On the Second Day of X-Mas
On the second day of X-Mas
my blogger gave to me
two boxing gloves
and a lesson in strategy.
In the Autumn issue of CPO Agenda, you will find the article Raw nerve by Richard May which indicates that sometimes a tough response is required when suppliers demand raw material price increases. Sometimes there are reasonable justifications for the request, but sometimes the justifications are not warranted. If you remember my post on The Internet & the Purchasing Knowledge Revolution, or Charles' recent insights on Supply Excellence on Caveat Emptor: Economic Indices Could Be Misleading You and Supply Market Assessment 101 you might recall that a single commodity index alone does not justify a price increase.
You need to know where the supplier is buying from, the relevant cost indices of the raw materials in those regions, the relevant exchange rate between your supplier's supplier and your supplier, it's expected stability, the relevant exchange rate between your supplier and you, and it's expected stability. An increase in the steel index in the U.S. is irrelevant if your supplier buys its steel in China. Also, the cost increase in a commodity can often be offset by a recent currency devaluation. Therefore, the first defense you have against a commodity increase is a deep understanding of your should-cost structure, including that of your supplier. It's your first boxing glove.
Your second boxing glove is a good strategic sourcing process that you can use to find an alternative source of supply, enabled by a cross-functional team that will allow you to quickly and efficiently work through the process. If there are genuine reasons for a cost increase, but your supplier refuses to collaborate to keep costs down for both parties, sometimes you need to find an alternate source of supply.
Great post, Michael.
One thing I'll add for those who buy components, assemblies, or finished goods is that you need to know the cost breakdown of a product into major materials and labor.
I've seen suppliers say things like "Resin prices have gone up by 10% in the last year, so we have to raise your prices by 10%."
A sharp buyer should say something like "Yes, but resin only represents 30% of your total price. So that would represent only a 3% increase in the price." Then the buyer can go on to say how productivity improvements should have reduced labor costs and more than offset the resin cost increase and, therefore, because the supplier brought up a price adjustment, that the price should actually decrease.