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Taking Advantage of Falling Commodity Prices

My last newsletter, written in June, discussed strategies and tactics for handling price increases based on rising commodity prices.  What a difference today versus 3 months ago! Oil prices peaked at almost $150 a barrel and have just broken below $90 – a reduction of 40%.  There is general agreement that we are in a down economy, whether you choose to call it a recession is not as important as what you do to take advantage of the situation on the Purchasing side of your business.  Here are some actionable suggestions:

  • Review all commodities where you had to accept price increases in 2008.  I would bet that the majority of those increases were justified at least in part by rising oil prices.  Suppliers are not as quick to react on the downside of the price curve.  Your purchasing people need to contact each supplier and ask for price reductions.
  • Review all contracts which have escalation/de-escalation clauses.  Purchasing should do the math in preparation for meetings with your suppliers.  Here is the example of these clauses that I included in my June newsletter.

Escalation/De-escalation – Volatile commodity prices usually lead sellers to add escalation clauses to contracts and individual order acknowledgements. Any escalation clause or wording should refer to de-escalation as well.  The amount and timing should be the same going up or down, but if you do not explicitly include the de-escalation piece, it may not happen as quickly as it should.  The contract language should specify the base price and the specific terms and timing for price adjustments.  I.e. – “The base price of oil is $130.00/ barrel on June 1.  Your price for “X” will be adjusted by $1.00 for every $5.00 change in the price of oil as published in the Wall Street Journal.  Pricing will be adjusted monthly on the first of the month based on the published price on that day.”  If the basis for adjustment is a published price in a trade journal or newspaper, you should review the history of that published price versus actual market experience before agreeing to use it.  Not all published prices reflect reality, especially those not tied to a commodity that is traded on a major exchange.

  • It is not likely that the economy is going to get a lot better between now and the end of the year.  What contracts or blanket orders are due to be re-negotiated for 2009?  You should expect to find opportunities to lower prices and/or improve terms for next year.  Set some aggressive targets for those negotiations.
  • In a business downturn, some potential suppliers are looking for new business.  Your current suppliers may be very interested in an opportunity to increase the volume they do with you.  Purchasing should be reviewing all of your commodities and taking appropriate action.

I have developed and implemented Purchasing tactics and strategies for many companies in a variety of industries.  If you are concerned about your organization’s capability to deal with the topics mentioned in this newsletter, give me a call.  I am happy to discuss your specific issues.

Please pass this newsletter on to others within or outside of your company who might find it useful.  If you do not want to receive future newsletters, reply accordingly.

Herb Shields

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