Despite the economic heat, now is not the time to put efforts to develop stronger supplier relationships on the back burner
"... a time of turbulence is also one of great opportunity for those who can understand, accept and exploit the new realities. It is, above all, a time of opportunity
for leadership."
Peter Drucker, Managing in Turbulent Times (1980)
One outcome of the global downturn is an absolute certainty: top management of companies in virtually every industry will be increasingly looking to their purchasing organisations for price reductions on bought-in goods and services. This is good business as supplier price cuts are the fastest way that a company can control costs, reduce cash outflow and generate bottom-line improvements in the short term.
While aggressive corporate turnaround actions may be necessary for some companies, those that are in better business shape have an opportunity to build more trusting supplier working relations that will benefit both parties as the economic situation improves. For those CPOs who are involved in strategic discussions about how to best position their companies for the upturn, this article provides insights on how to strengthen supplier relations in a competitively advantageous way.
The economic slowdown has and will continue to cause financial stress for many suppliers. Given the importance of maintaining uninterrupted supply, it is essential that purchasing assesses the current and potential financial condition of the company’s more important suppliers.
Knowing this will enable you to determine a realistic price reduction expectation that will contribute to a successful negotiation. Most importantly, by asking for a realistic price reduction, there is a greater chance of meeting top management’s expectations without jeopardising the future supply of goods and services from the supplier.
Maintaining supplier trust
Ample research proves that trusting supplier working relations provide substantial economic returns to buyers. It is, therefore, imperative that purchasing personnel negotiate price reductions in a manner that contributes to developing and maintaining, if not improving, the trust that exists between their company and the individual supplier.
At present, the need to get substantial price reductions from suppliers quickly almost guarantees that most purchasing organisations will use adversarial tactics. Such tactics do not enhance supplier relations. But purchasing can aggressively pursue price reductions from suppliers, without harming their relationship, if they ask for price concessions in a way that is consistent with a trusting environment.
Being valued as customers
Suppliers, like purchasers, have long memories. Treating suppliers fairly today, when they are facing significant economic uncertainty, will be rewarded by suppliers being fair to your company tomorrow when the economy turns around.
Taking a positive and constructive approach to achieving price reductions is just one of numerous opportunities the economic downturn provides a company to improve its supplier working relations. Once the business and liquidity concerns are stabilised, consideration can turn from operational issues to strategic activities that will result in a stronger company emerging from the downturn. The purchasing organisation can definitely help in this area, but first it will have to overcome some challenges.
In the process of stabilising the company, top management typically moves to reduce, if not stop, any effort associated with improving supplier working relations, primarily because they do not consider this to be an important priority. This argument is short-sighted for two reasons. First, the economic return of trusting relations can be substantial. Initial research we conducted covering a six-year period in the automotive industry found that 14 per cent of revenue and 33 per cent of profit was attributable to trusting supplier working relations.
Second, with up to 75 per cent of the revenue of manufacturing firms and up to 40 per cent of services companies’ revenues being spent on purchased goods or services, the impact of suppliers on a company’s marketplace and economic success can be significant. Other research we have conducted has shown that the more involved suppliers are with their customers, the greater the price concessions and the greater the transfer of innovation.
Nonetheless, even CPOs who appreciate the value of trusting supplier working relations are often reluctant to commit resources to improving them when confronted with economic uncertainty. But this is not a time to be timid, it is a time for purchasing leadership. In the few next months, suppliers are going to be confronted with the dual calamities of decreasing sales and increasing pressure for price reductions.
They are not going to expect a customer to seek to improve working relations with them at this time. So your suppliers will be much more willing to embrace your efforts than you might otherwise expect.
Specific measures to consider
There are numerous activities that you and your company can undertake with relatively few resources to improve supplier working relations. They include the following:
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Make sure your suppliers have the information they need in a timely manner to ensure they are doing what is expected of them. For example, provide them with accurate, adequate performance metrics frequently; ensure that design specifications for new products are complete and unambiguous; and give realistic volume estimates for pricing new business.
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To maximise the probability of future supplier price reductions, set realistic, but stretch, annual reduction targets and have a programme that fairly shares anticipated savings from supplier proposals (eg, 50:50 for the first year, then 100 per cent of savings revert to your company).
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If suppliers cannot meet price reduction expectations, provide lean experts to help them find ways to take cost out of their production systems. If these reductions exceed expectations, let the supplier keep the difference in year one.
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Provide and pay for training classes for suppliers in areas where they need improvement. Your company can determine the topic, arrange for internal or outside experts as instructors, and provide the training facilities. Attendance can be voluntary or compulsory depending on the need for supplier improvement, with suppliers paying for transportation, meals and hotel rooms when attending classes.
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Fairly compensate suppliers for sunk costs when programmes are cancelled, delayed or fail to meet volume expectations. The compensation doesn’t have to be in cash; it could be preference for new business, for example.
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Building trusting supplier working relations does not preclude being realistic about the need to meet the challenges of the marketplace. The task of maintaining a company’s economic viability during the downturn is formidable. But, as with any negative situation, there are substantial opportunities available for the taking. As Drucker said almost 30 years ago, turbulent times will reward those that demonstrate leadership.
CHECKLIST:
Why SRM should not be sidelined
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Closer working relations open up opportunities for joint cost reduction and efficiency initiatives – improving processes, eliminating waste, releasing cash tied up in inventory, using alternative materials, and so on.
John Henke (henke@ppi1.com) is president of consultancy Planning Perspectives in Birmingham, Michigan, and professor of marketing at Oakland University in Rochester, Michigan
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