It is easy for sellers on commission to be set targets and told to get the price increase or else. However, without an overall strategy in mind, the short term gain can come back and bite.

This is the story of one company who today is reflecting on the way its approach to gaining price increases. Company X had built a dominant position with its customer, Company Y. The product they supplied was built from commodity markets under the influence of oil prices which was a critical raw material for Company Y.

The Company X sales team received instructions to raise prices aggressively by 24% . Their approach was to indicate an immediate increase of 12% under threat of withdrawal of supply. This was followed after 2 weeks by another price rise again with little notice. Company Y had not time to find alternative sources and had little chance to pass on the price increase to its own customers.

Just how the buying team of Company Y felt can only be imagined. This was supposedly a partnership relationship. How did they react? Their Purchasing Director did what many do not. He paused and sought to bring together a cross-functional team tasked to address the issue using a strategic sourcing process facilitated externally by PMMS. He wanted to take the opportunity to bring fresh ideas and eyes to the overall supply strategy for this major material. The team revealed key supply vulnerabilities in other countries and found that the purchasing team had little visibility of the big supply picture and were managing in silos. The resulting strategy introduced a plan to reduce their vulnerability in several markets. New suppliers were encouraged, back-integration was developed, new relationships were explored with suppliers who had previously been ignored.  The outcome of what appeared to be a disaster was turned into an improved strategy for Company Y.
Timing is everything in any implementation of new strategy. With pressure from the business to reduce prices it would have been easy for Company Y to take a short term view but this would have prevented them addressing the problem of vulnerability. The cross-functional team¡¦s close interaction with stakeholders, particularly senior management, ensured that their actions were well coordinated. Each member understood their role and rehearsed their parts. The change process took place over 2 years. Alternatives were introduced, the overall strategy execution succeeded with reduced costs and reduced vulnerability in each of their markets.

Company X now has significantly less business with Company Y than before the price increase and it is not unreasonable to  suppose that their overall revenue for the product in question is now less, price increases notwithstanding.

Interestingly, the Purchasing Director at Company Y spends much time coaching his team not to treat their suppliers as they had been treated. He strongly urges his colleagues to use an empathetic approach, to give 3 months notice of changes and to always act in a warm but firm manner.

Perhaps even more interestingly, Company X feel wounded and has accused Company Y of short termism and tactical behaviour.

Perhaps the saying that what goes around comes around should be considered by both buyers and sellers in commodity markets.