Back in the day when I was running New England Suppliers Institute, a regional non-profit industry organization that worked to improve performance by improving the customer supplier relationship via lean enterprise, supplier development, education, and networking, one of our board members was the procurement manager at a semiconductor equipment manufacturer. He used to give an excellent and very popular presentation about how companies both large and small could fight a supplier price increase. This talk was very popular and its principles still hold true today:
1. View a price increase notification as a proposal that is still open to discussion. It’s not a done deal until it’s accepted.
2. Question the price increase.
3. Don’t accept a price increase verbally.
4. Never accept a form letter or a “dear customer” letter.
5. Request a written, detailed explanation from the supplier about why they are asking for the price increase. This should be a written explanation that is:
–specific to the product that your company buys
–includes all data relevant to the price increase
—and, is signed by the supplier’s senior management
6. Do your own homework. Don’t rely solely on what the supplier tells you. Become an expert in the categories you buy.
7. Be imaginative and creative (more about ways to do that in a future post).
8. For commodities that significantly impact product cost, involve other functions that can help you prepare for a negotiation. For example, can engineering find a substitute product?
9. Negotiate, negotiate, negotiate.
Consider, however, that your response to a requested price increase needs to be realistic and consistent with your organization’s relationship and history with the supplier as well as with current market conditions. Disregarding, for example, overall commodity price increases in the market could aggravate the supplier and lead to negative consequences. The concessions you exact today can come back to bite you in the future in the form of hidden costs.