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Is Chasing Deflation a Good Idea?

by Debbie Wilson  |  January 14, 2009  |  4 Comments

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.

Category: cost-cutting  strategic-sourcing  supplier-performance-management  tactical-sourcing  

Deborah R Wilson
Research Vice President
8 years at Gartner
15 years IT industry

Deborah Wilson, a Gartner research vice president, covers procurement strategies and applications. Her areas of interest include procure-to-pay, e-marketplaces, e-sourcing, spend analysis, services procurement and supply risk assessment. Read Full Bio

Thoughts on Is Chasing Deflation a Good Idea?

  1. A nice, thought-provoking post, Debbie.

    I agree that your organization’s degree of desperation is one of the variables to be considered when determining which categories to address with your cost reduction initiative. Other variables include (but are not limited to):

    1. Each supplier’s ability to sustain itself despite decreased revenue through price reductions.

    2. The availability of other supply and the general health of that supply market

    3. Whether or not the category is strategic to your organization’s success

    4. Whether your existing suppliers are performing the way you want them to anyway. After all, if your supplier is terrible, why continue on with them especially when there are likely more capable suppliers who would value your business in these tough times?

    Food for thought.

  2. Debbie Wilson says:

    Really good input Charles, thanks for the comments. You make some excellent points, particularly in regards to whether the category is strategic and whether it is time for a change.

    Regarding the first item, “1. Each supplier’s ability to sustain itself despite decreased revenue through price reductions.”
    I’ve thought this is good in theory but hard to put to practice. Buyers rarely have data on supplier performance as it relates to their particular contract, but rather tend to get performance metrics that are aggregated. (i.e. we can figure out for a publicly held company whether they are loosing money, but we do not know whether we have their lowest price and they are loosing money on US). Any suggestions to share on how to go about doing this?

  3. Debbie,
    My comment was mainly directed at the overall financial stability of the supplier, not so much the profitability of the relationship for the supplier. For publicly held companies, we can determine a few important things: their overall profit margin, their cash balance, management’s outlook, and the percentage of their total revenue that our business represents.

    If the supplier has a healthy profit margin overall, sufficient cash to fund ongoing operations in a recession, and they aren’t overly dependent on us as a customer, it may be a ripe time to “chase deflation.”

    If the supplier is unprofitable, running out of cash, and losing us as a customer (or losing a portion of our historical revenue) would be catastrophic PLUS that supplier is strategic to us, then chasing deflation may not be a good idea unless the price reduction is part of an overall cost reduction for the supplier that we facilitate. Maintaining continuity of supply and keeping that supplier alive may be a higher priority than knocking down your price by a nickel or two.

    So, it’s not an easy situation!

    Thanks for starting this discussion!

  4. Debbie Wilson says:

    That’s an excellent point Charles, and I agree with you. Thank you for sharing your thoughts.

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