Surprising Ways to Get the Best Pricing From Your Suppliers

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Many companies start a supplier relationship with tough negotiating, driving down the price and asking for “give-aways to sweeten the pot,” like free freight. In my role as VP, Operations at a manufacturing company, our goal was to be our key suppliers’ most profitable account. But wait, isn’t that giving away money?

Not at all. Our suppliers gave us world class pricing, often much lower than our competitors. Here’s how we did it…

1) We researched industry cost structures to understand the components of cost – materials, labor, overhead and profit. We strove to leave profit alone (and actually added to it over time), but we were relentless in driving down the other costs through concurrent engineering (including the supplier in product design) and detailed understanding of shifts in commodities prices.

When we found savings in the product, or commodity prices moved in the market, we split the benefits with the supplier 50/50, so our profit and theirs would go up while bringing the overall cost down.

2) We required our suppliers to provide detailed cost structure information so we could both work on improving profitability. This required a high degree of trust, which is the foundation for mutually profitable partnerships. During frequent face-to-face meetings, we worked together to reduce total cost of ownership (TCO) of the item, again splitting the benefits between both parties.

Over time, the profit numbers grew while the total cost shrank – a win/win in a true supplier partnership. As a side benefit, when we needed extra effort from our suppliers, they were more than willing to go the extra mile because we were their most profitable account.

What kind of partnerships does your company have with its suppliers? Do they give you world class pricing?

© 2019 – Rick Pay – All Rights Reserved.

Too Many Suppliers Spoil the Soup

Consolidating the supplier base can result in dramatic cost reduction. In Rick’s Materials Management Manifesto, the sixth element is, Too Many Suppliers Spoil the Soup. Many companies have a proliferation of suppliers, with many providing the same part or commodity. While the buyers may not have intended to develop a large base of suppliers, using RFQ’s for competitive costing, allowing engineers to select suppliers, having different buyers buy the same thing, and lack of coordination across large organizations can result in a large number of suppliers that provide similar commodities and parts.

Here’s how consolidating your supplier base can cut costs:

  1. Concentrated purchase volume results in greater volume discounts.
  2. Avoid the trap of different part numbers for the same part bought from different suppliers, which results in more inventory, numerous part stocking locations, obsolescence and increased transactions.
  3. Maintain control of purchasing, to prevent Engineering and other non-purchasing related buyers from choosing suppliers that aren’t optimal for service, quality and cost.

 

To reduce the number of suppliers, first prepare a simple list of where the money is going for the current fiscal year. List the supplier, the amount spent, and the key commodities bought. Then look for duplicates and commodity consolidation opportunities. As a general rule in small and middle market companies, if more than a dozen suppliers represent about 80% of the total spend, you have opportunities for consolidation.

One final note, as you undertake a consolidation program, use the opportunity to negotiate higher volume discounts, early payment discounts, and development of VMI and Kanban processes to reduce inventory. The results can be dramatic and make for great soup!

 

© – 2017 – Rick Pay – All Rights Reserved

Rick’s Materials Management Manifesto

At my first meeting with many companies, they’re often stressed by trying to deliver 3% to 5% per year cost reductions to their customers. They frequently have inventory turns of four or less, which consumes cash and erodes profitability.

Companies really can achieve dramatic improvement with profit numbers in the 20% of sales range and inventory turns over 12. Rick’s Materials Management Manifesto will challenge your thinking and put you on a path to world-class performance. Click here for an expanded description of all eight points.

 

  1. You can sell out of an empty wagon
  2. Don’t waste your buyer on buying
  3. RFQs increase costs
  4. Annual cost reductions of 3% to 5% are peanuts
  5. Unplug your MRP – it’s likely an ineffective buying tool
  6. Too many suppliers spoil the soup
  7. Manage products throughout their life cycle
  8. Consigned inventory can destroy supplier relationships

 

Supplier partnerships, process discipline and striving to improve flow though Just-In-Time inventory management can provide exponential improvements in profit and cash flow. Use Rick’s Materials Management Manifesto to guide your thinking and achieve world-class performance.

 

© 2017 – Rick Pay – All Rights Reserved

To Do Lean Or To Be Lean?

Being Lean achieves world-class performance. Doing Lean often only results in the deck chairs being reorganized just before the ship sinks.

