The primary driver for procurement in most organisations is to reduce the price paid for goods and services. However, a number of high-profile news reports take the view that cost reduction initiatives can sometimes go too far. Can that really be the case?
A number of these news reports have highlighted how some major retailers have developed what has been called an “adversarial” relationship with suppliers. They have even used words like “bullying” to describe their approach to managing supplier costs.
This issue highlights the increasing challenge for procurement and the balanced approach that it needs to take. We’ve all heard tales of buyers “playing hardball” to hold out for the absolute best price and, of course, there’s nothing wrong with negotiating lower prices from your suppliers. What is needed is to reflect on why you use third-party suppliers and what you use them for.
Why do you use suppliers?
Organisations engage third-party suppliers for a number of reasons. It’s usually because it’s more cost-effective to source the product or service than to do it produce in in-house. However, the situation may be more sophisticated that that.
Increasingly, organisations want their supply chain to be as agile as possible. That means not holding stock and having flexible ‘just in time’ delivery of products direct to individual locations. It could be that the organisation needs its suppliers to adapt or innovate their product.
Balancing the value equation
When you’re buying commodity products that a variety of suppliers could equally well supply, the value equation is fairly straightforward. If you need or expect some level of partnership or adaptability from your supplier then bullying the price down and down may prove to be shortsighted approach.
If you need your suppliers to invest in their product – or to invest time and attention in their relationship with you – then a respectful, ‘win-win’ approach will yield better long-term results.
Is the ‘hardball’ mentality damaging?
Beyond the results of individual tenders, some commentators suggest that taking a purely ‘hardball’ approach actually reduces the effectiveness and potential of procurement. It switches the focus from strategic goals to simple cost reduction.
The result of excessive cost reduction initiatives may be that organisations miss opportunities to develop their products and innovate their own offering because their suppliers don’t engage with them at a senior or strategic level. In an increasingly disruptive and challenging business environment it may be that seeing the bigger picture is pivotal to success.
To see how next-generation e-tendering technology let’s you build ‘best value’ into your procurement whilst optimising pricing for commodity purchases, contact us now to arrange a demo or download our latest white paper.
