Earlier this week, I logged my picks for what supply management executives can expect this year. Number one on the list: “You will pay higher prices.” The latest Conference Board Chief Executives’ Confidence Measure lends credence and clarity to my claims.

The quarterly survey of 100 CEO’s put the confidence index for North American business executives at 50 in the final quarter of 2006. (Like the ISM Index, a reading of more than 50 reflects more positive than negative responses.) The measure was up from the previous quarter. Conference Board analysts tried to spin this as “a bounce-back in CEO confidence suggests further economic growth.” But, in my book, a 50 reading means CEO’s are split on where the economy’s performance will go during the first half of 2007.

More important for supply management executives was the finding that most CEO’s expect higher prices in 2007, with the anticipated price hike averaging 3.3 percent.

Upshot: Supply managers should be on guard to chip away at expected price increases. Charles Dominick, President of Next Level Purchasing and master of the Purchasing Certification Blog, shared some valuable tips in a recent post on how to position against supplier attempts to boost prices. Charles’ advice examines how best to assess the cost breakdown of a supplier’s bid, and then use it to your advantage.

However, if you are forced to take on some price increases, use the following approaches to soften the blow:

• Benchmark industry pricing: Check pricing trends and indicies prior to initiating a negotiation to assess the degree of price increase to be expected. Use this intelligence to set realistic cost goals and to put a positive spin on internal communications by showing how you will beat industry pricing.
• Run a competitive bidding process: It may seem obvious, but if your incumbent supplier is pushing for unreasonable increases, turn up the pressure by introducing new competition into your negotiations. Industry research shows that pushing your negotiations online enables greater competition through increased transparency, more efficient bidding, and lower “transaction” costs. E-sourcing users report additional cost savings, even for their most negotiated categories. E-sourcing can also help mute price increases.
• Involve at least one Chinese supplier: Depending upon the item being sourced, invite qualified suppliers from low-cost regions — particularly China — to participate in negotiation. This is a favored practice of ITT Industries. “Involving Asian vendors in an auction can help force local vendors to be more aggressive competitive,” says ITT’s e-sourcing program manager.
• Reset expectations: When benchmarks portend a price increase, be sure to manage internal expectations by preparing key stakeholders for the boost. Issue “deal sheets” for each project to illustrate industry pricing and market trends and the sourcing approach you will take to hold down the increase. Be sure to provide an estimate for the lower-than-average cost increase you will negotiate. This is a tactic used by the supply management team at The Compass Group, the world’s largest food service company. Faced with sourcing highly volatile food stuffs, Compass’ sourcing squad proactively communicates industry supply and pricing trends and shares the e-sourcing approaches they will use to offset these. “While no one likes a price increase, it helps to prepare [stakeholders] for what to expect from each sourcing event.”
• Trumpet your results: Be equally communicative about the results of your strategic sourcing efforts. Compass’ supply group always follows up with key stakeholders to report the results of their sourcing efforts and to provide a scorecard of how they performed against stated goals.

While top-performing supply management teams always set out to secure lowest-cost and best-value awards, they recognize that, depending upon the category and market dynamics, winning cost concessions isn’t always possible. (Just ask Ohio State.) However, they also realize that they year’s supply goals are not made or broken on a single category. Proactively communicating and managing cost increases in certain categories — and offsetting them with cost reductions in others – is what it takes to make a winning season.