In the old days, purchasing had two levers in negotiations: the (rubber) mallet, which they used to bonk their suppliers over the head when they did not like the way negotiations were headed, and the carrot, which they used to try and convince suppliers to lower their prices. The particular mallet and carrot would change depending on the negotiation in question, but the goal was always the same — to convince suppliers to offer better terms in exchange for an award (the carrot) or to convince suppliers to offer better terms to prevent a loss of business (the mallet). For example, the buyer might offer the widget supplier part of the gadget buy as well for a 10% decrease in price (the carrot) or might threaten to take the gadget business off the table (if the supplier already had both categories) if a price decrease of 5% across the board was not agreed to (the mallet). A traditional purchaser would alternate between the strategies depending on the supplier, and might even use both in the same negotiation to try and extract the best deal.
However, these days, purchasing has more levers than just the carrot and the mallet, including win-win levers like total cost awards enabled by optimization, new opportunity identification enabled by cutting edge spend and data analysis, and innovation enabled by supplier collaboration and enablement technologies. But many organizations, who are obviously not innovative best-in-class, fast-acting leaders, or even average supply management organizations, still rely almost exclusively on the mallet and the carrot.
It’s a very good question that needs a damn good answer, especially given today’s economic climate where, thanks to the multiple financial crises, your average supplier is probably in, or about to be in, a credit crisis, if they weren’t already in a crisis with the explosive increase in most commodity costs over the past year and the recent increase in DPO (Days Payable Outstanding) at organizations trying to improve their working capital that failed to see the big picture. (This is one of the three sure-fire finance strategies for supply chain failure.) Now more than ever you need to work with your suppliers to find the best-deal that allows both of you to win … and this means abandoning the time-honored mallet and carrot negotiation techniques of supply management past.
The three techniques identified above will save you millions on their own if you haven’t applied them effectively before:
- Total Cost Decision Optimization
It will help you jointly identify savings that can come from better inventory distribution, manufacturing distribution between plants, and raw material cost savings on raw materials that can be bought in bulk, by or on behalf of your supplier, across needs in multiple categories — allowing you to save money without forcing your suppliers to accept unsustainable margins.
- Spend Analysis
As pointed out in Opportunity Identification, the savings opportunities that arise just from knowing where you are overspending, and where you can consolidate spend, is significant. Just focussing your efforts on the right buys will save you more than hammering an extra 2% in a negotiation on an insignificant buy.
- Collaboration and Enablement
When you work together to help a supply manufacture more efficiently and cost effectively, you can often find significant savings opportunities that would otherwise go undiscovered. Consider a recent client of Apriori who found that a different manufacturing process could reduce the production cost on a $4.80 part to $0.80, a savings of over 80% on a six figure annual buy!
And this just scratches the surface of the innovative techniques for savings that have been covered in this blog over the past few years. So if you really want to succeed in the new supply management economy, throw away the mallet and the carrot before you bonk yourself on the head and bite off more than you can chew.