In this inflationary environment, many of our clients have struggled with escalating costs and the need to extract/invoke price increases with many of their best customers. Particularly hard hit are our clients whose products are highly influenced by the skyrocketing price of oil. In fact, with oil going up so fast it has been hard to keep up, often requiring multiple price increases in the same year.
And now, after all of these stressful and hard fought negotiations, we face the risk of starting all over again. As the price of oil drops like a rock your customers are asking for a review and all of your hard work is at risk of being undone! Talk about "Opening Pandora's box"!
I've included some strategies here that are being espoused by Purchasing Agent Consultants on how to reverse the "price increase trend" and win back some of the price concessions they have been forced to make. I thought it would be valuable to "know the other guys play-book" and prepare for the inevitable. Times are changing and we need to be "fore-warned and fore-armed" to be able to respond tho these challenges successfully!
I have included in italics below some of these strategies:
What a difference today versus 3 months ago! Oil prices peaked at almost $150 a barrel and have just broken below $90 – a reduction of 40%. There is general agreement that we are in a down economy, whether you choose to call it a recession is not as important as what you do to take advantage of the situation on the Purchasing side of your business. Here are some actionable suggestions:
Review all commodities where you had to accept price increases in 2008. You can bet that the majority of those increases were justified at least in part by rising oil prices. Suppliers are not as quick to react on the downside of the price curve. Your purchasing people need to contact each supplier and ask for price reductions.
As a defensive measure, you may want to consider working with your best customers in coming up with a contract similar to the one highlighted below. Choose to "pre-empt the discussion" or "wait until the discussion occurs"... both strategies are viable under the right conditions but sometimes the "best offense" is a "good defense".
Review all contracts which have escalation/de-escalation clauses. Purchasing should do the math in preparation for meetings with your suppliers. Here is an example of these clauses that have been written into many supplier contracts:
Escalation/De-escalation – Volatile commodity prices usually lead sellers to add escalation clauses to contracts and individual order acknowledgments. Any escalation clause or wording should refer to de-escalation as well. The amount and timing should be the same going up or down, but if you do not explicitly include the de-escalation piece, it may not happen as quickly as it should. The contract language should specify the base price and the specific terms and timing for price adjustments. I.e. – “The base price of oil is $130.00/ barrel on June 1. Your price for “X” will be adjusted by $1.00 for every $5.00 change in the price of oil as published in the Wall Street Journal. Pricing will be adjusted monthly on the first of the month based on the published price on that day.” If the basis for adjustment is a published price in a trade journal or newspaper, you should review the history of that published price versus actual market experience before agreeing to use it. Not all published prices reflect reality, especially those not tied to a commodity that is traded on a major exchange.
It is not likely that the economy is going to get a lot better between now and the end of the year. What contracts or blanket orders are due to be re-negotiated for 2009? You should expect to find opportunities to lower prices and/or improve terms for next year. Set some aggressive targets for those negotiations.
Be prepared and identify how you might be able to take advantage of this situation. Their are contracts in place that have "kept you out" now may be a great time to review those and attempt to gain new business or re-coup business you have lost!
In a business downturn, some potential suppliers are looking for new business. Your current suppliers may be very interested in an opportunity to increase the volume they do with you. Purchasing should be reviewing all of your commodities and taking appropriate action.
Being forewarned and knowing the "other guys play-book" will help you prepare and succeed in this challenging environment. Suffice it to say "doing business the same old way will probably not get you the results that you are looking for". Change is inevitable and better we are the "change-or" vs. the "change-ee"!
Action Step: Review the contracts you have in place now and make "proactive" decisions on what you are willing to do. Look also at the opportunities these conditions create and make your plans accordingly. Plan your work and work your plan!