Use labor productivity to drive down purchase costs

Best practices , Gem , Negotiating with Suppliers Oct 20, 2017 No Comments

Labor productivity Suppliers often use wage increases to justify nudging up prices each year, usually 1 or 2%. And it’s hard to argue: – seems reasonable, and it’s less than inflation.
But wages aren’t the real issue – labor costs are.

And the reality is that the average cost of a ‘unit of labor‘ is about the same today as it was 5 years ago.

Impressive labor productivity gains in the U.S. (especially after the ‘Great Recession’ of 2008) have been keeping labor costs down, as the American worker has become more efficient. Wages, on the other hand, have increased by about 1.5% per year. It is easy to see that the ‘spread’ (1.5%) can really add up over time.

Of course, to keep labor costs at these low levels, a supplier is obliged to make investments in new equipment, computer systems, etc., that keep up with the national average.

So the next time you meet a key supplier, you might want to bring up the subject of productivity: “What programs have you instituted lately to raise labor efficiencies? Have you added new equipment or information systems? Have you been keeping pace with the rest of the country?”

Very few suppliers will say that they are not investing; or that they are not keeping up with average investments or productivity gains. In fact, most will claim that they are a better-than-average company.

This will be good news because, now that the subject has been discussed, they will likely think twice before using higher wages as a negotiating tactic again.

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Rod Sherkin

Rod is a former senior executive, responsible for Purchasing, for both Pillsbury and Ball Packaging back in the 80’s and 90’s. Since then, he has continued to work in the Purchasing field as both a consultant and founder of the website

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