Purchasing

Richard G. Weissman

Go for the Surcharge, not Price Increase
April 4, 2008

I'll bet more than one supplier has come into your office in the past few weeks trying to pass on a price increase caused by an increase in fuel costs. With the cost of diesel fuel in the news every day, and prices at the gas pump still high, how can we all not be sensitive to the increased cost of business? There is a way.

Work towards surcharges linked to a published index rather than an overall price increase. You are acknowledging the increase in the cost of business but drawing a line at a general price increase. And be careful. Some unscrupulous suppliers might also use the fuel increase as an 'excuse' to raise prices even if their margins are safe.

Volatile commodities are not new and many of us veteran buyers have been through this fuel thing before. You've also seen pricing issues with precious metals, plastic resins, and foreign exchange as well. Suppliers are quick to point out the increased cost of doing business and they are accurate. They pass those costs on to you and you pass them on to your customers and so on. It gets ugly, quickly. But, as fuel cost rise, they also fall. Not many suppliers come back to you to reduce prices when a barrel of oil drops $10, do they? And it can happen overnight.

Work towards keeping the base price the same and opt for a commodity related surcharge only. That way you are acknowledging the increased cost of business while not contaminating the standard costs or the impact on your company's income statement. Are you paying more? Sure. But it is for an isolated event and will not be rolled up in all of your costing methods.

The volatility always settles. Don't let it result in long term price increases. You've worked hard in squeezing out material costs throughout the supply chain. Don't let those successes be washed away in a sea of diesel fuel.

Posted by Richard G. Weissman on April 4, 2008 | Comments (0)