In my last post, 9 Ways to Fight a Supplier Price Increase, I listed approaches to handling a supplier price increase. These involved pushing back.  These days, commodity prices may be at the heart of increases. They can be volatile and unpredictable and offer little room for black and white approaches. Besides using hedging, a technique that only someone who really knows what they’re doing should attempt, other ways to tackle increases can be considered. Sometimes it takes a collaborative effort between customer and supplier to figure out how to avoid the price increase and even to reduce the price by reducing underlying costs. It isn’t done by threatening or bludgeoning the supplier into submission.  Here are 5 approaches for a buyer who is faced with a price increase. Not all are appropriate to every situation, but can be considered, depending upon the circumstances.

• Use competition. This is useful only under some circumstances. If you’ve got a supplier with a highly value-added product or service or one who is sole source, this may not be feasible. If the product or service falls more into the leverage category (rather than strategic or bottleneck), you may be able to hold a sourcing event using software or else use an alternative source whom you’ve wanted to try. Competition can be a useful tool if used cautiously and wisely with suppliers who provide products and services that are more readily available in the marketplace.
• Alternative materials/services. Perhaps the supplier can use a different, less costly material to make the product. Or for a service supplier, a less costly service will meet your requirements than the current one that you are buying. Being creative about alternatives may save you money.
• Value analysis/value engineering. Have you and the supplier done a value analysis of the product? If not, the supplier in particular, may be able to come up with creative ways to make the product more cheaply and potentially improve it at the same time. This can result in mutual benefit to both customer and supplier. Many suppliers, who know their product better than their customers do, are willing and even eager to do a value analysis but are rarely asked.
• Longer-term agreement/contract.  Some suppliers are willing to give their customers a better price in return for a longer-term contract. Extending the contract period can give a supplier the predictability and stability to offer a product or service at a more favorable price.
• Packaging and transportation. Can anything be done to reduce the amount of packaging or make it less costly? Can transportation costs be reduced? Are customers paying inbound transportation markups?  For example, many suppliers make a profit on outbound transportation to the customer by not passing along their savings to their customers.

In Part 2, we’ll look at 5 additional ways to handle supplier prices increases.

Sherry R. Gordon

In an April post on Spend Matters, Spend Visibility — Use RFPs with Home Maintenance Contractors, Jason Busch advocated using an RFP to make sure that contractors are bidding the same job and to help make it easier to compare bids. I wish it were that easy. We’re grappling with a trade that seems to think it’s exempt from that approach – masons. Even with a written RFP, every mason who comes to our house sees the job differently from us, and from other masons. All we thought we needed was to have the bricks on our 3 chimneys pointed and then coated with waterproofing. How hard is that? In fact my husband, who is not a mason, used to do this himself, but now would rather not be climbing on the roof.  We have had 4 masons/contractors come out to see the job, and their descriptions of the work has varied widely as has the price. Interestingly, the highest bid is FOUR TIMES the price of the lowest bid. And the scope of the second highest bid contains the least amount of work. Each mason has a different view of what he thinks needs to be done compared to our RFP (and compared to all the other masons).

We started with accepting and signing the lowest bid from a mason whose firm has good references and has been in business for three generations. Great. However, not only did he never show up, but he no longer returns phone calls or emails. The mason with the third highest bid wanted to do the least amount of work for the money. And the highest bidder actually is doing the most work, as he showed us that there is, in fact, a lot of brick work to do. He actually brought binoculars to look at the chimneys, while the others took a quick stroll around the house before bidding. The second lowest bidder (who is 2.5 times the price of the lowest bidder) is a chimney sweep who had a completely different scope from our RFP and from the other bids, including a quote to install a state-of-the-art brass cap on a chimney that other masons felt needed just a screen to keep out animals. Interestingly, no one would discuss the scope and negotiate with me. Their bids were immutable and they become incommunicado if questioned about their bids.

In something of a desperate move, we chose the highest bidder who spent the most time scoping the job and was doing the most work, and we felt that his bid was based on something factual. Also we chose him partly because he used to coach my younger son in soccer, we know that he is an honest and hard worker and he has good recommendations. However, he has yet to show up to do the job.

I’ve reached a few conclusions. First, contractors will give you a price based upon where you live and how eager you seem to do the work. If you live in a higher calorie town, so to speak, the price shoots up. Masons in our area must be plenty busy, even in a recession, as none seem very eager to do the work. And there are absolutely no standards of professionalism among the masons we contacted, despite many years in business and good customer recommendations. No one follows the RFP, no one wants their bid questioned, and no one wants to show up even if you do accept their bid as is.

Despite what Jason said about taking charge of home maintenance contractors and treating the process professionally as you would in any procurement process, I’m finding, unfortunately, that masons are not on the same supplier management planet.