If you’re in procurement, the chances are good that you’ve had the experience of doing a great job and making some really impressive savings, only to find the goalposts have been moved three months later. What can you do when you’ve market-tested every service? You know that you have the best value for price and are confident that you have cut your supplier’s prices to such an extent that he’s barely making a margin, yet your CFO still asks for more.
More cost reductions, more value-add… there’s a limit to what can be achieved, right?
If you have no real market power or influence, there’s really nothing you can do but fail, right?
Wrong on both counts.
What do you do when faced with this situation? The secret to achieving the best value in the long term doesn’t lie in squeezing every last penny out of spend. The clue is in the description. Best VALUE. Anyone can buy cheap – you set up an e-auction and watch the prices fall to the bottom of the market and that’s great…for now. But come next year, the ability to squeeze more out of that price will be significantly reduced. So how do the best firms in the world continue to create value, year over year?
Supplier relationship development is key. The best, most productive, organizations in the world have long term relationships with trusted supply chains. They identify and nurture those key suppliers who want to grow and work together, who can be innovative and share a passion for improvement.
What we can learn from the automotive world?
A prime example of this is the car industry, and Nissan in particular. Nissan works with its suppliers to evolve and develop its products and processes – it doesn’t take an ax to margins, it takes the long term view. This has resulted in supplier relationships lasting decades rather than years. It is through this kind of innovation and supply chain efficiency that true value can be achieved. Had they gone down the route of short term price cutting, they might have achieved 5, or even 10 percent savings in year one– and perhaps again in year two – but the chance of consistently repeating it year on year is next to zero. Nissan chose instead to look at longer term service innovation, working with suppliers to refine requirements and innovate ways of working, resulting in longer term benefits of 30, 40, even 50 percent. This is why a family hatchback today costs less (as a percentage of wages) and has levels of equipment and performance that far outweigh the luxury cars of just 10-15 years ago.
By investing time and energy in developing longer term, trusting relationships with key suppliers, firms such as Nissan are able to consistently get better value from their inputs, driving value for their customers and thus benefiting from sales success.
Working with and influencing stakeholders
According to a Proxima l Supply Management Insider Survey, 60 percent of procurement professionals felt engagement from the top was one of their biggest challenges. Over 50 percent of procurement professionals felt the business expected them to make cost savings a top priority in the next 12 months. As a profession, procurement practitioners need to work closely their stakeholders – especially their CFOs – to change the narrative from “cost” to “value.”