Many companies spend months (if not years) doing Lean. In too many cases, they don’t achieve the results they set out to obtain, and the Lean effort slowly fades away. In fact, 70% or more of companies fail to get the results they wanted from their Lean initiatives. With the plethora of MEPs, Lean consultants and books available, why is that?

Doing Lean includes the tactical activities of training, implementing tools, shop floor and warehouse improvement projects, Kaizen events, and score keeping. If those activities aren’t driven by your operations strategy and company vision, there’s no alignment with your business objectives, and the ground level activities don’t get results or keep the interest of executives.

Being Lean

Being Lean is a whole different thing: it’s the context within which Lean activities occur. Being Lean provides the strategy for the Lean efforts, which help target activities to produce the greatest and most meaningful results. Being Lean changes the way products are designed, includes partnerships, eliminates superfluous activities, and changes the culture of the company. Being Lean provides breakthrough results.

An example is the implementation of a Kanban system. Kanban is a signal or trigger to do something, often associated with the movement and acquisition of materials. In the doing environment of Lean, safety stock and minimum order quantities are included in the calculation of Kanban size, and should be. But safety stock is a waste, and minimum order quantities optimize supplier performance at the expense of your company’s performance.

If you are doing Lean, once the calculation is set, the system is executed with good results, but safety stock and MOQs continue to impact overall performance. If you are being Lean, efforts to eliminate both of these issues take place, allowing you to achieve breakthrough results including turns over 12, 99.8% service levels, 20% annual materials cost reductions and more.

Wouldn’t you rather be than do?

© 2016 – Rick Pay – All Rights Reserved

How Supplier Partner Programs Can Reduce Materials Cost Volatility

There are a number of ways to reduce materials costs or at least make them more predictable in volatile times. One method is supplier partner programs. Many companies try to cut materials costs by being “tough negotiators,” but in truth they could get lower prices by inviting their suppliers to be part of the team.

Inner Circle

In supplier partner programs, companies bring suppliers into the inner circle, including them in product design efforts, communicating with them continuously, and providing detailed sales/product forecasts. The supplier wins because they know they’re getting the lion’s share of the company’s business for the part or service they provide.

Win/win

Partnerships start by rationalizing the supplier base; reducing the number of suppliers for a particular commodity to a few certified, developed and trusted suppliers. Purchase volume per supplier goes up, materials flow is smoothed and the total cost of ownership drops significantly. As if that isn’t enough, supply chain reliability goes up and risk goes down. A true win/win for everyone!

© 2016 – Rick Pay – All Rights Reserved

Supplier Partnerships Provide Big Financial and Technological Gains

Many companies try to cut costs by putting pressure on their suppliers. Many of my clients have customers that demand 3% to 5% annual cost reductions but don’t provide any ideas or support for doing so. In an article in the Wall Street Journal (GM Cuts Costs for the Long Haul, October 14, 2013, p. B1), General Motors managers suggest that putting cost pressures on suppliers without working with those suppliers to help achieve the cost reductions will be a losing proposition.

Working with suppliers to achieve cost reduction can yield both technological advancements and financial savings. The technological advancements often come by having both company and supplier engineers work together on product designs to more effectively use materials and manufacturing methods to reduce product costs. This gives the supplier the opportunity to share new technologies that the customer wouldn’t otherwise be exposed to.

By working with suppliers and motivating them by sharing savings, companies can attain surprisingly large cost savings, often far exceeding the 3% to 5% targets. In GM’s case, they worked with suppliers to co-locate plants resulting in substantial reductions in logistics and inventory costs while improving quality. Supplier partnerships can provide these surprisingly positive results.

© 2016 – Rick Pay – All Rights Reserved.

Reduce Complexity To Reduce Costs

Many executives ask me how to reduce costs more than the 3% – 5% often required annually by customers. Through many client engagements I’ve found that companies  can reduce costs exponentially by reducing complexity. Companies of all types complexify the simple by allowing numbers of parts, suppliers, employees and so on to increase over time without considering what that does to costs.

