ProPurchaser Best Practices

Print  |  Share  | 

Create a Tag-Team to Wrestle Costs Down

Create a Tag Team

Tough times

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.

Here, we describe a different approach to supplier negotiations that might help you gain an edge.

The Purchaser's conundrum

Many Purchasers are handicapped by having to wear two hats.

First there's the tough-negotiations hat. Driving down costs is a fundamental part of the job; that's why Purchasers spend so much time negotiating.

Then there's the good-relations hat. Production and customer needs change constantly. Purchasers require suppliers to react quickly to fluctuating demands; and, hence, need to cultivate give-and-take relationships to make sure this happens.

It's easy to see how the two roles 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.

Doesn't fly: asking for a favor undermines your negotiating position. Tough negotiations and good relations make an awkward couple.

Try a tag team

So get some help from your Financial colleagues. Form a tag-team with your Controller! Let him play tough guy, while you are the understanding working partner.

Here's how this strategy works. The simple wooden pallet will serve as an example. Suppose your pallet supplier has been doing a good job and is asking for a modest 2% increase for next year.

Your Controller enters the ring saying Forget the increase – I want to cut the 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 value of a pallet is in the wood itself. He says minus 1% is fair and actually sends you a memo explaining his rationale, along with the back-up graph & calculations.

Tag Team Chart

Next, it's your turn in the ring. Armed with the Controller's memo, you deliver the bad news to your 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 negotiating dynamic. Your supplier is now in defensive mode, and chances are you'll come out of the ring with a better price and your working relationship intact- like having your cake and eating it too.

Get out in Front

Know the story of the two boy scouts walking in the forest? They take off their shoes to ford a stream. At the far bank they see a black bear heading straight for them! They race back across the stream. When they look round, 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 scout smiles. "I don't have to outrun a bear… just 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.

Print  |  Share More Best Practices