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Planning for Contract Negotiations

HCS Consulting Newsletters

December 2004

As we head towards the New Year, the economy, both manufacturing and service sectors, continues to improve. Inflation, although still moderate, is a factor that should be included in your 2005 plans. The Fed has raised rates 3 times and has signaled that the trend is likely to continue. Here are some suggestions for you to consider in looking at your purchasing and inventory management activities.

Even with relatively low inflation, prices for certain commodities can rise dramatically in the short term especially when there is a perceived or real supply constraint. (Oil and steel are two good examples.) In a recent member survey by TEC, 46% of its members plan to raise prices in the next 12 months. These are small to mid size companies in many different industries. Even Wal - Mart has finally accepted some increases from its suppliers.

As your purchasing people negotiate contracts for 2005, be sure to consider including:

  • Escalation caps if the contract is tied to a raw material or other price index.
  • De-escalation if your supplier insists on escalation.
  • Longer term agreements (2 years instead of one) if you feel that there is upside risk to the commodity covered by the agreement and your current price is attractive.
  • Assurance of supply language - minimum/maximum volumes, firm quantities, etc.
During 2004 we saw the return of capacity constraints in a number of key raw materials including chemicals, steel, aluminum, and plastic resins. I worked with several clients where we addressed this issue with some or all of the following ideas:
  • If you do not have a second source for key purchased materials, try to identify possible suppliers and qualify at least one.
  • If you or your suppliers own proprietary tooling to make your parts, how many sets exist, what is the capacity versus your anticipated volumes, and is all the tooling with one supplier?
  • Have you provided your purchasing people and your suppliers with your best estimates of '05 volumes by month?
  • If you have agreements in place with some suppliers to make and hold inventory, the planned levels should be reviewed against your '05 forecast and any plans for new product introductions.
Questions or concerns about the above? Give me a call or an e-mail.

Logistics Education

During the last 2 years, I have been fortunate to develop a second area of interest. My venture into the education world started with a project to develop a logistics two year degree program for Daley College, one of the City Colleges of Chicago. The people that I met since that initial project have helped me develop these additional projects and activities:

  • Developed and delivered a 16 session logistics program for displaced workers under a Northern Illinois University Business Services program.
  • Developed curriculum for a 3 year logistics program currently being piloted in 3 high schools in the Chicago Public School system. My work continues writing teaching materials for the sophomore course.
  • Designed a Purchasing course which I will teach in the Spring '05 semester at Illinois Institute of Technology.
  • I serve on the Advisory Board of the Greater West Town Training Partnership, an organization that prepares unemployed people for productive jobs in society. Applicants must pass a rigorous screening process followed by a 12 week training program in either warehousing and distribution or wood working.

Why mention this to my readers? If you have employees whose skills need to be upgraded in any aspect of logistics or supply chain, I may be able to help you select the right approach to fill that need. If you need entry level personnel in your warehouse or DC, GWWTP graduates about 70 terrific candidates each year.

Thank you for taking the time to read this newsletter. If you know of someone who might find it of interest, please pass it on to them. If you want to be removed from my distribution, send a reply to that effect.

Thank you for your business, or your interest and support in 2004. Best wishes for a prosperous 2005!!

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