Packaging Supplier Squeeze
You are the category buyer for packaging at a cosmetics manufacturer. One supplier provides 80% of your printed cartons. Its reject rate is 3% against a specification of 0.5%, and 18% of deliveries have been late in the last quarter, causing two line stoppages. The supplier has now requested a 12% price increase, citing resin costs. The contract has a 2% annual price reduction, no service credits, and 60-day payment terms. The supplier says it may not be able to continue supply at current volumes without the increase. An alternative supplier has quoted 15% more than the current price but needs a 12-week qualification and a minimum order quantity that would double your inventory. Your operations director wants security of supply; finance wants the price increase resisted; quality wants the supplier replaced. The annual spend is £2.4 million. You have a meeting with the supplier in two weeks.
1. Assess the supplier's performance and price request, and identify the information you need before negotiating.
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Assessment:
- The supplier is high-risk because of dependence: 80% of cartons from one source, a 3% reject rate against 0.5%, and 18% late deliveries. The cost of poor quality includes line stoppages, rework, scrap and expediting, not just the invoice price.
- The 12% request may be genuine cost pressure or may be an opening position. Resin is a commodity with published indices, so ask for a cost breakdown, index evidence, volume data and the proportion of resin in the carton price.
- The contract gives a 2% annual reduction but no service credits. That is weak leverage. The alternative supplier is 15% more expensive and needs 12 weeks, so switching is not an immediate answer.
- Information needed: actual reject and late-delivery costs; supplier profitability and capacity; resin index history; the cost of qualifying the alternative; inventory cover; and the supplier's performance improvement plan.
- Finance's demand to resist and quality's demand to replace are both premature until the total cost and supply risk are quantified.
2. Recommend a negotiation strategy, including what you would trade and what you would refuse.
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Negotiation strategy:
- Aim for a conditional, evidence-based adjustment, not a blanket 12%. Offer a temporary resin-linked increase, for example capped at 5% for six months, with a review against an agreed index. Refuse an unconditional permanent increase.
- Trade: accept a modest price adjustment and longer payment terms only if the supplier commits to a quality improvement plan, 99% on-time delivery, service credits and stockholding. Ask for a reduction in the 2% contractual reduction to be offset by productivity savings.
- Refuse: paying for the supplier's inefficiency, accepting the 3% reject rate as normal, or removing service credits. Also refuse to double inventory with the alternative supplier without a phased plan.
- Develop a BATNA: qualify the alternative supplier in parallel, but do not use it as a threat unless you are prepared to switch. Seek a second source for a small volume to reduce dependence.
- Prepare a cost model showing the total cost of the current supplier versus the alternative, including poor quality and stoppages. Use it to justify the mandate.
3. Outline a supplier relationship management plan for the next six months.
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SRM plan:
- Hold a monthly review with the supplier's operations and quality leads, chaired by procurement. Use a scorecard: reject rate, on-time delivery, lead time, responsiveness and cost index.
- Agree a 90-day improvement plan with root-cause analysis for the 3% rejects and late deliveries. Set interim targets: rejects below 1.5% in 30 days and below 0.5% in 90 days; on-time delivery above 95%.
- Introduce service credits or a price-at-risk mechanism for missed targets. Link any price adjustment to achieved performance, not promises.
- Increase safety stock temporarily and identify a qualified second source for a small proportion of volume. This protects the line while the supplier improves.
- Hold quarterly business reviews with finance and operations. Keep a written exit and transition plan, including tooling ownership and 12-week qualification timeline, so the relationship is managed, not merely endured.