Drive Down Purchase Costs with Labor Productivity

Add comment October 23rd, 2006 David Bush - Iasta

Dr. Lamoureux of Sourcing Innovation recently pointed out the Frasers/PMACNewsLetter to me and this month it has a great article on how to Use labor productivity to drive down purchase costs.

The article points out that suppliers often use wage increases to justify small nudges in prices each year since it seems reasonable, but wages aren’t the real issue, labor costs are. For example, in Canada, labor productivity gains have been keeping costs down and the cost of a “unit of labor” has risen at the low rate of approximately 1.3% per year. Of course labor costs depend on productivity, but considering that this Stats Canada article (the first one that came up in Google) notes that US GDP rose at a rate double Canada in the second quarter of this year and that unit labor costs increased a mere 1.2% in the same quarter, you can see that this article is just as relevant to US buyers since labor costs could be significantly less then wage increases due to increased levels of productivity.

Thus, as the article notes, when negotiating with a supplier, be sure to discuss their productivity. After all, if they are really investing in technologies and processes to improve productivity, then they should not need to raise prices by much more than a mere percentage point to cover wage increases and stay competitive.

Entry Filed under: General, Supplier Performance, Suppliers