We are approaching the time of year when we begin to receive holiday letters from our suppliers thanking us for our business and wishing us the best for the upcoming year. Often the letter is from the CEO, or marketing head, and signed by all of the account reps. 

Perhaps there is a cute picture of Snoopy and a holiday themed doghouse. Maybe even a calendar with the company logo. But most likely there is a notice of a price increase tucked inside as well.  Happy New Year. Time to pay us more. 

Never ending market pressures

The annual battle over price increases is one of the more tawdry fundamentals of the buyer and seller relationship. 

The seller claims increases in raw material, labor, health insurance, and the prices they pay their suppliers are driving costs up.  Buyers counter with pressure from top management to lower costs due to overhead pressures, coupled with end customer demands that prices be lowered.  Market pressures abound throughout the supply chain.  

At the end of this yearly ballet, no one quite gets what they want. Perhaps that is a sign of negotiating success, or just a failed business model. 

There is a difference between price increases from arms length commodity suppliers and those where there is a stronger relationship. 

Competition and market dynamics will often act as a governor on pricing for commodity items like fuel oil, road salt, copy paper, and such. A well-timed RFQ is sometimes all that's needed to have an incumbent supplier delay or suspend a price increase. And perhaps there is a new supplier out there that will offer better pricing and service. A price increase letter may be the push you need to check out the market. 

Creativity leads to success

Price increases from relationship-based suppliers may be harder to mitigate, but not impossible. While there is a more open book approach to material, labor, and overhead costs, shared risk and progressive processes like lean and early supplier involvement are supposed to reduce overall costs, not increase them. 

Some raw material costs may increase, but there is usually an offset in processing costs to keep purchase prices in check. But not always. 

Brad owned a company that supplied highly engineered custom molded parts, each one well over a thousand dollars. The relationship with Brad's company and mine was a model for others. He worked well with engineering, deliveries were always on time, and prices were generally stable.   

My company was quite large and Brad's quite small. We often chatted about the unique financial pressures we were both under to manage costs. I was sensitive to Brad's needs, and he sensitive to mine. 

But we danced. Brad would send me a sheet torn out of a plastics magazine showing the trend of plastics price moving upward. I'd respond with an article about the pressures on our customers to reduce prices in a competitive consumer market. He responded with an article on rising labor costs in New England. I touted lean. 

At the end we solved the problem with a variable margin pricing approach. I’d take an increase on a product where our sales margins were higher, and a lower price on a product under a high cost reduction scrutiny. He maintained his overall company profit margin and I kept my job. Not magic, just creative supply management with a trusted supplier. 

For industry veteran Steve Palazzola, a buyer with Beverly, MA based Microcline Surgical, price increases are one of those inevitable pressures he faces every day. "I try to delay it, soften the percentage of increase, or find an alternative if available," said Palazzola. "The threat to change to a competitor's product often works well if I have the engineering approval."

Palazzola tells of a recent negotiation with a supplier who was raising prices due to a raw material cost increase in her supply chain. He countered with an opportunity for more volume by combining the purchases he was making with her primary competitor. "In exchange for more business, and a more favorable supplier position, they ate the price increase." 

Working with middle range suppliers

How best to handle the middle range of suppliers where there is no market or relationship based leverage to battle the increase?

• Make it a habit to resist any and all price increases. Some may be rescinded or delayed but others will not. Yet the supplier will know that you are paying attention. This can set the stage for future negotiations. 
• Assign a job. With larger suppliers, ask that they perform an analysis of the impact of the price increase on forecasted demand. This exercise puts the onus on the supplier to "earn" their increase and they also see the actual impact. Delay the increase until they deliver their homework. 
• Use the notification of the increase to begin negotiations on a long term pricing agreement that will not only mitigate the increase but work towards a price reduction. 
• Pick your battles wisely and look at overall cost impact. Some price increases are just too insignificant to worry about. Others may damage your business. 

Consider a cost avoidance is as good as a decrease. Take credit for reducing or eliminating an increase.

I've actually had suppliers tell me that I make them work too hard to get an increase. They'll spring them on customers who don't see to care as much as I do. I'll take that as a win every time. 

A practitioner turned educator, Rich Weissman has more than 25 years of experience in all facets of supply chain management. He is past president of the Institute for Supply Management –Greater Boston, and the recipient of the Harry J. Graham Memorial Award, the highest honor bestowed by the Association.