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Suppliers like you because… Discovering all your leverage points
Terence Lillew
A common strategy for lowering procurement costs is the consolidation
of a commodity or service with fewer suppliers. Purchasers feel if they leverage their buying power, they’ll gain a commercial advantage; and in most cases, they’re right. Becoming an ‘A’ customer to one firm is better than being a ‘C’ customer to several.
But that’s not their only leverage point. The following is a list of discussion points to consider when a cost management strategy is explored.
1) Dollar volume
There’s no question the amount of money a company spends annually on
commodities and services is its primary leverage point. When a supplier can budget resources based on a predictable volume of work, costs can be managed at a lower threshold.
When the supplier can forecast his personnel and equipment requirements, the savings can be shared in the form of increased discounts. For that reason, a purchasing department with a strong ability to plan and forecast is very attractive to suppliers.
2). Size
A corollary to dollar leverage is the size of the organization. Generally speaking, the larger the organization, the better the discount structure. But this can also be a detriment. Where the organization is large and unwieldy, with layers of bureaucracy and process, suppliers must add a cost factor to offset the time associated with servicing that account.
3). Leadership
The leader of the organization establishes the tone for the business values. If a leader has a narrow interpretation of his constituents, such as strictly on the shareholders, he could be eroding long-term credibility.
Where a leader is respected for his views and opinions, and has demonstrated his long-term effectiveness, the company can lever itself into a better commercial position.
4). Business philosophy
A fair and ethical business philosophy that looks for solutions instead of attaching blame, continually improves and supports creativity will give the organization a competitive edge.
This isn’t an easy task. It’s more than writing a value statement and posting it on the wall. It’s constantly living the values. A superior business reputation can be an extremely valuable leverage point.
5.) Policies and process
If the company’s purchasing department is responsible for the business process, but the company tacitly supports the awarding of business through their technical staff, suppliers will adjust their sales strategy accordingly.
When commercial comparison and validity is left unscrutinized, the organization’s cheque book takes a beating. If the policies and processes are outdated, they must be reviewed and amended consistently, so suppliers feel confident in submitting their best offers.
6). Early influencer
When a company is an innovator, and isn’t afraid to trust its instincts, they gain a certain renown. An affinity for change, and the ability to assess and adopt new technology makes them an industry bellwether. This celebrity can be used to leverage procurement. Sales organizations will want to be seen as a partner, as they can enhance their own reputation by the association.
7). Benchmarking
Benchmarking is the practice of comparison. But it’s not copying. Duplicating what another company does only allows your organization to be in second place; always chasing instead of leading.
A company should always be measuring itself; against last year’s
performance, against its peers and competitors; even outside of its industry to establish new norms. Organizations that set goals for both itself and its supply base are desired by vendors.
8.) Buy locally
Placing as much business locally, and aligning with strong local vendors allows a company to reduce inventory. The quality and speed of service is greatly enhanced. There may be a cost premium, and it’s important to understand what this premium represents. A large premium may not be acceptable. The tradeoff has to be shared. Local
business should not take it as a right that they don’t have to compete, and the company must understand and balance the relationship issues between their personnel and the local suppliers.
9). Payment cycles
Another leverage point known and understood, but rarely taken advantage of, is a company’s ability to improve its payment cycle. Accounting departments have stretched payment cycles to a standard of more than 60 days.
If a company can offer payment terms of less than 25 days, suppliers
will look at extending an additional one to two per cent discount. When annualized, this can mean an additional discount of between 10 per cent and 20 per cent.
This point has to be used judiciously, as vendors supplying a product that can be deemed a commodity may not have the margins to give this incentive.
In conclusion, if a company is going to manage costs, while maximizing value, it must know what it’s bringing to the table, and what it’s worth to suppliers. b2b
Terence Lillew, C.P.P. is president of Calgary-based consulting firm, Better Business Decisions Inc. He has more than 30 years experience in purchasing. He may be reached at bbd@shaw.ca
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