Key Questions When Assessing Supplier Health

A recent article over on Industry Week that indicated that it is “time for a supplier health check” made a good point — Tier 1 suppliers may need to expand globally in the high-growth markets more quickly than they had originally anticipated, and manufacturers need to know if their Tier 1s are up to this challenge. In order to make this assessment, they have to do a detailed supplier assessment of their current Tier 1 suppliers, which should ask, at a minimum, these questions:

  • Does the supplier have access to capital to retool and meet an increase in demand?
  • Does the supplier have the talent to support a ramp up? Or did they do significant layoffs?
  • Does the supplier have the leadership to accomplish a ramp up? Or was the management team significantly reduced by layoffs or attrition?
  • Does the supplier have the right technology to support new systems and processes?
  • Does the supplier have the right financial controls in place to support a larger operation?
  • Is the organizational structure suitable to expansion?
  • Does the supplier have a viable business plan to support an expanded operation? Has it been executing against the plan?

If any of these questions yield negative answers, the supplier might need to be replaced. The alternative, if the supplier is critical, is for the organization to take an ownership position in the supplier and get it back on track. Either way, the supplier base needs to change.

Negotiation Tactics with Naughty Vendors

As discussed in Common Negotiation Ploys, while your goal as a procurement and contract professional is to get the best deal you can, the sales people at each and every vendor that you deal with have the same goal. And while you’re splitting your time between determining internal customer requirements, writing RFXs, negotiating contracts, managing contracts, and educating and managing your internal customers, your sales counterparts get 100% of their time dedicated to sales — and they’re spending all of that time trying to figure out ways to get more money from you.

And if they can’t get it from an honest day’s hook, the vast majority have no problems getting it by a con man’s crook. Your average sales professional has a dozen ploys ready to go before they even contact their first customer, because they get weeks of training before they’re let out into the field while you get a 2-hour crash course in negotiations, if you’re lucky.

So what can you do? First, you can learn what the common ploys are (as discussed in Common Negotiation Ploys and Some Basic Counter Tactics) and how to spot them, then you implement basic counter-tactics, as described in Stephen Guth’s Contract Negotiation Handbook, and, finally, you take the offensive using some negotiation tactics of your own.

There are at least eight solid counter tactics that you can use to counter the sixteen plus ploys an average vendor will throw at you. This post will discuss three of my favorites.

Power of No

If the vendor won’t budge on price or terms at all, and you know there is considerable margin in the deal, just say “the deal is off” (and give reasons such as the internal customer changed their minds, budget was not approved, etc.) and wait. The vendor will then start e-mailing / calling everyone looking for a chink in the armour to exploit and revive the deal, but if everyone holds fast, and the deal is for a significant amount of money, the vendor will eventually make concessions to save the deal.

You may have to “burn” yourself with the vendor to make it work, where the customer becomes the primary negotiator and you work behind the scenes, but it almost always works, as long as everyone holds fast and provides a unified front of “no deal” because vendors panic when they think they have lost a (big) deal, especially if they thought it was “in the bag”.

Columbo

If you’re willing to become the slow-witted police detective that uses his shabby appearance and absent-minded persona to lull suspects into a false sense of security, and wait until the deal is done to try for “one more concession”, and the concession isn’t ridiculous, it’s often an easy way to get one more concession from the vendor.

Columbo was successful because he always started out by pestering suspects with seemingly trivial questions, which wore them down, and then he was able to pop his signature tactic of exiting the scene of a conversation but then stopping in a doorway or returning one moment later with a “just one more thing” on the unwitting suspect who then went berserk and confessed. It worked because the subject had already mentally closed the door on the conversation and dropped his or her guard.

In the same way, if you wait until the vendor thinks the deal is done and all that is left is getting the contract executed, and you ask for just “one more thing” that is reasonable, you can take advantage of the vendor’s strong desire to close the deal quickly to get the contract signed. For example, a few days of free training, an extra few months free before maintenance fees, better on-site service guarantees, which don’t cost the vendor much but cost you dearly because of their mark-ups, can often be acquired at the last minute with no negotiation effort on your part if your customer is willing to sign tomorrow.

Price Slice and Dice

This requires some mathematical and technical skill on your part, but if you’re willing to dive into the data, you can often reverse engineer the vendor’s pricing to determine how much you really should be paying. If you can get a variety of pricing scenarios from the data, not only can you attempt to interpolate or curve fit them to various models until you find one that works. However, if you get enough data, you also increase the chances the vendor will slip up and provide you with additional data that is favourable to you (such as formulas in spreadsheets, etc.) that maybe the vendor didn’t want you to see.

