How can procurement cut costs without beating up suppliers?

So... we've had a recent spate of organisations being criticised for asking their suppliers for rebates and reduced prices. The Royal Mail had the temerity to offer their suppliers pastries before asking what they could contribute (in what seemed to me a pretty reasonable manner).  I know one other very large, high -profile organisation that is about to do the same (asking suppliers for savings, not offering pastries), and of course, this is basically what Francis Maude and his team are doing with the top suppliers to UK Government.

We had a couple of excellent comments on our Royal Mail post here.  David Atkinson, ex Rolls Royce CPO, stressed the importance of credibility,

What we were certain about is that we had to retain our credibility at all times. We were, and had to be seen as, deadly-serious and we systematically worked to ‘condition’ the supply base that we WERE going to achieve the results, with a preference for their active participation and collaboration. It’s worth noting that Rolls Royce is not able to switch suppliers easily or cheaply as most changes would require some of form of ‘engine re-qualification’, the cost of which is easily into six figures territory. So we had to work with the existing supply base – INTENSIVELY.

'Guy' pointed out that there can be an upside for the supplier:

I’ve done similar exercises throughout my career. Done in the right way they put the gauntlet down to the supply base to meet the challenge and the right response from a supplier can be game changing in terms of that supplier’s relationship. In the last such exercise, most suppliers gave up a few things, but one supplier made proposals that cut our costs in half, took business from their main rivals and gave them a prominence within the company that they had been struggling to achieve for years.

So taking those comments on board, and our experience, how should you best approach these exercises?

The positioning does very much depend on the situation your organisation is in. If you are genuinely in troubled circumstances, then suppliers will be more open than if they perceive (as in our NatWest example here) that you are not exactly struggling. However, play the 'hard-up' card carefully. Writing to 100 suppliers and telling them you are in imminent danger of going bust might just worry a few shareholders, or make suppliers less likely to extend credit.

But you can still engage suppliers even if things are not so difficult. Do it in the spirit Guy and David described.  Make it clear that you are serious, you are looking for suppliers' assistance; but also allowing the opportunity for them to benefit.

Be open as to where the value improvement might come from.  Benefits can come from suppliers identifying areas of joint process improvement; revised specifications that take cost out for you (and perhaps them); even demand management opportunities where suppliers can see wasteful behavior in your organisation. Do make it clear that you want the 'warts and all' story, even if it makes your organisation look less professional.  In my experience, suppliers will often see your opportunities for improvement that are less visible from inside the organisation!

But what about pure 'threat'? If you have enough power, then by all means use it. If procurement has previously been weak in your organisation, there may be enough fat (supplier margin) in some spend areas to generate immediate benefits. But it is rare in my experience for suppliers to just take this on the chin.

I once worked in the food industry (not in my time at Mars I should say) and we did get demands for price reductions from big, powerful retail customers. Sometimes we had to accede. But the next step, given our wafer-thin margins was, of course, to see how we could take cost out of the product. That didn't always mean lower quality; but often it did.

There's also sometimes an assumption that “if we're going through tough times, then everyone must be, so there must be scope to negotiate some savings”. That's not always the case; at the moment, while some industries are struggling, those which have robust export businesses to the Far East or South America may be booming. Suppliers in those markets may NOT be be desperate for business at any cost.

And in all cases, the better your information is - around spend, compliance, and supplier performance - the more ammunition you have to identify opportunities and bring appropriate pressure to bear on suppliers.

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