There are several things you can do to simplify processes and reduce costs:

  • Reduce the number of parts you carry – on an annual basis, eliminate those items that represent the least amount of sales in your portfolio. By developing a report on SKU movement, you can sort by number of units sold and see those SKUs that have low or no part movement. Eliminate the bottom 20% and you will reduce transactions in purchasing and accounting, warehouse space, cost of holding inventory, and obsolete inventory.
  • Reduce the number of suppliers you buy from – if you buy a particular part from more than two suppliers, not only are you increasing costs, but you’re also introducing variation in quality which can result in even larger costs. Properly reducing the number of suppliers per part does not increase risk as some supply chain professionals think. Conducting an annual supplier rationalization exercise provides opportunities to reduce costs and receive higher volume discounts, all of which can dramatically improve your materials costs as a percent of sales.
  • Improve product management through Ramp-down – this is the process of managing the backside of the product life-cycle curve. By managing older products and eliminating them in favor of newer products, not only do you keep your product assortment fresh, but you reduce the cost of obsolete inventory, reduce warehouse space taken by slow moving items and reduce inventory, thus freeing up cash.

Reducing complexity can have many benefits, not the least of which is dramatic improvement in profit and freeing up cash. Studies are easy to conduct which will show if you have overly complex processes and how to simplify to accelerate profit and growth.

© 2016 – Rick Pay – All Rights Reserved

Has Your Company Reached a Break Point?

In over 25 years as a consultant, I’ve noticed that companies reach growth plateaus. I call these “break points,” and I see them happen at several points – around $5 million, between $12 and $15 million, around $30 million, near $60 million, $120 million and again at about $500 million. When companies hit these breakpoints, their growth often stops, and they seem unable to break through that ceiling.

Here’s what you as a leader can do to help your company continue to grow.

Strategy Allows You to Exploit Opportunities

First, have a strong, well-communicated strategy that provides clear focus and direction to your team, helping them understand where the company is going. With a clear strategy, they have a context for decision making so they can continue down the right path as events and opportunities present themselves.

Think Big

Second, look for breakthrough results, not just improvements. Many companies are on the journey to Lean and continuous improvement and that’s good. Unfortunately, that can cause an inordinate focus on cost reduction and incremental improvement. Seeking breakthrough results means your team must think and do things differently to really reach new levels of performance.

Think “Different”

Third, be innovative. Partner with your customers and suppliers to develop new products and approaches or apply a combination of ideas in new ways.

As Marshall Goldsmith said in his book, What Got You Here Won’t Get You There, your ability to move through your growth breakpoints will provide an exciting future.

© 2014 – Rick Pay- All Rights Reserved

Audi Has The Right Idea – Innovative Strategy

Audi knows that supply chain strategy can separate the best from the rest. Global sales are up 11.7% with an operating return of over 10%. In a recent article in the Wall Street Journal, the writer explains that part of Audi’s success is based on the idea of using modular design throughout the family: VW, Audi, Porsche and Bentley.

Modular design is a supply chain strategy that uses commonality among products that offers reduced costs and greater production efficiency. For example, there are three common wheel base lengths among the various SUV models in the family. At the same time, Audi engineers still bring in top of the line styling and finishing along with distinct engineering in the transmissions and engines.

Use of modularity is an example of innovative strategy in the supply chain. As you consider your supply chain architecture, don’t just focus on problem solving and cost reduction, but look for innovative approaches that will provide you with competitive advantage while producing world class profitability. Audi knows how to do this and is overtaking the other premium brands on the global stage.

© 2014 – Rick Pay – All Rights Reserved.

The Three Types of Communication That Are Vital for Strong Partnerships

Information sharing on several levels is vital in creating collaborative relationships. Many companies think they have good partnerships with their suppliers, but in reality they haven’t reached the level of trust needed to create world-class performance.

First, both parties need to be very open in sharing cost information. Cost structures, Bills of Materials and design information needs to be shared so the customer can improve their product designs to reduce cost and improve performance.

Second, suppliers need to be deeply involved with product design in the beginning and throughout the product life cycle. Involving the supplier in design reviews, cost reduction efforts, and quality improvements (through technical capability studies) can help you reach new levels of performance and cost reduction. It can also reduce lead times and risk in the supply chain.

Third, both sides should use scorecards. I’ve known many suppliers that thought they were doing just fine, only to find out – when it was too late – that their customer perceived their performance as substandard. I’ve also seen customers whose policies made it difficult for the suppliers to meet their expectations. Both sides need to share performance measures frequently. True partnerships are based on trust and communication.

© 2014 – Rick Pay – All Rights Reserved