I’ve been hearing an increasing number of organizations going back to suppliers for mid-contract price reductions because of prices generally falling. Other organizations are, for the first time, seriously bidding out work that has gone for years (or forever!) to favorite incumbents. For published examples, see: Prices are clearly falling in many spending categories. For examples, check out “Steel Prices Expected to Fall Further” in Purchasing Magazine; “Conditions Tougher For Trucking Than Rail” from Zach’s Investment Research; and “Suppliers Face Price Reduction Call as Monsoon Hits High Street” in Procurement Leaders.
I have heavily mixed feelings on whether chasing falling prices is a good idea.
On the “pro” side – you may need to aggressively follow or even push the deflation curve to maintain competitiveness (best case) or to survive (worst case). Certainly the procurement organization is “where the buck stops” in terms of who should identify opportunities to reduce pricing and to actually deliver that savings. And when our organizations need us, we should clearly rise to the occasion.
On the “negative” side – pushing aggressively for cost reductions when our suppliers may already be hurting could well be adding insult to injury. From a macro-economic standpoint, chasing cost reductions may contribute to a dangerous deflation cycle that eventually makes things worse for everybody. But who among us would be the first to say, “I want to pay a higher price?”
Perhaps the answer is to gauge the response to the degree of cost reduction pressure on your organization. If your cost cutting efforts are in the realm of keeping the doors of your business open, well, who cares about tomorrow and whether suppliers will still support you when things turn around? But if you are not desperate, and you can follow the curve down more conservatively – you may certainly cultivate very loyal suppliers that are willing to go above and beyond for you when they can.
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