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.

You CAN Sell Out of an Empty Wagon

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“You can’t sell out of an empty wagon,” is a favorite saying among salespeople, meaning that you have to have inventory (usually lots of it) to quickly serve your customers. But it just isn’t true! In fact, if you have a successful Just In Time (JIT) supply chain management process, often the less inventory you have, the better you can service your customers. Here’s why:

  • Lower inventory leads to having the right inventory in the right place at the right time – true JIT inventory management.
  • Inventory buffers often lead to obsolete inventory.
  • High inventory levels jam up the warehouse and make it harder to quickly find and pick what you want for shipment.
  • Large amounts of inventory often lead to inaccurate records, so you don’t know what you have or what you need, resulting in stock outages.
  • Too much inventory requires more storage capacity, which raises the cost of holding inventory and reduces profit.

These are just a few of the ways excess inventory hurts profits and cash flow. By running a true JIT system, you can better serve your customers and yes, you CAN actually sell out of an empty wagon.

 

© 2019– Rick Pay – All Rights Reserved

The Case of the Mistaken Measures

Recently a company asked for my help in solving a mystery. Their revenue was growing but their profitability had declined over the past couple of years and they couldn’t figure out why. They thought it might have to do with operations and supply chain, but they weren’t sure.

As I investigated, it soon became apparent that most of their key performance indicators (KPIs) were activity oriented. They measured output per hour, number of purchase orders received, number of lines shipped, number of orders processed, total headcount, etc. One day they received 100 purchase orders and the next day they received 120. Which is better?
When I started to ask questions about average order size, dollars shipped per labor dollar and other elements of economic value, they said, “That’s not the way we measure things.” And that’s why their profit was declining.
To read more about the importance of measuring the right things at the right time, check out my latest Growth Accelerator newsletter.
© 2018 Rick Pay, all rights reserved.

Reform Your Business When Business Is Good

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Last year I sent out a Growth Accelerator newsletter about why it’s essential to keep growing your business, especially when things are going well:

I find it very interesting how many executives want to wait to meet, start projects, hire key people and start change initiatives, because they’re making a profit and “Things are fine.” Why should they put effort into improvement when nothing’s wrong right now? Here’s why:

1) Succumbing to the status quo (even if it’s good) can be dangerous.

2) Their competitors are getting better everyday.

Toyota, the icon of Lean and continuous improvement, is always striving to get better. In an article “The Contradictions That Drive Toyota’s Success” (Harvard Business Review, June, 2008) senior executives said, “Never be satisfied.” The chairperson of Toyota said, “There has got to be a better way, and we need to reform business when business is good.”

Click here to read the full article.

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©2018 Rick Pay – All rights reserved.

Thinker-Uppers

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I was talking to a friend who is a retired senior partner in a very successful advertising agency. We were discussing what drives profit and growth acceleration in companies. He explained that there are three kinds of people in companies: doers, getter-doners, and thinker-uppers.

Doers are those who execute – important certainly, but you can find and develop doers relatively easily. Getter-doners are those who make sure the work gets accomplished, setting priorities and project managing to ensure quality goals and deadlines are met. These people are harder to find, but again, can be developed or hired as needed.

The third type is the rare breed, the thinker-uppers. These are the people who develop innovative approaches, generate imaginative ideas and often use disruptive thinking to create new ways of doing things. These people are hard to find.

Senior executives are responsible for assuring the presence of all three kinds of people in the organization. Without doers, the work never gets done. Without getter-doners, the priorities are lost and the work drifts. Without thinker-uppers, profit and growth won’t accelerate.

Do you have the right people on your team? If you lack thinker-uppers, do you use outside resources to help accelerate profit and growth?

© 2018 – Rick Pay – All Rights Reserved

New Book: Moving Into the Express Lane

I’m pleased to announced that my new book is available on Amazon.

Moving into the Express Lane: How to Rapidly Increase the Value of Your Business, will show readers how to exponentially increase their company’s value by aligning operations strategy with the business model. Increasing a business’s value and potential sale price is important for business transitions as well as for ongoing operations to accelerate revenue growth, increase profits and cash flow, and to allow the company to increase capacity and grow without capital expense. Many companies focus on implementing tactics, such as lean, without a strategic framework, which renders their efforts fruitless. By taking a holistic operations-based view of strategy and tactics, executives can exponentially improve their company’s value.

© 2018 Rick Pay, all rights reserved.

