As a Procurement Professional, your primary focus is on reducing spend, because that’s the greatest contribution to the bottom line that an organization can make. When one dollar of savings equals ten dollars of profit, it’s pretty easy to focus on squeezing every penny you can out of that supplier. But you can go too far. For example, if you push the supplier’s margin to minimally sustainable levels, and raw material costs rise, either the supplier is going to go belly up, or sacrifice on quality (with cheaper materials or processes).
If the supplier sacrifices on quality, and you don’t realize it until after the fact when customers start returning goods, your organization is going to have trouble giving the customer an excellent customer service experience, which is key not only to customer retention, but to profit. I was reminded of this when I came across this recent article in CRM buyer on the value of excellent online customer service. The article notes how a recent survey has revealed that customers are willing to pay a 9.7% premium for good customer service (and a 10.7% premium for customer service online). In other words, the only thing most organizations have to do to increase revenue by 10% is provide quality service around a quality product!
So keep this in mind the next time you’re trying to reduce an already good deal by an additional percentage point. If that’s the difference between good quality, and a product that is defective 10% of the time, then that 1% savings is costing you 10% revenue, which is not a good deal at all.