As suppliers enter 2017 looking to recover lost margin with double-digit price increases, we’ve found that the operators with the most successful responses are the ones who most effectively use data.
In this post, we share how Oil & Gas Supply Chain teams can respond to the 5 most common arguments suppliers use to raise prices.
1. “My costs for X are up”
We often hear suppliers come to the negotiating table with arguments like “our overhead is up by 3% this year” or “our labor costs are up by 5%, which means that our costs are rising by 7%”. So what are some effective ways to respond to a supplier who necessarily has better visibility into their own cost structure? We suggest starting with 3 key questions:
- Have the costs really gone up that much?
- What are the other cost drivers doing?
- Are factors like supply/demand offsetting the cost structure?
Developing a standard negotiation packet filled with market data on the particular item or service can be an effective way to respond. In this case, we suggest starting with a cost model that breaks down the cost of the item into its individual cost inputs, and then tracking how those inputs have moved with the market over time.
For example, if a joints supplier came to you saying “the price of labor for steel mills services is rising,” you could instead point to the other commodities that are exerting downward pressure on joints. In the graph below, we can see that steel has a much stronger impact on the price of joints than iron and steel mills services does, suggesting that the overall outcome should be a price decrease.