Turning Supplier Price Hikes into Negotiation Wins

Price increases from suppliers are inevitable, but they don’t have to catch you off guard or automatically impact your bottom line. Suppliers often send out form letters or emails announcing price increases with a set effective date. However, you don’t have to accept these increases as a done deal. Here’s a step-by-step guide to minimize the impact of a price increase and even turn the situation to your advantage.

1. Ask for Information

Before accepting a price increase, gather as much relevant information as possible. This step is critical in making an informed decision and negotiating effectively.

• Reply: Start by responding to the supplier’s email. A polite but firm response sets the stage: “I received your email with the requested price increase. We are under significant cost pressures. You understand if I need to ask for more information regarding this requested increase.”

• Justification: Ask for the reasoning behind the price increase. For example, if they claim labor costs have risen, dig deeper:

• How much did labor costs increase?

• What percentage of the quoted price is labor?

• Can they provide a breakdown of material, labor, overhead, and profit as a percentage of the price?

• Commodity Price: If relevant, ask for the specific commodity price the increase is linked to.

• Timing: Confirm when the increase will take effect and whether it applies only to new orders or existing deliveries.

• Last Price Increase: Find out when the last price increase was implemented and the justification behind it.

• Alternatives: Ask about alternatives to avoid the increase, such as using different materials or parts.

• Cost Reduction Programs: Inquire about any cost-saving measures the supplier is implementing for themselves and their customers.

• Customer Ranking: Understand where you rank in their customer base. If you’re one of their top customers, you may have more leverage in negotiations.

2. Evaluate the Information

Once you’ve gathered the details, take time to evaluate whether the price increase is justified and what options you have to negotiate or mitigate it.

• Volume Impact: Consider how much of the item or service you order annually. Even small price increases can have a large financial impact, especially for high-volume purchases.

• Cost Breakdown: Assess if the increase makes sense. For instance, if labor costs represent only a small portion of the overall price, a 20% labor cost increase should not translate into a 20% price hike for you.

• Competitive Comparison: Compare the price increase to what competitors are offering.

3. Negotiate the Price

Now, it’s time to begin negotiations. Armed with your analysis, reply to the supplier with counteroffers. Options to consider:

• No price increase.

• A reduced price increase.

• Delaying the price increase to a later date.

Also, ask for:

• Freight comparison: Request quotes with and without freight to see if it’s cheaper to use your own freight carrier.

• Payment Terms: Negotiate for better payment terms.

• Cost Reduction Programs: Push for the supplier to start a program aimed at reducing your costs over time.

4. Determine Your Plan

Based on the negotiation, decide how to move forward:

• Will you bring orders in early to avoid the increase?

• Will you switch freight carriers?

• Will you change suppliers entirely?

• Can you implement a cost reduction program internally or with the supplier?

5. Execute Your Plan

Once your strategy is set, take action. Execute the plan and note what worked well and what could be improved. This knowledge will better prepare you for future negotiations. Also, track key cost drivers such as commodity or labor prices to know when you should push for a price reduction.

Negotiating against a price increase is about preparation and persistence. By gathering detailed information, evaluating the situation thoroughly, and confidently entering negotiations, you can often minimize the financial impact on your business.

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