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Suppliers announce price changes in various ways. Seldom do they ask the buyer in advance if a price inc..." />

Beware of Blanket Price Changes

Date: 09/01/2008

Suppliers announce price changes in various ways. Seldom do they ask the buyer in advance if a price increase will be accepted. Normally they announce an increase by a letter, or in a revised catalog, or sometimes preceded by one or more public announcements.

The details of the price change also vary. One of the better ways is to change actual prices on individual items. This allows the buyer to calculate the effect based on the volume of each item. Smart buyers sometimes get the supplier to do the calculations and submit the cost effect on each item based on the expected volume. This saves valuable buyer time. Even if this is done, the report needs to be carefully checked, item by item, to make certain the figures are correct.

A less satisfactory price change announcement is the blanket change where the seller states that all prices will be increased by a certain average percentage. Such a statement can be very misleading because the average may be entirely different if the change is weighted for differences in volume of the items purchased. Looking at the details, you may find that one item has been adjusted by an 8% increase, whereas another item has been only increased by 2%. The stated average for these two examples would be 5% without considering volume. If, on the other hand, you normally buy 1000 pieces at $5 of the item with the 8% increase and only 100 pieces at $9 of the item with the 2% increase, the weighted percentage price change becomes 7%.

Blanket price changes may not deliberately be done to fool the buyer. One reason, especially where hundreds of items are involved, is it is far easier and less expensive for the seller to simply make a simple across the board statement of a certain percentage rather than have to calculate the justifiable price for each item.

Although across the board price changes are easier for the buyer too, calculating the impact or analyzing the data is necessary work for any purchasing professional who wants to pay prices based on real costs. Not having time to do the analysis is a weak excuse.

Any price change increase should not be easily accepted, but price changes submitted without proper consideration of real costs should be strongly resisted. It is highly unlikely that blanket increases represent the real cost of each item. Objections to price increases may not always succeed, but the attempt should be made.

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