What Bankers Want

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A good banker has your best interests at heart and can be a key advisor to your business. Not only do commercial lenders provide lines of credit and short term cash flow, but they can also offer import/export cash management and protection assistance, cash for expansion and growth, and advice and counsel about a number of issues related to your business. Of course bankers can’t tell you how to run your business and they walk a fine line to keep the regulators happy, but most mid-market bankers I know are excited to help their clients in any way they can.

So what does a banker look for in a well-managed, bankable business? First and foremost, the ideal owner is honest, realistic and communicates openly with accurate information. They have a clear strategy and the team to execute it. They have a strong succession plan and allow their team to run the day-to-day aspects of the business while they focus on developing a vision and strategy for growth and profitability.

Second, bankers tend to focus on the balance sheet more than the income statement. Of course they want the company to be profitable, but over the years, I’ve seen many “profitable” companies run out of cash and end up in the ditch. Bankers look for a strong relationship between asset and liabilities and a short cash-to-cash cycle, which is the number of days from when you spend a dollar on goods and services to when you get it back from the customer. Inventory is a particularly big part of that.

Third, bankers look at how companies manage capacity. Is the company ready for growth? Do they have the resources to support it? Do you need to work with your banker on a capital line to support expansion?

Use your banker as a key advisor. They can have a useful perspective on your company, and if they don’t, perhaps it’s time to seek a new banker. Your successful future might depend on it.

© 2018 – Rick Pay – All Rights Reserved

Making the Most of the Supply Chain Revolution

CFO Magazine recently interviewed me for an article on how supply chains are changing and the cost reduction opportunities those changes will offer. Manufacturers and distributors have to be faster and more agile in their approaches. Supply chain innovations pioneered by Zara, Zappos and Amazon reveal the combined power of partnerships and speed, moving items from a designer’s desk to retail stores in as little as two weeks.

Here are four ways that supply chain thinking is evolving and offering significant opportunities for growth and profitability:

  1. Supply chains are moving from hard to soft
  2. Costs are becoming less flexible
  3. Transport is transforming
  4. Supplier partnerships and professional skills are changing

Flexible and innovative supply chain strategy is critical for your company’s ongoing growth and profitability. For more on this topic, check out my recent Growth Accelerator newsletter, or call me if you would like to explore how your company can be on the leading edge of this disruptive era in supply chain management.

503.781.2014

© 2017 Rick Pay, all rights reserved.

The Bank Owns Half

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I recall a conversation I had with a CEO client about the fact that his company had more inventory than it needed. He looked at me and said, “What difference does it make? I don’t own it, the bank does.” I was speechless.

When banks provide lines of credit, they primarily lend on Accounts Receivable. For companies that have inventory, the bank will often lend on a portion of that as well. The primary consideration for the bank is how easily the inventory can be turned into cash, therefore, the maximum the bank will lend on inventory is usually limited to 50% of current value. Occasionally that might be higher or lower, but 50% seems to be the number in the current market. That means the company, owner, and investors own the other 50%.

To make matters worse, before the bank calculates 50% they’ll often eliminate the old or obsolete inventory from the total value. Normally this is anything more than a year old, but it could be a longer time horizon if the inventory is easily converted to cash. But it’s fair to say that the bank owns half, and it’s the good half. The owner owns the remaining (slow moving) half.

Do you own half of your inventory? Is it the bad half? Can it easily be turned into cash? If not, your half is slowly eroding and costing you profits and cash flow every day.

© 2017 – Rick Pay – All Rights Reserved

Some of the Best Measures Aren’t Numbers

Most companies measure their progress in numbers – revenue growth, profit growth, EBITDA, shipped on time, market share and so on, but actually, some of the best measures are reputation, trust and relationships. In my book, 1 + 1 = 100: Achieving Breakthrough Results Through Partnerships, I propose that two keys to developing trust in partnerships are knowing what is expected and knowing how each partner is doing.

My friend and business confidant, Val Wright, suggests that one exercise to know how you’re doing is to list the three traits that set you apart from your competition, and the top sound bites or phrases that you’re known for.

Reputation speaks loudly for your partners both within your company and externally. Have you heard Ralph Waldo Emerson’s phrase, “What you are doing speaks so loudly, I cannot hear what you say?”

Trust and relationship are the foundations of strong partnerships. If you want to measure how you’re doing, check your reputation. It speaks volumes!

 

© 2017 – Rick Pay – All Rights Reserved.