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I had the opportunity to attend a presentation by Professor Rob Handfield on supplier risk yesterday. He had a great deal of advice for companies on early warning signs of danger from suppliers, as well as some recommendations for working with key suppliers to reduce those risks. But one quote in particular regarding the risk posed by the record number of bankruptcies and the role buyers sometimes play in pushing their vendors towards financial trouble, really resonated with the audience:
“If we believe a rebound will happen, the last thing we should do is hammer these people (suppliers) on prices and payables.”
It reminded me of an extremely well done, funny video that shows how the buyer’s hard bargaining tactics used with vendors would look if applied in the real/consumer world…
The take away message is that “hammering” suppliers on price (with tactics humorously illustrated above) may put your suppliers and thus your supply chain at risk. In the short term, the problem may be in the vendor’s liquidity and financial health. And if they fail, what’s the impact on your supply chain? Certainly it will cost more than any costs savings earned by pricing pressures or extended DPOs.
And if we think about suppliers who have the financial means to survive the recession, the relentless price pressure many buyer place on their suppliers may damage their mid/long term relationships. Sooner or later, this economic crisis will end. And at that point, we’ll likely have a marketplace with a reduced number of potential suppliers for many categories. When that rebound occurs and the suppliers are getting more and more business, leading to capacity issues and price increases, it will be extremely beneficial to the be the “buyer of choice”.
Very interested to hear if/how you’re looking at strengthening key relationships, with an eye on the post-recession time frame. Are you focused solely on cutting short term costs? Or are there steps you’re taking to become that buyer of choice? (It’s potentially a sensitive subject, so leave comments anonymously if you must).
Justin Fogarty is Managing Editor of Supply Excellence. For any questions or feedback on the blog or its contributors, Justin can be reached at jfogarty[at]ariba.com.
8 responses so far ↓
1 anonymous // Jun 4, 2009 at 8:30 am
I do not agree with the writers conclusions regarding waiting for “better times” to press for price reductions. Purchasing decisions are not based upon price alone, but more upon the percieved total value the supplier brings to the customer. Suppliers act in their own best interest, just because a Buyer presses for a price decrease, doesn’t mean a supplier has to provide the decrease. Business is very Darwinian, that is to say companies that innovate survive, weak companies may not survive tough times, and Buyers that associate with weak companies may find thenselves without suppliers or worse that their own organization may not survive. The end consumer is the final arbitrator of value, it is the job of each supplier in the line of buyers and sellers that comprise the supply chain to do their very best each day to provide this maximum value. There can be many winners, but sadly not very company will be a winner, it is the Buyers job, along with others within the Buyer’s organization to sort out the winners from the also rans.
2 JLP // Jun 4, 2009 at 8:33 am
I agree this does add to risk, but on the other hand many suppliers have been bought and sold multiple times by equity groups or others creating excessive debt. As a customer, this debt is purely non value add. I am not interested in paying the holding company for debt they incurred for paying to much for a company.
Part of managing risk is finding alternate suppliers willing to be cost competitive. Look at monomer prices currently, they are below the historical average by quite a bit. The chemical producers are not passing all of this reduction through to the end customers. They followed it up quickly last fall and were slow to respond with the sudden drop.
The lean companies with good management and sound financial decisions will survive. The over leveraged, poorly managed companies are going to go bankrupt and as a buyer our job is to identify these at risk suppliers and find alternatives. If it is sole source situation it should be a priority for the company to develop alternatives designs or sources.
There is a balance between price and service as both the customer and supplier and that is what purchasing departments have to be able to identify and evaluate.
3 JeffH // Jun 4, 2009 at 9:15 am
If I don’t press my suppliers for price reductions and my competition does, my company is at a disadvantage. Why should I subsidize their savings?
If we don’t take advantage of the current soft market to get lower prices now, we will pay even more when the inevitable inflation that will follow current goverment monetary policy causes prices to rise.
