For Industry Week
Price increases come in all shapes and sizes from suppliers and in ways you might not expect. Here’s a recent example.
One of our clients designed a strategic component into a consumer product. For many years, the contract manufacturer of the product was required to use this component, and the price for the final assembly had this particular component baked in. In early January of this year, without warning, the supplier sent an invoice for over two years’ worth of purchases of this strategic component to our client’s accounting department, bypassing the supply chain team, hoping the invoice would simply get processed and paid. The change was escalated during the approval process and the supplier was confronted. Pushing back, the supplier changed tactic, claiming raw material price increases (unrelated to the component) required overall price increases to the entire assembly.
This wolf-in-sheep’s-clothing shows the creative ways a supplier may try to package price increases.
The last couple of quarters have been particularly busy for price increase asks across the board, with nearly every supplier, all industries, looking to shore up margins. Material prices, exchange rates, shipping capacity problems—the sales pitches for increases shared these common themes. Many suppliers waited until just before Chinese New Year to make the announcement. That put many customers in a tough spot. Those refusing an increase risked moving the back of the line for capacity, and missing key shipping dates. Those taking an increase risked tough conversations with end customers, whose forecasts (and fixed contracts) did not account for sudden changes.
The resulting strain on supplier-customer relationships can last for years and put all business at risk.
Over the past few weeks, CMD has been tasked by clients with numerous negotiations related to price increases. There are no ‘one size fits all’ methods. We handled each situation differently. Total deal size, total capacity of a supplier consumed, availability of a backup (BATNA) plan, relationship history, competitive environment—all are among the endless backdrops that set the stage for variety of unpredictable performances.
Michelle Liu, operations leader, is CMD’s lead negotiator for price discussions. Assuming a supplier comes at you with an “across the board” increase, here are a few approaches she considers.
1. Listen
If the negotiation starts off tense, let the supplier vent. By doing so, you gain a special advantage by showing empathy. We’ve found that by allowing suppliers to express their emotions, they will eventually come around to a rational state for a business discussion. Then both parties can listen better, and you can shift the conversation from feelings to facts. Be authentic and genuine, so the supplier feels you are reasonable and not trying to take advantage of them or avoid their point of view.
