Monthly Archives: April 2009

Increasing Your Supplier Negotiating Strength

A recent article by Mark Trowbridge in the Supply Chain Management Review covered “seven ways to build your negotiating strength” that should be considered a must read for anyone engaged in negotiations, especially if the relationship with the supplier is not a collaborative one.

  1. Involve Supply Management Early and Often
    This tactic, employed by world-class sourcing groups, will assist in communication and coordination with internal customers.
  2. Differentiate Between Competitive and Collaborative Negotiations
    Competition is a great way to level the playing field and drive suppliers down to market-efficient pricing, provided that there is competition, movement ability, sufficient volume, sufficient time, and a willingness to change. In comparison, competitive bargaining can assist in complex negotiations where you’re “negotiating out of a hole”.
  3. Prepare the Team to Fight the Tough Battles
    As the author notes: 75% of negotiation time should be spent outside of the room preparing data, strategy, and roles.
  4. Empower Negotiations through Factual Data
    There’s nothing more powerful than being able to call out a supplier in a negotiation when you have a well-researched should-cost model that backs up your claim that the supplier should be able to come down 20% if you consent to the volume necessary for optimal production runs.
  5. Negotiate ALL TCO Elements Before Entering a Relationship
    Forget the transportation costs? That’s a shakedown. The holding costs? That’s a shakedown. The disposal costs? That’s a shakedown. The service fees? You bet that’s a shakedown.
  6. Shift the Supplier’s Paradigm
    Even when a supplier thinks they have a deal locked up, it may still be possible to convince them otherwise and create a significant advantage. Starting renewal negotiations early, putting other products or services on the table, and tabling joint development can all play in your favor.
  7. Leverage the Buyer’s Performance
    Use the supplier’s past performance as a lever in negotiating future product or services acquisitions.

And, whatever you do, don’t allow the following mistakes to be made:

  • Letting a supplier know they have the business before the negotiation is done.
  • Creating specifications that can only be satisfied by one supplier.
  • Not allowing sufficient time to complete the requirements.
  • Allowing colleagues and executives “on the supplier’s side” to be involved in the negotiations.
  • Failing to recognize the scope and complexity of a multi-faceted, high-value acquisition.
  • Letting business units make key concessions to the supplier.
  • Allowing “inside information” to fall into the hands of the supplier.

Is Constant Change A Supply Chain Risk or a Supply Chain Reward?

A recent article by Noha Tohamy of AMR Research claimed that “constant change” was the buggest supply chain risk of all. (I assume she meant biggest, as otherwise it would just be a flea-sized annoyance and gnat worth discussing.)

Referencing a study that found that volatile fuel, energy, and commodity prices were the top three risks reported by companies last October, Noha noted how global companies faced a dilemma between the cheaper production costs and labor wages in China and other low cost countries and the high costs of transportation that result during periods of high fuel and energy prices and concluded that constant change must be the biggest supply chain risk at all.

I have to disagree. While volatile markets are a supply chain risk, which is sometimes only dwarfed by supplier solvency (which is probably the biggest risk these same companies are facing today as entire factories are closing up shop overnight without a warning in China) they are only one example of constant change.

Other examples of constant change are the constant improvements in supply chain technology, supply chain risk management processes, and supply chain finance. Today’s on-demand SaaS platforms, when adopted by your supply chain partners, can give you real time visibility into your supply chain and let you know where your order is at any time, anywhere. Improvements in scorecarding and supplier management practices can delivery higher quality products at lower costs. And modern supply chain finance methodologies, that include properly managed early payment discounts and buyer financing, can lower costs for all parties. I think these rewards far outweigh the risks of constant change in the supply chain.

What do you think?

Hidden Costs of Global Sourcing

Purchasing recently ran a good article on “the nine hidden costs of global sourcing” that should not be overlooked if you think global sourcing is your way out of the downturn. It might be, but if you don’t consider all the costs, you could easily make a wrong decision.

As per the article, the following 18 costs (which includes 9 bonus costs found only in the web version) can add up and turn that 20% labor-based savings you expected to see into a 10% loss over your current solution when compared to your current arrangement.

  • Internal Expenses
    The resource intensity of sourcing in unfamiliar markets with unsophisticated suppliers can easily erode forecasted savings by 5%.
  • Supplier Health
    If a supplier goes bankrupt, there go your savings, and then some, when you have to quickly switch to a (much) higher cost of supply.
  • Post-Contract Lull
    In order to insure that savings materialize, you need to monitor the contract in the weeks and months after it is signed. There is a resource cost associated with the monitoring.
  • Duty and Tariff Changes
    A change in the duty or tariff rate could dramatically affect the cost of a product being sourced and the savings that materialize.
  • Contract Non-Compliance
    If your buyers go maverick, so do you savings.
  • True Inventory Costs
    Sourcing from an overseas supplier lengthens lead times, which increases safety stock, and increase time in transit and this significantly increases your average inventory cost.
  • Logistics Volatility
    Not only does increased distance increase your freight costs, but so do rapid increases in freight demand which could cause freight costs to spike.
  • Technology
    Tracking product flow from global suppliers could require new technology, which will increase costs as well.
  • Quality Breakdowns
    If a contract manufacturer’s quality affects delivery of the part or increases the number of failures, it could wind up costing more than originally forecasted and wipe out the global sourcing ROI. And if it forces a costly recall, it could wipe out your business — period.
  • Transition Costs
    There’s nothing “soft” about this cost which will affect initial ROI.
  • Margin/Burden Stacking
    If supplier sites compete against each other, that can cost you.
  • Lost Tariffs/Taxes
    Improper classifications and missed recoveries on VAT add up quickly.
  • Packaging
    If you’re not careful, your supplier might try to profit off the packaging, taking another chunk out of your ROI.
  • Logistics Costs
    It’s not just freight — it’s handling, intermediate storage, and the costs of inevitable delays.
  • Hardware Costs
    Some overseas suppliers have difficulty obtaining standard parts at your cost. Failure to recognize this, and help them obtain parts cost effectively, also costs you money.
  • Labor Costs
    Failure to understand the labor cost breakdown can cost you.
  • Markup vs. Margin
    Know the difference — it can be very substantial.
  • Burden on High Dollar Parts
    Some suppliers may try to burden a $6 part the same as a $6,000! Be careful!