materials or designs). They shared that they have index-based price agreements with automotive customers, but not with power systems customers. Regarding resins, they shared that supply continues to be very tight and they’ve found automotive customers to be willing to move quickly to approve alternative sources. They shared their playbook for responding to supplier price increases is:
- Reject the request
- Request postponement
- Require justification and documentation (e.g. invoices)
- Vice President of Purchasing for an automotive supplier shared that they use a similar playbook for responding to supplier price increases. Specifically with microchips, they have had success delaying supplier cost increases due to capacity issues.
- Vice President of Purchasing for a manufacturer of automotive seating components and actuators shared that their playbook for responding to supplier price increases has a couple of additional steps:
- After rejecting the price increase, they review the supplier contract and have legal counsel send a letter reminding the supplier of the contract terms
- In parallel with requesting justification and documentation, they review market trends to understand if the supplier lowered their prices when commodity indexes were down, and if forecasts project index prices will decrease in the future, they request the supplier defer the increase
- They shared that the purchasing team achieved good results in 2021 but are finding suppliers to be more aggressive in 2022. Suppliers are now requesting price increases to address energy, labor, and logistics costs in addition to materials. They also shared that should-cost models have been useful when awarding new business, driving discussions with suppliers on how they will close any gaps identified.
- They shared they have bi-weekly commodity status review meetings between purchasing and their commercial team. They are finding that customers prefer semi-annual payments for cost increases rather than piece price changes and negotiate a similar approach with their suppliers.
- They shared that it’s been difficult to get customers to approve raw material changes but have been successful when they present material changes as an alternative to cost increases. They also shared that they have had success getting customers to pay the cost of buying chips on the spot market when their allocation from chip suppliers falls short of customer needs. They direct their EMS suppliers on chip purchases.
They also shared that supplier price increases related to labor and freight will be a lot harder to reverse when costs go down, so they are tracking these closely as price increases are approved.
- Procurement Director of a propane distributor shared four successful ways they’ve been able to delay or minimize supplier cost increases:
- Use regulatory constraints to delay cost increases (they are part of a regulated utility)
- Address cost drivers (e.g. changed minimum order quantity to offset a price increase)
- By actively monitoring ocean shipping costs, they identified a route that had a sudden cost decrease and were able to redirect to save $500k annually
- They’ve been able to minimize cost increases from domestic suppliers by introducing a cost competitive supplier from overseas
- They also shared that they participate in calls with customers to bring credibility and help justify cost increases.
- CFO of an electronics component manufacturer that is also a contract manufacturer shared that they have been able to pass cost increases on to their contract manufacturing clients but have had to absorb cost increases for their businesses that sell to end customers. They also shared that ocean freight has been a particular challenge, with lead times a bigger concern than cost increases.
- Sr. Vice President of an automotive lighting supplier shared that they are finding it difficult to recover cost increases from customers. Their domestic OEM customers typically have clear APRs in contracts, while Japanese OEM customers are more flexible on APRs, but tougher. They also shared that they’ve established a process for accepting/rejecting expedite charges from suppliers to ensure they are not paying for delays caused by suppliers.
- They are finding that suppliers are requesting cost increases due to increased labor costs in 2022. They also shared that it’s important to understand cost drivers and validate cost models to ensure the right amount of cost increases are approved and to be able to proactively get cost reductions from suppliers when their costs go down in the future.
- Global Strategic Sourcing Manger for a manufacturer of aerospace structural components shared that their customer contracts don’t allow them to recover cost increases (and material cost increases have been significant). They have lowered costs of purchased services and components by applying their contracted pricing to suppliers and moving parts from smaller suppliers to larger, more efficient suppliers.