Price Change Management

Price Change Management

Purchasing managers must challenge supplier price increases and not treat them as pass through costs. It is important to work with suppliers to restrict price increases to a reasonable and equitable level. Furthermore, purchasing should establish a systematic method of handling all price increase requests from suppliers. At a minimum, the system should require:

 Determination of the reason for the price change request.

 Specification of the total dollar value impact on the firm.

 Justification of the price change by suppliers.

 Review of the price change by management.

 Strategies to deal with price increases.

 Alternatives for reducing other price elements or improving processes to offset the price increase.

Purchasing should work with the offset price increases through other improvements, such as reduced delivery lead times, better service, or other opportunities.

Frequently, conditions such as potential supply constrictions or inflationary markets cause purchasing managers to buy more of a product than is required for current consumption. This practice, called forward buying, serves to protect the organization from anticipated shortages or to delay the impact of rising prices. The trade-off course is increased inventory carrying costs. When using this strategy, the purchasing manager must evaluate the trade-off between inventory carrying cost increases and the risk of supply constriction or increased prices. This was the case with Ethyl Corporation.

The Ethyl Corporation, a petrochemical and pharmaceutical company, forecasts raw materials needs and prices in its purchasing department. An economist at Ethyl creates a quarterly outlook based on major economic indicators to aid in the purchase of materials. Steven Moore, director of commercial services reported:

During the period leading up to the conflict in the Persian Gulf, we saw a major increase in petroleum-based raw material prices; we predicted this price increase and we were able to benefit from advance purchases of these materials.

Speculative buying refers to purchases made not for internal consumption, but to resell at a later date for profit. Speculative goods may be the same as goods purchased for consumption, but the quantities purchased will be in excess of current or future needs. An example occurs in the diverting of retail goods.

Company may offer special discounts to retailers only in certain areas of the country. Retailers will buy substantial quantities of goods to ship to other locations or even to sell to other retailers in different parts of the country where the discount is unavailable.

Volume contracts are a way to a leverage purchase