Real World Sourcing- tough negotiation can also drive supplier innovation

I’ll write at more length about yesterday’s BravoSolution Real World Sourcing session next week and link to the slides, but just a quick thought for today. Guy Allen presented on “You get what you pay for” – or, as he put it, “you pay what you deserve to pay"...

He argued very persuasively that the market sets prices rather than price being any sort of reflection of the intrinsic cost make-up of the product. One consequence is that, at times at least, it is fine to buy below the supplier's “actual” cost of production.

Doesn’t this lead to situations like horsemeat in burgers, you might ask? Guy would say no – that could happen even if the buyers were paying higher prices. It was down to greed somewhere in the supply chain, which doesn’t go away if buyers are more generous.

He also made the point that pushing suppliers on prices can lead to innovation. He gave the example of Ford in the 1980s, who told their suppliers to implement statistical process control to improve component quality. Can we increase prices, the suppliers asked, as this will cost us more?  No, said Ford. And of course better quality actually saved the suppliers money themselves in the medium term, and the innovative approach to quality benefited everyone.

However, we might question whether the same scope for innovation is there in the case of a “beef” lasagne? Or is pressure for prices that can’t be achieved by proper means going to put more pressure on suppliers to cut corners? I think it must do.

As Guy says, some suppliers might still look to increase margin through bad practices, even if prices are “fair”. But pushing them into unsustainably low prices, with little option of innovation, must make that bad practice more likely.  (That is also different to taking advantage of temporary factors, or buying at the margin on certain occasions – I’m talking about long-term prices here).

So maybe that’s a good lesson – what sort of behaviour is aggressive price negotiation going to have on your suppliers? How might they respond? With innovation – or horsemeat? Worth considering at least when you develop your strategies and tactics.  And more from the session next week.

Voices (3)

  1. Hans van Eck-Casteels:

    Unfortunately, or fortunately, innovation sometimes is driven not by want, but by necessity. Many colleagues have stated that they would never “do what they do” today, if it hadn’t been for them being made redundant at a prior employer. Frankly, I hadn’t thought about innovation in this context – I will now!

  2. Romulo N. Ulibas:

    I fully agree. Also, collboration on the cost driver with supplier – whether a specification, a consolidation, assembly level (innovation ideas), are negotiation alternatives. This way, both the buying and selling organization can share on the profit of innovation in a transparent way, rather than pulling/pushing each other in the negotiation process.

  3. Alis Sindbjerg Hemmingsen:

    I agree. Tough negotiation can drive innovations. Though like in many other cases it really depends on the people the supplier has in the “frontline” and their ability to convert tough times into possibilities. It s just like selling a house: some people only see the wrong tiles, the wrong kitchen etc. Some people see the possibilities and work from there.

    What could a procurement professional do in a case where this is an issue? Here I have experienced that coaching questions has been very useful. As a procurement professional you will have to take on more of a guidance role until the supplier understands the “burning platform”. Which it often is.

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