The Wrong Way To Get Cost Reduction

There’s a right way and a wrong way to do everything. Bullying suppliers into slashing their prices, as alleged in this report last week, is the wrong way to control costs. While the report concerns a UK company in the retailing industry, the practice of bullying is in no way restricted to that industry or country. US automotive manufacturers were notorious in the past for their hardball tactics with suppliers, though today they see the value of collaboration. Some miners in North America were bringing heavy pressure on suppliers to slash prices last summer.

There is nothing wrong with negotiating lower prices from suppliers. That’s what procurement is supposed to do. But the key word is “negotiating,” and that implies treating the other side with respect and ensuring that there is some benefit to both sides. Sadly, sometimes those elements are missing in business dealings.

Don Klock, professor of supply chain management at Rutgers University and former CPO of Colgate Palmolive, nailed it in a quote he gave Procurement Leaders last week: An adversarial approach switches the focus from strategy to simple cost savings, he said.

Most CPOs realize that fact, as evidenced by the trend of the last few years toward more collaboration with suppliers. Turning key suppliers into business partners by sharing technology roadmaps and strategic plans, aligning key executives in buying and selling companies, providing incentives for innovation, involvement of suppliers early in product development, and establishing long-term contracts are all better ways to get price reductions in the long run than holding a gun to suppliers’ heads.

There is another word that applies to buyer-supplier relationships besides “negotiation.” That word is “capitalism.”

Just as it’s right and fair to work with suppliers to cut costs, it’s right and fair for suppliers to take steps to protect their own businesses too. Facing excessive, bullying pressure on costs from a customer, they may decide to spend more time servicing and working with other customers who treat them more as partners. They may not be forthcoming with industry and market insights that can be helpful and may not present their best innovative ideas. They may also do something else that Don Klock alluded to: Look elsewhere for business.