Today’s Manufacturing Question Answered – August 15, 2024
Q: Inflation is high, and it costs me more to buy raw materials, pay employees, and operate my facility. But I’m locked into a pricing contract with my customer. How do I raise prices?
By Garry Hojan
Our Solution
A: Inflation is a major concern for business owners.
The question above has elements of contract law associated with it, and I am not an attorney. I cannot offer legal advice and I highly recommend having an attorney look at your contract.
This is particularly important if you are truly locked into the contract without price adjustment clauses. If that is the case, it may also indicate that it’s time to review contract handling in general.
Engage vendors and consider finding new ones with better pricing solutions. Have you utilized all available leverage for better annual buying, payment terms, and exclusive vendor deals?
Ask vendors what they have to offer. Let them know that you are on a cost-cutting mission and are open to what they suggest to that end. They may offer overlooked solutions that cut costs without sacrificing safety or quality.
Take another, closer look at part/assembly production for efficiency and cost improvements. Engage employees in giving their best ideas for cost reduction through improvement, apply lean principles, make it a friendly competition, and get creative.
After these steps, I would consider communicating with the customer. Even if the contract does not allow for a price increase, a candid discussion may prove fruitful. Most reasonable customers will try to work with reasonable requests, especially if your company is a qualified vendor of value.
Remember they have no obligation to grant a price increase request, and they’re likely not going to grant multiple price increases this way.
I’ll leave this newsletter with something my attorney’s firm shared with me, that most owners/top management will sign a deal and not review the contract’s legal language. Don’t be that person.
Most contracts are intentionally written to shift liability from the contractee to you. Be aware of this before signing.