Going Fishing with Suppliers
When the going gets tough, sometimes the best thing procurement can do is drag a supplier into a fishing boat and make it clear they need to land a whopper or the boat is going to sink with everyone on board.
Once supplier costs are transparent and the buyer/seller relationship is non-adversarial, deals tend to close more quickly and smoothly at competitive pricing levels. The opportunity now exists to use the freed-up time to take relationships to the next level. “Fishing with suppliers” means working together, investing time and effort to uncover savings and sharing the catch so both parties benefit.
As the old saying goes, “Fish where the big fish are.” That may seem obvious, but what isn’t obvious is where in the supply chain to look for the biggest savings opportunities. The answer may surprise you. ‘Trophy’ fish are usually found in supplier organizations: inside the heads of their managers, engineers, operations and production planning staff.
Here’s an example (based on a true story)…
Let’s say you work for a packaging company that makes paint cans. One day, to your shock and surprise, the president calls you into her office and tells you the competition is selling the same paint can you make for 25% less. And it’s not just a one-time deal: they’re offering your customers long-term contracts that guarantee this new pricing!
“Chapter 11 is less than 3 months away if we can’t figure out how to match the new price and still make money,” she explains. The problem seems unsolvable – reducing prices by 25% means the cans would sell for less than you are paying for the steel!
You ask yourself, “How on earth can our competition be paying so little for steel? I am a good buyer; it makes no sense that our price would be so out of whack!”
What do you do?
You drag your supplier into a fishing boat and make it clear you need to land a whopper or the boat is going to sink with everyone on board.
As it turned out, the steel supplier did have the answer. Their staff had deep technical knowledge about steel making. They knew that about 6% of all steel produced is not flawless, prime quality. This ‘secondary’ steel is quietly sold (for about half the price of prime) to steel service centers, on the condition they keep it out of the prime marketplace. The supplier also knew that a portion of the secondary steel would be quite suitable for paint cans because some flaws (e.g. wavy edges, small specks of embedded dirt, annealing stains, etc.) would not affect the function or appearance of a paint can.
They had always resisted selling secondary steel directly to customers in order to preserve prime pricing levels in the marketplace. But clearly their competition was breaking rank and selling secondaries directly to customers (a.k.a. our competition). No wonder they could drop can prices by 25%: they were paying 50% less for steel!!
Within a week, the company in our story was also buying secondary steel, matching their competition’s pricing, and making reasonable margins. In the end, they stayed in business, their supplier retained a valued customer, and their fishing boat became a trawler.
The role of a supply chain professional is to be the catalyst that makes things happen. He or she is can become a bridge, encouraging new ideas and creativity, and helping both organizations become more profitable..
The best part of fishing with suppliers is the job satisfaction that comes from being an agent of positive change. Procurement will earn respect and appreciation from their colleagues and senior management while adding to the company’s bottom line. And they’ll wind up with a string of trophy fish to show management at performance appraisal time.
If you’re interested in judging for yourself if cost transparency really works, join thousands of other procurement professionals and take out a free trial to ProPurchaser (no credit card required).