How to manage price changes in the supply chain

Summary

To avoid disputes with important suppliers, it is advisable to plan purchases over the medium and long term and not operate solely on the basis of orders and order confirmations. Planning makes it possible to agree on the duration of the ’supply agreement, minimum volumes of products to be delivered and delivery schedules, prices, and the conditions under which prices can be varied over time.
The use of a framework purchase agreement can help avoid future uncertainties and allows various options to be used to manage commodity price fluctuations depending on the type of products , such as automatic price indexing or agreement to renegotiate in the event of commodity fluctuations beyond a certain set tolerance period.

I read in a press release: “These days, the glass industry is sending wine companies new unilateral contract amendments with price changes of 20%…”

What can one do to avoid the imposition of price increases by suppliers? 

• Know your rights and act in an informed manner
• Plan and organise your supply chain

Does my supplier have the right to increase prices?

If contracts have already been concluded, e.g., orders have already been confirmed by the supplier, the answer is often no.

It is not legitimate to request a price change. It is much less legitimate to communicate it unilaterally, with the threat of cancelling the order or not delivering the goods if the request is not granted.

What if he tells me it is force majeure?

That’s wrong: increased costs are not a force majeure but rather an unforeseen excessive onerousness, which hardly happens.

What if the supplier canceled the order, unilaterally increased the price, or did not deliver the goods?

He would be in breach of contract and liable to pay damages for violating his contractual obligations.

How can one avoid a tug-of-war with suppliers?

The tools are there. You have to know them and use them.

It is necessary to plan purchases in the medium term, agreeing with suppliers on a schedule in which are set out:

• the quantities of products to be ordered
• the delivery terms
• the durationof the agreement
• the pricesof the products or raw materials
• the conditions under which prices can be varied

There is a very effective instrument to do so: a framework purchase agreement.

Using a framework purchase agreement, the parties negotiate the above elements, which will be valid for the agreed period.

Once the agreement is concluded, product orders will follow, governed by the framework agreement, without the need to renegotiate the content of individual deliveries each time.

For an in-depth discussion of this contract, see this article.

• “Yes, but my suppliers will never sign it!”

Why not? Ask them to explain the reason.

This type of agreement is in the interest of both parties. It allows planning future orders and grants certainty as to whether, when, and how much the parties can change the price.

In contrast, acting without written agreements forces the parties to operate in an environment of uncertainty. Suppliers can request price increases from one day to the next and refuse supply if the changes are not accepted.

How are price changes for future supplies regulated?

Depending on the type of products or services and the raw materials or energy relevant in determining the final price, there are several possibilities.

• The first option is to index the price automatically. E.g., if the cost of a barrel of Brent oil increases/decreases by 10%, the party concerned is entitled to request a corresponding adjustment of the product’s price in all orders placed as of the following week.
• An alternative is to provide for a price renegotiation in the event of a fluctuation of the reference commodity. E.g., suppose the LME Aluminium index of the London Stock Exchange increases above a certain threshold. In that case, the interested party may request a price renegotiationfor orders in the period following the increase.

What if the parties do not agree on new prices?

It is possible to terminate the contract or refer the price determination to a third party, who would act as arbitrator and set the new prices for future orders.