Speaking to a number of procurement and supply chain professionals, all survivors of past downturns inevitably the conversation turned to companies aggressively slashing capital spend, jobs being axed and suppliers being asked for price reductions.
Cost cutting is effective at generating immediate cash, but not sustainable if unaccompanied by changes long term that affect the way your procurement function operates, but it’s important not to lose sight of your most important supplier relationships while you’re addressing other goals.
While action such as extended payment terms are on the rise, delaying payments beyond the agreed length of time specified in your contracts it is clearly not the way to win your suppliers’ favor.
Well one option is to work with your suppliers to find ways to save money together. One procurement manager explained how his company had taken a collaborative approach when it found that its suppliers feared its cost reduction efforts would be seen as simply pushing costs onto its suppliers. The company viewed cost reduction as an opportunity to collaborate with their supply chain. The category management team identified suppliers that would be willing to work together and was open to sharing information. Then, the team created should-cost models - using information based on historical costs, market insights, publicly available data, and category experts - to better understand their supply chain costs and gain insight into the supplier economics. They then used their should-cost models as the centerpiece of a dialogue with the suppliers. Together, the two parties would validate the category team’s calculations and evaluate the costs of alternative scenarios.
To further encourage suppliers to participate, they negotiated agreements that let suppliers share in the savings.