Buyer Analytics

No doubt the surge in energy costs has been felt in the cost of many petroleum based products. Suppliers in their quest to maintain market share have held off price increases. This has been a result of slow growth and production moving out of the U.S. to low cost markets.

The end result is pressure on margins. Have you monitored your key supplier's margins? At some point the pressure will be too large to bear and they will come calling.

Take Dow Chemical for example, according to the Associated Press:

The chemical maker's profit margins shrank from 9.8 percent in 2005 to 7.6 percent in 2006, and to 5.4 percent last year. During the 12-month period that ended March 31, the margin narrowed to 5.1 percent, according to Capital IQ.

Now for the triple slam from Dow:

1. A 20% across the board increase effective June 1
2. Another increase effective July 1 by as much as 25%
3. A freight surcharge for North American customers of $300 per shipment by truck and $600 per shipment by rail effective August 1

What should the savvy buyer do?  Include pre-determined escalation provisions in all of your major contracts. Best time to do this is during the bid process - have supplier's compete to provide the best price adjustment terms.