Opinion

Why supplier bashing won’t do

Procurement must work with suppliers to reduce the cost of poor quality, not simply try to impose price cuts

17 April 2009

by Willem van Oppen 

The economic crisis has driven many companies back into Neanderthal-mode. In the quest to safeguard the bottom line, they are falling back on hitting suppliers over the head. Arbitrary breaking open of contracts, unilateral price reductions and the extension of payment terms are a few of the measures that proliferate throughout the business world as C-level management intuitively looks to procurement to deliver savings.

But driving the supply base against the wall will only aggravate the economic conditions. “Tit-for-tat” behaviour will cascade through the supply chain, creating havoc in its delivery capability. In a networked economy the interdependencies between companies are such that “supplier bashing” will boomerang within a relatively short period. “Win-lose” will quickly turn into “lose-lose”.

A more effective way of driving costs down is by reducing the cost of poor quality. These costs are often the result of poor supplier relationship management. A quality relationship between supplier and customer can reduce cost and at the same time enhance customer satisfaction. Your supplier network can help you improve your processes, reduce the cost of poor quality and deliver breakthroughs that enhance your company’s market performance. The same holds for your role in improving the performance of your network partners.

The best way of reducing cost is to cut expenditures. But procurement should not let itself be lured into becoming the sole champion of this process. There are three basic steps that ensure a well-founded programme:

• Make expenditures transparent over the category, supplier and user/business axes. The more granular the better, and a historic perspective will serve to set thresholds.

• Perform Pareto analysis together with the business entities. You will see the waste that results from having a diverse supplier base and its associated cost; the result is a concerted supplier reduction programme, cutting out non-active suppliers. Directing expenditures to the remaining supply base will enhance your attractiveness as a customer.

• Organise a “gatekeeper” role at a business level, whereby intended expenditure is challenged on a regular basis and, if approved, directed to the selected supply base. This should mean that only solid, underpinned plans will be tabled and can have a massive effect on reducing spend. Regular reporting of spend development will enthuse the organisation to drive spending down even further.

Cash management is another area where procurement can make a difference by working closely with finance. But extending payment terms is a measure that should not be taken lightly. It has an enormous impact on the cash position of suppliers. Certainly when dealing with smaller yet essential suppliers, you can run the risk of pushing these companies over the edge.

If cash really is king, you should be willing to compensate the associated interest to suppliers. It is a balancing act between cash and operating expenditure. It is essential that negotiation tactics are decided on a supplier-by-supplier basis and that the business co-determines the strategy. If compensation is to be paid, it will come out of their pockets.

It calls for procurement leadership to stand up against supplier bashing. But don’t stand up on your own. You have to dovetail with the business even at shop-floor level. It is there that the results of supplier relationship management – whether good or bad – are immediately felt. Make your case together with these colleagues to convince senior management of the wisdom of the “quality” approach.