As I stated about a month ago in a posting titled “The Lubricant Roller Coaster: Are You Strapped In?”, negotiating transparent and traceable price-adjusting mechanisms is just as important as negotiating the pricing itself. If at all possible, it is imperative to outline clear price adjustment methods during the contract development process. So what if you’re already stuck in a lubricant contract that doesn’t? What do you do if you feel that being in the dark leaves you with no option but to accept your suppliers’ price increases? You get smart and become a pain in their ass. When pushing back against supplier increases, knowledge is power.
Okay, so you don’t have access to whatever convoluted, asinine index your supplier is using to justify an increase. And you probably don’t have time to track all the indexes and economic factors that you would need to formulate a solid argument. What you do have is access to the wealth of summary industry information that’s available online and from independent trade publications like Lubes ‘N’ Greases. Without a leg to stand on or compelling information, a price increase conversation could easily go like this:
Supplier: “Our costs are going to go up, so we need to increase your price by 10%”
Purchaser: “But haven’t crude prices been decreasing or staying flat?”
Supplier: “Well yes, but the base oil markets are all about demand and capacity. It’s not that simple. Week-over-week increases in demand for base oil stocks have caused our market demand forecasts to rise significantly. This, in turn will cause our costs to rise and…blah…blah….blah…we’re going to need to pass some of this increase along.”
Purchaser: “Well then, I guess that makes sense.”
After all, for many sourcing professionals, lubricants are an indirect spend category they may not be able to spend time tracking. Now let’s say you are strapped for time, but have managed to squeeze a few minutes in to read an article like this month’s base oil report. After his reasoning you would be able to respond:
Purchaser: “How can you possibly justify this increase? During the first six months of 2009, automotive production-a key indicator of an active base oil market-has fallen by 41 percent! February US auto sales fell to their lowest annualized rate in 27 years! Plus, you and I both know that the forecasts for summer traveling aren’t looking too bright. I don’t know what index you’re tracking, but these signals certainly seem to suggest weak demand for base oil.”
Now this probably won’t cause the supplier to wave a white flag and back down, but they’ll at least have to ditch their usual glib “reasoning” and actually talk about the specifics of their pricing with you. This will open the door for you to make valid, logical arguments that, with a little pressure, will seriously improve you chances of lessening or altogether avoiding a price increase. The point is that you don’t have to be a subject matter expert to have enough subject matter knowledge. There are a number of resources sourcing execs can take advantage of to supplement their knowledge of indirect categories without spending hours tracking and researching a hundred different markets. If you leverage these resources properly, you’ll be able to efficiently stay on top of enough information to show suppliers in any industry that you know how to play hardball.