Q: We have been reducing supplier numbers and increasing contract volumes in order to get better deals. When should we stop leveraging our purchasing power like this?
A: One quick answer to your question is "when the supplier to which you are awarding all this business is unable to cope with any more, or is finding it so painful that they want to pull out". Another is "when the unlucky suppliers are starved to such an extent that they decide to get out of the business or refuse to be available to your company". Letting any of this happen is not the time to start addressing your question, but it is exactly when many companies do.
There are no general rules dictating the maximum amount of business that can "safely" be given to any one supplier, although some companies say they will not let contracts exceed "X per cent" of the supplier's turnover. It is a risk management issue. However, there are telltale signs that indicate an impending supplier crisis or a lessening of its interest in your custom, such as becoming less responsive to changes in your requirements, or sending its newest recruit instead of the key account manager. You must look for them. This requires an ongoing relationship management plan, or at least a watching brief.
Planning to improve a current deal by aggregation is an "inside-out" stance which is somewhat myopic and can lead into danger without seeing it. It is better to take the "outside-in" view.
Think strategically about how the supply market (for the particular item being acquired) must look and behave in future so that it performs in the way your company needs it to. The gap between "today" and "the future" defines the actions to be taken that make the future become reality. The deal then sits in this strategy. The latter determines how much business may be given to a supplier, the way the relationship is managed, and the fall-backs prepared "just in case".
The strategy should recognise that "piling high and buying cheaper" is not the only way to leverage maximum value from the supplier. It will identify additional ways in which doing business with you is valuable to the supplier. In the case of the main supplier (where two or more are used simultaneously), the main lever might well be the volume one.
But, for the smaller supplier(s), other levers will be used to maintain their interest in you as a potential or bigger customer. If only one supplier is available then it must be managed closely as if it were part of your own company.
One object of strategy might be to develop supplier choices and fall-back options if they don't exist now. It's about playing several instruments in the supply market at the same time, but in different ways.
Q: My procurement team has just led a successful outsourcing project for our company. What else can procurement step up to lead?
A: An excellent, upbeat question, albeit carrying the danger of over-reaching oneself! My erstwhile boss said that my "licence to make change was renewed daily". I could only "manage change" so long as day-to-day operations continued smoothly. Taking the eye off that ball to shoot for other goals was not an option. So, make sure that your company's procurement process is in order first. In fact, doing this is often the best way to stimulate wider change.
One manufacturing company recently presented procurement with an enlightened invitation to "lead change". At the time it was in a trough in the business cycle. Unlike many who hire and fire their way through life, this company decided not to wait for recovery but to stimulate it and lead the up-cycle. In addition, the company wisely realised that it did not want to engage consultants to move in, take over and leverage their way to cost savings.
Up-front savings would, of course, be welcome and demonstrate the impact of "new procurement", but the real object was to equip the company's procurement teams with the skills, ambition and authority to acquire more value from their supply markets, and to develop these markets to meet company needs. A series of workshops, management briefings, market analyses and action-planning sessions then made a profound impact.
The most difficult challenge was to get people to patiently clarify objectives and to understand situations fully before leaping into action. The business cycle is now in full flood and, although the procurement process still has more to do to reach "best practice", there is no doubt that its substantially improved effectiveness has contributed to the company's current prosperity. Why not step up and do the same in your business?
Dr Richard Russill
(
www.russill.com
) is a business adviser and writer, specialising in supply, cost and relationship management
