Are Your Suppliers Playing Fair?
By Stephen Machin, CMA

As a purchaser of a wide variety of products and services for your business, you have probably received many phone calls from sales reps that go something like this:

Sales Rep:     Hi Bill, this is Fred over at ABC and unfortunately we are going to have to increase our prices across the board by 7%.  As I’m sure you have seen in the business papers, that our input costs have sky rocketed over the past 3-months and although I did fight the increase as much as I could the bean counters at Head Office have laid down the law.

In some cases you may have been able to negotiate a smaller increase but generally the price increase goes through as originally requested.  My question to you is how many times have you received the following call:

Sales Rep:        Hi Bill, this is Fred over at ABC.  Good news, our input costs have declined over the past 3-months and we are going to reduce our prices by 7% effective immediately.

The reality is that most input costs go through cycles of price increases and decreases.  However, most suppliers will react to the rising market and ask for a price increase but ignore the decreases.  This strategy usually works because most Purchasers’ are too busy to keep track of the costs changes for all of their inputs.  As a result, they miss opportunities to negotiate decreases when suppliers input costs fall. 

Tying prices to your suppliers key input costs will usually work in your favour over the long term.  Let’s assume that one of your supplier’s key inputs is Polyethylene.  As you can see from the attached graph your supplier was likely to have implemented a price increase in the fall of 2005 as their input prices jumped dramatically.  However, in early 2006 the prices for this commodity declined significantly and unless you were tracking the pricing on this product it is unlikely that you would have seen a price decrease.  In the summer of 2006 prices once again started to track upwards.  It is quite possible that your supplier may have once again complained of higher input prices to support a price increase even though you, as a customer, had received an increase in the previous cycle with no subsequent reduction. 

According to the graph, the current prices are now 9% lower than they were 2 years ago. It is certainly logical that your current price should be close to, or lower, than what you were paying 2 years ago.

So what can you do with this kind of information?  When you call your supplier asking for a price reduction you will be able to quote current information showing that while you accepted a price increase during the rising market you also expect to see a decrease when their costs come down.  It is only fair and the vendor will not be able to dispute your argument once they see that you have done your homework.

If you would like to learn how you can have access to pricing on all of the major commodities send an email to smachin@eracanada.com and I will provide you with the link to an online service.  This web service has all kinds of valuable information that will be a significant help in your efforts to reduce your input costs.