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The Procurement Conundrum: Savings or PR?
These are tough times to be in business. Costs are rising but selling prices are not, mainly due to global competition. The arithmetic is simple: profits are being squeezed. Finding ways to drive down costs lower than your competition's has become more important than ever – but value and customer service can’t be ignored either.
I like to take an approach to supplier negotiations that I believe will help you gain an edge in these tough times. It starts by finding an answer to the ‘procurement conundrum’.
Many procurement pros are handicapped by having to wear two hats:
First there's the tough-negotiator hat. Driving down costs is a fundamental part of the job; that's why we spend so much time negotiating.
Then there's the good-relations hat. Production requirements and customer needs are constantly changing. Procurement needs suppliers to react quickly to fluctuating demands. As a result, we need to cultivate give-and-take relationships to make sure this happens.
It's easy to see how the two ‘hats’ conflict. Imagine phoning a parts supplier on Friday to coax him into running an unscheduled weekend shift, then on Monday asking for a better price. It’s hardly a recipe for long term success.
Asking for favors undermines your negotiating position. Tough negotiations and good relations make an awkward couple. I suggest trying a tag team.
Get some help from your colleagues in finance; form a tag-team with your Controller! Let him play the tough guy, while you are the supplier’s understanding working partner.
Here's how this strategy works. Suppose your pallet supplier has been doing a good job and is asking for a modest 2% increase for next year.
Your Controller says, ‘Forget the increase – I want to cut our pallet budget by 1% for next year.’ He has information that wood prices are down over 2% (see graph), and estimates that about half the cost of a pallet is in the wood itself. He believes the 1% reduction is fair and sends you a memo explaining his rationale, including a back-up graph & calculations.
Next, it's your turn. You share the Controller's memo with the supplier, adding that it's hard to argue with the logic. You might even offer to help by asking if there is something the Controller overlooked that you might take back for discussion.
This approach changes the whole negotiating dynamic. Chances are you'll walk away with a fair price and a good working relationship with the supplier - like having your cake and eating it too.
Do you know the story of the two boy scouts walking in the forest? They take off their shoes to ford a stream. On the far bank they see a black bear heading straight for them. They race back across the stream, but when they look around, the bear is even closer.
One scout sits down to put his sneakers back on. "Are you crazy?" yells the other, "shoes aren't gonna help! You can't outrun a bear!"
The other scout smiles. "I don't have to outrun the bear… I just have to outrun you."
It's all about outrunning your competition. And clearly, companies that have the knowledge and techniques to drive down costs most effectively are more likely to survive in this new world of unrelenting global competition and continuous margin pressure.