Going Fishing with Suppliers

Over the last few weeks, we’ve worked our way through the Four Cornerstones for Leveraging Cost Transparency. If you missed any of those articles, you can read them here:

• Are you following The Golden Rule?
• Using Should-Cost Models – Actionable Transparency
• Converting Sales Reps into Champions for Your Cause

Just one cornerstone left, and this is where, in my career, procurement became the most rewarding and interesting - ‘going fishing’ with suppliers.

If you’ve implemented some of the ideas contained in the cornerstones above, your suppliers' costs should now be transparent, either through should-cost modelling or through cost-history graphs. You should now have relationships with your salespersons that are non-adversarial, and you’ve reached a place where deals tend to close smoothly, at competitive pricing levels.

Now we get to take that supplier relationship to the next level. When I suggest ‘fishing’ with suppliers, I really mean working together with them to land savings opportunities and then sharing the catch, so both parties benefit.

I had a boss who used to say, “Fish where the big fish are.” Pretty obvious, but what isn’t obvious is where, in your supply-chain, you will find the biggest savings opportunities. In my experience, the trophy fish are to be found in your suppliers’ organization: inside the heads of their managers, engineers, operations, and production planning staff.

Here’s an example (actually a true story)…

Let’s say you work for a packaging company that makes paint cans. Of course, you are continually working to reduce input costs. One day, to your shock and surprise, the president calls you into her office and tells you the competition is suddenly 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,” she explains. “If we can’t figure out how to match the new price and still make money.” The problem seems unsolvable - reducing prices by 25% means cans would sell for less than you were paying for the steel. You would lose money on every sale!

You ask yourself, “How on earth can our competition be paying so little for steel?” 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 sinks with everyone on board.

In our story, it turns out that that the steel supplier was able to come up with the answer, mainly because 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 some of the secondary steel would be 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, we were also buying secondary steel, matching our competition’s pricing, and making reasonable margins. We stayed in business, our supplier retained a valued customer, and our fishing boat became a trawler.

The role of a supply chain professional is to be the catalyst that makes things happen. You're the bridge. You are in a unique position to encourage new ideas and creativity.

The best part of fishing with suppliers is the job satisfaction you get from being an agent of positive change. You also get respect and appreciation from your colleagues and senior management while adding to your company’s bottom line. And -- you'll wind up with a string of trophy fish to show your boss at performance appraisal time (and add to your resume).

If you’re interested in going fishing for savings with your suppliers, click here to sign up for a free trial membership to ProPurchaser.