Best Practices

The Procurement Conundrum: Savings or PR?

Asking for favors undermines procurement’s negotiating position, and tough negotiations and good relations make an awkward couple. Why not try a tag team?

These are tough times to be in business. Costs are increasing, but competition is keeping selling prices from rising proportionately. The arithmetic is simple: profits are being squeezed. Finding ways to achieve costs lower than your competitors’ has become more important than ever – but the need to preserve good supplier relationships can’t be ignored in the quest to drive down purchase prices.

Procurement needs to take an approach to supplier negotiations that will allow them to have it both ways: the most competitive prices coupled with great service. We call this the ‘procurement conundrum’.

Most procurement pros are challenged 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 procurement’s negotiating position. Tough price negotiations and a good service relationship often make an awkward couple.

Why not try a tag team?

Get some help from your colleagues in finance and form a tag-team with your Controller. Let him or her play the tough cop, while you play the good cop: the supplier’s understanding working partner.

Here’s how this strategy works. Suppose your trucker has been doing a good job and is asking for a modest 2% increase for next year.

The company Controller says, ‘Forget the increase – I want to cut our freight budget by 1% for next year.’ He has information that diesel prices are down about 2.5% (see graph below). He estimates that about 40% the cost of running a truck is the fuel, and, therefore, the 1% reduction is fair. He sends procurement a memo explaining his rationale, including a back-up graph & calculations.

Next, it’s procurement’s turn to enter the ring. 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 can mention.

This approach changes the whole negotiating dynamic. Chances are you will walk away with a fair price and a good working relationship with the supplier – like having your cake and eating it too.

This is like 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.”

Success is all about outrunning the competition. And clearly, companies that have the knowledge and techniques to drive down costs most effectively are more likely to become low-cost producers, fit to survive today’s unrelenting global competition and continuous margin pressure.

Call to Action:

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