4 Bryan Larkin // Jun 8, 2009 at 2:33 pm
Justin,
I read your post as a strategic piece encouraging supply chain (not buyer/seller) thinking. This assumes a company is focused on thinking about the entire supply chain as opposed to thinking of just one link - the relationship with the immediate seller.
Studies have shown that retailers (non-VMI) change their POs an average of 4.4 times, but don’t automate those changes. While the original PO might go via EDI, most changes are done manually. Findings point to a desire on the buyers part to be able to change their mind up to the last minute and the sellers desire to not receive a cancellation electronically that he/she doesn’t have a chance to influence before it is executed.
When retailers and their suppliers optimize their business for this purchasing agent/sales rep compensation model instead of optimizing the supply chain, we see the things we’ve seen for years:
* high stock outs
* an average of 2% of gross sales in compliance penalties paid by suppliers to retailers
* high numbers of unique, tactical compliance requirements that drive supplier costs up
* higher inventory stock
* lower margins
* significant supply chain inefficiency
While the buyers responding to this piece so far have made a great case, it is within this framework rather than from a strategic, multi-tier supply chain standpoint.
Everyone in the supply chain needs to focus on the competitiveness of the supply chain, not the best price for an item. Often the hidden costs of low prices end up being higher costs in the operational aspects of the relationship - costs that often don’t get tied back to the original purchase process.
Wal*Mart is driving long-term relationships with their Chinese suppliers not just because of cost considerations for products, but for overall supply chain efficiencies. While some of the marketing hype talks about “environmental sustainability”, that is just another word for efficiency - less waste is both financially and environmentally desirable.
I agree with your strategic fundamental point. We have to make our supply chains function better - and the cost of goods is just part of the equation for corporate financial health. If your supplier isn’t around, you won’t have product to sell and you won’t be competitive. Yes, you need to have alternatives, but are the products competitive, can you trust their supply chain if you have to move to them quickly? Have you already automated with them “just in case”?
This latter point is an area I see too often ignored. I’ve worked with many retailers that keep a “just in case” relationship with 10% to 20% of their suppliers, but don’t bother to automate with them. Considering it may take many months to get a mature B2B relationship up and running, moving business to a back-up can be quite costly operationally for some period of time - especially if the back up supplier is in an emerging market. Margins for these relationships will be negatively impacted, stock outs will be higher, and consumer satisfaction will suffer. The question is, if you lose the consumer, will you get them back.
5 Leo Harris // Jun 14, 2009 at 12:48 am
One thing that I have noticed that no one has mentioned. The economy may be hard on the buyer, but you have to remember that the economy is equaly hard on the supplier. I have reduced just my inventory costs by $35,000 in the first six months of this year and reduced my overall budget by 6% over last year. Right now, suppliers are cutting prices just to keep afloat in these trying times. So instead of trying to beat them up on pricing, let them compete and let them know you are in the market for new suppliers. Its amazing how fast prices can drop on thier own.
6 ESH // Jun 19, 2009 at 10:03 am
For me, all vendors’ prices are open for negotiation. In these times, if our vendors have not trimmed their fat, they have put themselves at risk. It would not be my lower pricing that would put them under.
We cannot dictate pricing. We simply apply the pressure that helps the vendors apply the pricing that they deem appropriate for the current market.
Our vendors did not have a problem asking for price increases when their costs were high. Now that their costs are down it is our responsibility to bring the higher costs back in line.
7 John // Jun 27, 2009 at 12:00 pm
“Hammering” is not a good long term strategy. Regardless of what side of the table I’m sat on I try to be sure I know what a fair market rate is for whatever I’m buying or selling and work around that.
Of course I don’t like to leave money on the table, but if I feel that I’ve been screwed on a deal, that is a company that will not get business from me again, and I’ve walked away from a few deals in my time because I’ve not been comfortable with where things are going.
My integrity and reputation are more important to me, and I’ve established those through fair deals.
8 Supply Excellence — Post-Recession, will you be more efficient? More effective? // Oct 21, 2009 at 9:06 am
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