Avoid the Fido Approach: Tackling Raw Material Price Inflation Head On

Nearly every procurement staffer -- from an entry-level buyer to the most seasoned global executive -- has dealt with the ramifications of commodity price inflation in the past 24 months. But rolling over and playing dead like a dog will never cut it with customers and shareholders, especially when top line growth is slowing or not assured. I found that a recent Supply Chain Digest piece from Herb Shields had some useful tips for companies to tackle commodity and raw material price inflation head-on. Written by one of my wife's colleagues -- they're in the same executive coaching group -- the advice holds true across industries. Most important, these are tactics that every company can and should deploy (e.g., they don't require advanced skill-sets and expert financial savvy to enable hedging or other tactics).

Among other pieces of advice in dealing with price increases, Shields suggest that delaying can be a good topic. Here, it's important to ask a number of questions to the supply base. "Can the supplier hold off until all materials that are in the pipeline are used up? Can we wait until our new standards are in place? Can we have 60 days to notify customers?" A lot can change in a couple of months, but at the very least, delaying can buy you time. Shields also suggests that "if the proposed increase is based on a raw material or energy price change that is part of the supplier's cost of goods, make them work through the usage content calculation for your specific item." Here, I'd argue that it's also critical to have in place baseline local information for raw materials pricing. For example, if a supplier is basing a metals price increase on the LME, they could effectively be passing along a higher than needed price increase, since local metals prices to do not always track the exchange.

- Jason Busch

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