Do not let rising prices obstruct the search for value, buyers warned

21 January 2011

23 January 2011 | Lindsay Clark

Purchasers should not let escalating global prices distract them from the search for value for money.

According to procurement consultancy ADR International too much focus on price can blind buyers to the need for further negotiation with vendors.

Bill Michels, CEO of ADR North America, said in a briefing: “Most suppliers will have survived the recession by cutting their overhead and profit margins razor-thin. New orders have the potential to be very profitable, based on the lower overheads.

“On the other hand, insisting on price reductions when margins are already thin can push a good supplier out of business – or to a rival customer.”

In the last month, figures from the Office for National Statistics and the Markit/CIPS Purchasing Manager’s Index surveys showed rapidly increased prices of commodities due to growing demand and interruptions in supply caused by bad weather. Meanwhile, the Confederation of British Industry in the UK has foundevidence that manufacturers are now passing on prices rises to their customers.

Paper is one of the commodities to see high price increases over the last year. ADR sourcing consultant Tera McKeen said procurement professionals could help deal with the challenge of growing paper prices by challenging suppliers.

“It is essential for the paper buyer to gain an insight into the best possible way to target areas of cost reduction by understanding how various cost components contribute to the supplier’s price,” she said.

“If you are not already operating in an open book environment where you know what proportion of the supplier’s costs raw materials, production, energy, transport, profit margins and so on represent, a cost breakdown will give you a clearer understanding.

“This will help you focus on the supplier’s motivation: to what extent are their increased costs justified? Don’t be afraid to challenge the price increases,” McKeen added.

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