Supplier Management and Cost Optimisation

Having worked in cost optimisation initiatives with a number of procurement teams in different environments, I believe that the value that can derive from successful management of our suppliers is not usually captured. Here are some thoughts.

Coming from a business/entrepreneurial career start myself and unable to hide my respect and admiration for those that succeed in business and became my suppliers, I made it my business to create a trustworthy relationship that enabled me to turn for support when needed. It may be a little different from big global suppliers, but the basic principles still apply and if put into practice can deliver significant value.

I will never forget a few instances in the telecoms industry that saved tens of millions that I use as examples when talking to procurement teams:

  1. A parabolic antenna manufacturer suggesting that we can buy a smaller diameter model for the TV product using a much lighter fixing bracket and 3 fixing bolts instead of 4. Most of his clients do it, why did we have to have our own spec? 
  2. A mobile phone supplier that comes up with the idea to change our ‘packing-marking’ Annex in the contract and enjoys a small % discount by using his standard packing line. Do we really care if a pallet has 10 boxes of 10 handsets each, instead of 12 boxes of 6 handsets each?
  3. A Set-Top Box supplier wondering about the specification overdesign of the item he was delivering. Looking at it in more detail, it turned out that the full features were used by about 3% of the customer base and the decision was taken to change the spec.

It became evident to me that the supplier often observes the mistakes made in the various stages of the supply chain, and unless the correct relationship has been created, he has no interest to speak up. A supplier once told me that, when he proposed a cost optimisation option to one of his clients, the Procurement Head decided to immediately launch a new pitch, considering that a retendering process was the right thing to do with a new spec. He then lost the job and decided to be more careful next time. 

I believe that, no matter what, ‘the supplier knows better’. 

We have nothing to gain if we are looking at him as the enemy instead of the valuable business partner we can turn him to.  It is an important part of our business to create this type of relationship that will encourage him to support our cost optimisation effort. He may have to sacrifice some revenue without necessarily sacrificing his margins (I have seen cases that margins were improved), but he may end up with a long-term relationship in return. Not being able to stop thinking like a ‘greedy’ Procurement Officer, I am convinced that Supplier Cost Base analysis, etc, is not enough. There is more and more and more value to be harvested if the relationship is serving the purpose.

I will be happy to hear your views, I am sure there is a lot of wisdom out there.