Purchasers' Turn to Shine

Purchasers Turn to Shine

It's still quite scary out there: recession clouds may have receded, but they are still lurking in the distance. Sales volumes are struggling to rise; unfortunately, costs are struggling less, as suppliers pile on price increases, citing higher raw material costs as the reason.

Call to action

What can Purchasers do?......plenty, by taking a leadership role in pushing back costs. Makes sense when you think about it. Your role is critical, since purchases typically represent the largest single source of cost savings for most organizations. Try this 3-step approach.

First, think about the raw materials that go into making the key products you buy (e.g. plastics for packaging, nickel for stainless steel, steel for racking, natural gas for chemicals and glass, scrap metals for castings, to name just a few).

Next, collect data on what's happened to these raw material costs. This example uses Aluminum, but is equally applicable to any raw material. Suppose you buy aluminum extrusions. The graph below shows that Aluminum prices have been moving up steadily for the past year or so. It would be reasonable, therefore, for suppliers to ask for increases over this period (and for you to pay them).

Go back 2 years, however, and you see a different picture! Aluminum prices were significantly higher then. Now go to your accounts payable department and find out what you were paying back in May, 2008. Hmm… why should you pay any more today than you did back then?

Aluminum Chart May 2008 - May 2010

Step three. Phone with your supplier and ask why he is asking you to pay more today than 2 years ago. A nice touch would be to email him the graph while you are talking.

Maximizing your gain

He'll probably say he has to get back to you (makes sense: pricing decisions are rarely given to sales people).

His response is of great interest. It not only sheds light on his company's pricing policies, but also reveals the nature of relationships they like to build with customers. If he comes back at a similar price to 2 years ago, it means that they are willing to play fair (at least when confronted by a knowledgeable Purchaser). Suppliers like this are usually 'keepers' because they willingly share savings and are comfortable with price transparency.

If he comes back with only a paltry decrease, it's time to roll up your sleeves. Ask how his company arrived at the figure. And demand specifics: if he says labor is up, ask exactly by how much labor represents of the selling price (should be less than 10%). If he says his overheads are higher, ask him why their efficiency is down (e.g. Are you running fewer shifts? Or, has productivity declined?).

Explain you can't understand how he can try to justify charging more now than 2 years ago, especially given today’s competitive business environment. "Are you here for a good time or a long time?", you might ask. Give him a chance. "Please go back and ask your management to reconsider". Hopefully, they will make amends and become "keepers". If not, you've learned something very valuable and can start looking for alternatives.

The silver lining

Marketplace knowledge allows Purchasing professionals to achieve two very important goals. On a day to day basis, you can force suppliers to play fair and drive down costs. In the long run, you can make your organization more competitive by creating a stronger supply-chain, reinforced by a lineup of capable, stable, low-cost "keepers".