Over on Supply Chain Management Review’s site, James Baehr, a Senior Advisor at Greybeard Advisors, recently authored a guest blog post that suggests sourcing is about to get more difficult because of declining volume. James writes that, "incumbent suppliers will carefully guard the business they have and lack the willingness to cut into margins. Potential suppliers may be less aggressive. It's very likely that incumbents will be focusing on cash flow by ensuring that customers meet their commitments under existing agreements–volume, spend and otherwise … Fulfilling obligations may require restructuring agreements through strong negotiations skills and non-traditional thinking."
While I'll grant James the benefit of the doubt that some suppliers will attempt to hold customers to price breaks tied to volume commitments, I have no doubt that many suppliers will be more than willing to look the other way as capacity opens up and as they risk losing even more business. In addition, in a rising price market, suppliers are typically all too quick to pass along price increases. But in a downturn as commodity prices decline, will they be as honest in passing along decreases? In some cases -- especially if the non-value added portion of a contract is not pegged to an index -- the old way to find out will be to introduce a competitive sourcing process. And the threat of this alone should be enough to convince smart suppliers --at least in most cases -- of not playing contractual hardball.
For category managers facing price increases, I'd suggest the following tactics. First, benchmark the market price before approaching your incumbent. Ideally, pursue a benchmarking process that is global in scope. Second, attempt to understand the total cost elements of what you're buying and how the change in underlying commodity prices should impact the total cost. Third, confront your incumbent with this information and intimate that you're more than willing to conduct a re-sourcing effort if they're not going to maintain or reduce prices. In a down market, contrary to what James argues, I believe that when companies do their homework before a negotiation -- regardless of volume challenges in many cases – they can come out on top, provided they’re willing to consider switching suppliers and can identify alternatives before a negotiation begins.
- Jason Busch