The great thing about this negotiation tactic is that it’s easy to get a variety of pricing scenarios from a vendor that wants your business. First of all, the vendor wants to seem helpful and will, thus, have no problem answering innocous requests for various pricing scenarios and, secondly, because the average sales person doesn’t have a lot of mathematical skills (and knows basic math skills are approaching an all time low in North America where less than 1 in 7 American adults are “proficient” at math), he will see no harm in providing different pricing scenarios.

For a deeper discussion of these tactics, and five others (good negotiatior / bad negotiator, silence is golden, signature limit lasso, endless BAFO, and school zone), I strongly recommend picking up a copy of Stephen Guth’s Contract Negotiation Handbook. In addition to a deep dive into common ploys, counter-tactics, and negotiation tactics of your own, it outlines five tactic-killers that your internal customers could unwittingly use to pull the rug out from under your feet and some tips that can make the difference between a great result and a good one.

Sustainability is a Long Term Goal

I enjoyed a recent post over on the HBR Blogs on “Ford’s Impressive Sustainability Strategy” that noted that a real sustainability effort requires both a short term and a long term sustainability challenge.

As the article notes, if we are running out of resources at less than 7 Billion people, imagine the situation when we get to 9 Billion people in less than 40 years. Sustainability can no longer be a fad, it must be a way of doing business. And it’s not going to be obtained with short-term quick fixes. And even if you eliminate 90% of waste from the production process, that still leaves one tenth the waste to be eliminated and, most importantly, the process is probably still using too much energy and water, which are becoming increasingly scarce resources.

Plus, market saturation is not always sustainable. Sometimes the right level of market penetration is less, not more, and sometimes users should pay a premium for the privilege of the product, or a penalty for overusing a product or service.

And, most importantly, sustainability is more than strategy. As the post points out, it’s execution.

The Voice of the Customer

As mentioned in yesterday’s post on What Can The Right Supply Chain Transformation Do For You, there are a number of best practices that should be followed when undertaking a supply chain transformation but by far the most important is to listen to the voice of the customer. Since the whole purpose of the supply chain is to serve the company and the whole purpose of the company is to serve the customer, the best supply chain is one that serves the needs of the customer from end to end and enables the company to excel in the products and services it provides.

Even when considering manufacturing, service, and raw material suppliers, the voice of the customer has a hand to play. The voice of the customer has a role to play at each stage of the supply chain mega process. Whether you are Planning, Buying, Making, Moving, Storing, Selling, or handling a Return — the customer’s needs must be considered. The following are just a few of the questions that can be asked at each stage:

Stage Question
Plan What needs does the customer have?
What products or services might meet these needs?
Which of these do we have the competence to offer?
Buy What materials or services do we need to offer the products or services we plan to offer?
What level of quality is the customer expecting?
How robust do the materials or services need to be?
Make What features are most important to the customer?
What level of quality is required?
What materials should be avoided because they might be hazardous?
Move How fast does the customer need the product?
How environmentally concerned is the customer?
Are there any special transportation requirements required to insure the product arrives to the customer as expected?
Store Where should we place the product to get it to the customer when they need it?
What are the storage requirements to maintain quality and integrity?
Sell What price point is the customer expecting?
Where does the customer expect to buy the product?
Return If something goes wrong, how does the customer expect to accomplish a return?
Where does the customer expect to make a return?
How efficient does the customer expect the return to be?

If you answer these questions correctly, then you just might have a customer who says:

  1. I need a solution.
  2. I know where I can get it.
  3. I buy from you.
  4. My order goes “in production”.
  5. My order is then put “in transit”.
  6. I get and use the product.
  7. I get support when I need it.

And that’s a successfully transformed supply chain.

What Can The Right Supply Chain Transformation Do For You?

There’s a two-fold reason one of the top themes for SI this year is Next Generation Sourcing and a reason SI has spent posts (upon posts) discussing CAPS Value Focussed Supply, Tompkins Associates’ Supply Chain Value Creation Framework, BravoSolution’s High Definition Sourcing, Purchasing Practice’s Innovation Framework, The MPower Group’s Next Practices, and, shortly, Greybeard Advisors’ Next Level Supply Management. Not only is your supply chain not likely to survive the prolonged global economic recession and “jobless recovery” without it, but it’s going to mean the difference between survival and smashing success.

As proof, I point you to The Lessons from Dell’s Supply Chain Transformation, a recent videocast and article over on Supply Chain Digest.

While Dell’s investor relations group edited out some of the more detailed metrics that resulted from their recent supply chain transformation, the ones that stayed were extremely compelling.

  • 300% reduction in forecast error
  • 30% freight cost reduction
  • 30% manufacturing cost reduction
  • 37% improvement in product availability
  • 33% improvement in order delivery times

That’s more-or-less a 30% improvement across the board! All you have to do is implement best practices and, most importantly, listen to the voice of the customer at each stage. (And yes, it’s often easier said than done, but those returns are worth the effort.)