Why You’re Using Your Suppliers Wrong

Why You’re Using Your Suppliers Wrong

What I’ve seen in working with at least 20% of the Fortune 500 is a consistent theme:  There is an overwhelming focus on driving down costs through price negotiations. Anything achieved in that realm is considered a victory.

It’s not a victory at all, however. From a supply chain view, there are no cost savings. Just profit reductions from one link in the chain. And they’ll probably go hammer the link before them to make up for it, and the gorillas in the supply chain win, while the others suck it up.

I’m not really big on hammering suppliers for better deals. That strategy was invented when the bartering system was invented, even before the invention of currency.

And while you may experience success, it’s not where the money is. It’s like trying to increase your household savings by not eating out anymore. It’ll make a difference, but good luck transforming your finances with that. I’d rather you figure out how to make more.

There’s 3 things you need to know if you want to make it in this business:

1) Your suppliers are smarter than you.

2) Most of the cost opportunities are in what suppliers are spending, not what they are making.

3) Taking costs OUT of the supply chain is the future. 

Let me go through each of these.

Your Suppliers are smarter than you. Embrace this or struggle in this profession. You are only buying for your company and your end users are only using these products and services they way they know best.

HOWEVER, your suppliers are selling to endless companies who are trying to solve the same problems as you. Many of their customers do it smarter, and many dumber.  Witnessing both scenarios first-hand makes your suppliers infinitely smarter than anyone in your company, because they learn from the industry, while you still only learn from your company.

In short, failure to recognize this results in suppliers fulfilling many dumb requests. Things they KNOW for a fact is not in your best interest, but their hand is forced to do what you ask.

Why would a supplier fulfill a dumb request? Because bids state “failure to comply will result in bid disqualification”, suppliers receive hardcoded specs and SOWs, and because suppliers have mistakenly confused customer service with doing what the customer asks – even if they’re asking for the wrong thing.

Suppliers also fulfill these requests because your way is oftentimes more profitable for them than the way they know it should be done. Capitalism at its best.

Most of the cost opportunities are in what suppliers are spending, not what they are making.

Your suppliers are probably making ~ 10% in bottom line profit (after cost of goods sold, administrative expenses, interest, taxes, etc). When you squeeze them on price, you are in effect saying “I’m going to focus on the 10% financial opportunity instead of the 90% financial opportunity”.

The reason is that you are focusing in on a tiny cost component – supplier profit – to try and achieve your savings. There are several problems with this. One is there’s not much there. Second is, you will never have an eager dance partner. Third is, the supplier knows how to get that money back post-contract. They all do. And they will. Every time you need something, you’ll get an invoice.

The money is in the architecture of the demand by your internal business unit. I can tell you with 25 years of conviction that your end-users don’t know how to design for cost or total cost. They hardly know how to design for performance outcomes.

End-users mostly know how to design for what they want to buy, but not for what they want to achieve. Therein lies all the cost opportunities. How the demand is architected then defines what suppliers have to spend to do things your way, which in the end is likely not the most cost or performance effective way for your firm.

Taking costs OUT of the supply chain is the future. I’ve been saying it for years – when you squeeze on supplier price, you are just shoving costs back up the supply chain.  You haven’t accomplished a single thing for the benefit of the chain, just for your own supply chain link.

And while it may feel good to take a supplier to the cleaners, this kind of opportunistic behavior – which unfortunately forms the basis for nearly all negotiation classes out there – needs to go in a time capsule and never be opened up again.

And so we get to the crux of this blog: The biggest opportunities you will ever find is by getting out of the habit of sitting across the table from suppliers, and instead sitting on the same side with them.

By focusing on PERFORMANCE OUTCOMES (something virtually no company that I have found does well in their procurement department), you can collaborate with suppliers to determine the most effective and efficient method of accomplishing those objectives.

The supplier’s bag of tricks are far deeper than yours. Their knowledge of the industry and of lessons learned is far deeper than yours. And most important of all, you will now have an eager dance partner, because you are taking costs out of the supply chain for both parties instead of opportunistically squeezing their profits.

CPOs, you need to be driving these behaviors in your departments. This is not about taking training classes or pushing flavor-of-the-month initiatives, this is about weaving this negotiation capability into the DNA of how your organization does business.

Now go off and do something wonderful.

Be your best!

Omid G

“THE Godfather of Negotiation Planning” ~ Intel Corp

P.S.  A message to Chief Purchasing Officers!

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