As we approach year end for many organisations, procurement leaders can be forgiven for their anxiety as the deadline looms for the cashing-in of all those cost-reduction initiatives planned and launched earlier in the year. The early year optimism has given way to trepidation as the savings delivery moves ‘to the right’ and a 2011 shortfall looms.
And what happened to those suppliers, in whom we placed such trust to engage with our cost-down projects this year? Some have performed really well, but others seem to have dragged their heels and their commitment to what we need is a bit suspect.
It’s about this time that some procurement leaders organise a supplier conference. November is littered with them, and the agendas can be remarkably similar. The year-to-date performance is less than expected and, as ‘partners’, the suppliers must share some of the blame. What’s required is ‘a contribution’ from the supplier to aid the buying organisation to end the year on a high; usually meaning accelerate those savings. These conferences are essentially about YOU and YOUR business, little more than a challenge to suppliers to sharpen their pencil.
Just a few years ago, a large U.K. company attempted this very thing; challenging their key suppliers with ‘The 5% Challenge’ (or some such theme), almost demanding the suppliers help them out of its financial pickle. The message was clear, and so was the unequivocal response from the suppliers….zero. It was a bluff and the suppliers knew it, and it didn’t do much for the reputation of the buying organisation.
So, are these hastily-arranged conferences at this time of year worth hosting at all?
Increasingly we ask suppliers to quantify their propositions in financial terms that are meaningful to our organisation; not just the price, but how will the supplier’s offering tangibly support our quality, service, delivery, innovation goals, and how will these benefits support both the top and bottom line. Suppliers that are able to do this can create a real competitive advantage for themselves and the buying organisation.
But isn’t it about time buyers more deeply understood what’s in it for the supplier? How much more effective would our engagement with suppliers be if time were taken to quantify the value benefits of our contracts to the supplier in monetary terms?
Calculating the impact of increased revenue and margin for the supplier is relatively easy but there is merit in understanding the supplier’s cost of servicing the buyers account: is the organisation expensive to serve, or easy to deal with? There is a value to the supplier of a customer reference from the buyer’s organisation; what is it? What is the value of future business or a long-term agreement? Can the supplier develop innovative products and services by working closely with the buyer and, if so, what business-winning value does this have for the supplier elsewhere? The aggregate value of the above is going to be different for each supplier, and will change over time.
It is better to engage with important suppliers all year round and understand the full value of your business to them, as well as their value to us. What isn’t in doubt is that it is a lot more effective than a one-off event with the year-end clock ticking loudly.
This blog was first published in Supply Management magazine in November 2011.
By David Atkinson