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How to Protect Operating Profit with Cost Recovery

Any sudden change in component cost can quickly put companies with a high percentage of operating costs tied to purchased components at risk. Escalating raw material costs due to volatility in the commodity market are often the cause, forcing companies to negotiate with their customers to remain cost neutral on their products.

The following three-position pricing strategy protects margins and keeps products market competitive.

1. Know the cost-plus numbers – a customer-driven process that monitors cost variances to control supplier margins

2. Understand the value-base – the method used for highly engineered, difficult-to- resource products

3. Know your competitive position – where your customers are with pricing so you can identify how much room you have to move while remaining market competitive

While each customer and product is different, this approach will yield success. One company negotiated a cost neutrality position with 90 percent of its customers. In the remaining 10 percent, the cost was offset by delaying committed productivity until the raw material markets stabilized.

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