As commodity prices increase, suppliers come knocking, pushing through commensurate increases. But what happens when those same commodity prices fall? Too often, purchasers fail to get a break. Consider the situation of an aerospace and defense supplier. As key metal prices rose, the company grudgingly accepted its suppliers’ price increases for machined parts. Trouble is, the company lacked good tracking data on commodity indexes. So when commodity prices dropped, it failed to go back to the supplier to negotiate lower prices. When the company started closely tracking supplier input prices, it found a large, immediate opportunity to claw back savings from the supplier. It now has a commodity index dashboard tied to key inputs. Companies can use this approach to reap savings in categories as diverse as components, freight and temporary labor.
Source: “A fresh look at procurement”
Original Publication: Bain
Subjects: Finance, Management, Operations