The Procurement Cost Containment Program
by Bruce D. Caldwell, C.P.M.
Vice President, CAPM

The procurement departments of all companies are under constant pressure to reduce costs. The benefits of cost reduction will be eliminated if modest increases from vendors are allowed. This step by step Cost Containment Program has been adopted and implemented with great success by all the purchasing departments I have managed. For the program to be successful, the purchasing department must be relentless and stress a "Zero Tolerance" on price increases. With the support of Senior Management and all departments, the purchasing department must do everything possible to hold down costs and reject all price increases wherever possible.

The program is carried out in the following manner:

EXAMPLE:

The supplier notifies the company of a 5% increase.

1. Supplier is told we will not accept any increase. Our company has a zero tolerance on price increases.

2. Supplier is told he is going to lose us as a customer.

3. Supplier is told to re-evaluate their position and come back to us in a few days.

4. Purchasing will notify the staff chemist/engineer of the possibility of a price increase and request alternatives to the current supplier when purchasing is in a sole source position.

5. Purchasing will contact other vendors to obtain quotes, seeking substitutes, volume purchasing, etc.

6. Let’s assume this does not work. The current supplier should then be called in for a meeting. At this meeting, it should be explained to the supplier the amount of business in dollars we have given him over the past three years and, due to the type of competition we are face with, we cannot accept ANY price increase at this time. We will plead, cajole, get upset, but not accept a price increase.

7. If this approach does not work, then Purchasing will ask the supplier to hold off any price increase until the following year and explain that we will be glad to discuss the situation again the following year.

This approach will hopefully work, but for this example, let’s assume it does not. Purchasing will then negotiate a price increase of something less than what was originally proposed and spread out two or three increases over a period of time.

In the face of material increases in the coming year, Purchasing must do everything possible to hold down our cost. Purchasing must have the support of all the company's senior management to make this program a success.