Global supply chain is rapidly changing – it is a very unusual time in history, and many businesses are feeling the pressure of rising vendor costs and an unpredictable future.
Raising your prices may offset some of the increased cost, but basic economic theory tells us that customers will eventually reach a point where they choose an alternative or go without.
One of the best tactics you can use to protect against uncertainty and large cost swings inside your supply chain is to lock-in vendor terms for an extended period using a Long-Term Agreement or LTA (also known by many other names). The basic components of an LTA include:
– Demand quantity
– Cost per unit
– Escalation of cost over the base period
– Option clauses for additional quantity and extended duration
How to get started? Identify your top 5 most-procured materials or services (by dollar amount) and get comfortable with your 3-year plan for each one. Once you get your arms around the big ones, work your way down the list of remaining major suppliers.
If your business offers blanket sales orders, or long-term fixed price contracts with customers, you are the perfect candidate for LTA’s! Any time your revenue is fixed for a period of time, your related cost should also be fixed, or at least well-protected. A solid LTA will eliminate the shadowy figure of unknown cost in future years and allow you to plan your own price increases and budgets more effectively.
Now may seem like a challenging time to evaluate opportunities for LTA’s with your major vendors, especially considering the rapid global changes, but we encourage you to think of the Chinese proverb,
“The best time to plant a tree was 20 years ago. The second best time is now.”