Using a preemptive strike to avoid a price increase announcement can prevent one, but it can also initiate one. In other words, being proactive by asking a supplier for a price reduction or other concession may make a supplier reconsider asking for more or may motivate the supplier to do just that.

You must properly prepare in order to achieve your cost reduction objective. Preparation means checking the market and finding out what the competition is offering. If you are going to negotiate, you need to be ready.

Even if it is a proprietary product with no other supplier available, you can do some things to see if you are on firm ground to ask for a cost reduction. Determine how long you have been buying the product in question. Compare this with price changes during that period (see Lesson 103 on page 10 of this issue). Look at the cost of labor and the cost of component material to see how their prices have changed during the period when you were purchasing the product. If there is no competition for the exact product you have been buying, there usually is plenty of competition for the raw material or components going into the product.

If you find a component that is less expensive than what your supplier is using, you may influence your supplier to change his source to the supplier you located. When you negotiate, you then can offer to split the savings. This way you both gain.

One way to justify the price reduction is to use the Learning Curve. The supplier should have been able to reduce his cost by becoming more proficient. Another way is to point out your increased volume that provides the supplier with economies of scale.