Dear supplier, please give us some money. Love, the Procurement Director

The recent fuss about organisations asking suppliers for price cuts reminded me of a personal experience from ten years ago.  I was Procurement Director for NatWest at the time we were going through a takeover battle, with Royal Bank of Scotland (under 'Fred the Shred' Goodwin) and the Bank of Scotland - both a fraction of our size - vying to buy us.

NatWest obviously wanted to present a strong profit forecast to the City.  So one day I was asked by a Board member (probably the intellectually smartest guy in the company),  "why don't we just demand a 10% price reduction from all our suppliers?  That would increase next year's profit by £200 million"!

I think I eventually had to go into writing and make four points:

1. What the **** do you think we have been doing in procurement over the years?  Do you really think our suppliers have 10% excess margin to offer up just like that?

2.  NatWest made over £1 billion profit last year and a return on capital of 20%;  a lot better than 90% of our suppliers! We're not exactly going bust, and we're unlikely to get much sympathy from suppliers ...

3. Our biggest suppliers are people like IBM, Dell, Unisys, Ford.  While we're important to them, we're not THAT important. Our business isn't essential to them. Indeed, in some of those cases, we need them more than they need us.

4. I hate to tell you this, but many of our big suppliers don't like dealing with us very much.  We're bureaucratic, we create a high cost of sales for them, etc.  Some of them are actually rooting for the guys trying to buy us!

The lesson from this - other than that very bright people don't always understand procurement - is that you have to think very carefully before you make this sort of move, consider the chance of success, and develop appropriate strategies that maximise the chance of a good return.

So we'll take a look shortly at approaches that can work if you are in a 'let's find some savings quickly' situation.

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