Recently I’ve had a number of discussions with company owners and other consultants about Trump’s tariffs. Many companies are wringing their hands due to the sharply increased costs on many commodities associated with the 25% tariffs, and in some cases, the lack of availability of materials. Do these tariffs need to have that big an impact on your company or your customers?
A recent editorial in the Wall Street Journal (My Customers Don’t Pay Trump’s Tariffs – July 1, 2019 p A17), shared the experience of the CEO of a consumer-electronics company that sources 90% of their products from China. Even though his products should have a 25% tariff, the company only experienced a 2% cost increase. How can that be? His purchasing department took a proactive partnership approach to his Chinese suppliers, appealing to their best interests, and got price concessions that all but wiped out the impact of the tariffs.
There are three key elements you can use to mitigate the impact of tariffs on you and your customers:
- Don’t use your buyers for buying! – They should be much more than order executers, they should be managing the supplier relationship.
- Focus on Total Cost Of Ownership – It includes many costs not considered during product development and off-shoring activities.
- Develop partnerships with suppliers – Focus on a few carefully selected suppliers for speed, quality improvement and cost reduction.
A strong supply chain strategy is vital to reduce or even eliminate the impact of the current tariff environment. If you would like a review of your Supply Chain Strategy, give me a call.
© 2019 – Rick Pay – All Rights Reserved
Communication with suppliers is a vital element of forming a supplier partnership program, yet many (I would say most), companies don’t establish a solid foundation of communication. Here are four ways to super-charge your communication:
1. Get together face-to-face. Phone calls and emails don’t establish the depth of relationship that you’ll need for your supplier partnerships to succeed. Face-to-face meetings to discuss expectations, status updates, changes to products, designs, materials, forecasts and other important issues are critical. Meetings should be on-site, alternating between the supplier’s location and yours, especially for your top ten suppliers. Going to the Gemba (point of work) can help clarify your perception of the supplier’s capabilities and help them understand exactly how their product is being used.
2. Organize a Supplier Day. Invite your top 20 – 25 suppliers to an all-day event where your sales leaders present company growth plans and forecasts, your CEO shares the company’s strategy, and the operations and supply chain people present expectations for the year. This gives suppliers a window into your company as well as the opportunity to network with other key suppliers and find opportunities for cooperation.
3. Connect executive sponsors in your organization to their counterparts at the supplier. Establishing these connections adds depth to the relationship, and also allows the executives to contact their counterpart for support in solving any problems that arise.
4. Set metrics to clarify expectations and provide feedback to the supplier on their performance.
All of these tools can help you super-charge your supplier partnerships and get the most out of these important relationships.
© 2018 – Rick Pay – All Rights Reserved
A buyer’s primary job is to buy, right? Many companies require that buyers or purchasers simply execute purchase orders; assemble, issue and score RFQs; and negotiate deals with suppliers. That is all low value work!
In most cases, the focus and yield from those activities is getting parts on time so as not to shut down production or miss order shipments, and to try to get materials as cheaply as possible to reduce materials costs. Often companies find that at best, those activities might reduce costs 2 to 5% per year, but in many cases, commodity prices drive materials costs, so even that level of performance is hard to achieve. Not only that, but the best suppliers often don’t respond to RFQs, so quality and performance may be substandard as well.
So what is the best use of buyers? Turn them into Supplier Business Managers, to develop relationships with suppliers that can yield from 5% to 20% reductions in cost! An SBM’s key responsibilities are:
- Rationalize the supplier base to focus on the few key/best suppliers
- Develop and execute the supplier partnership program
- Minimize inventory through use of auto-replenishment systems
- Provide supplier performance feedback
- Conduct supplier visits to review performance, capabilities and opportunities for outsourcing
- Provide forecasts of future demand
- Monitor commodity cost changes leading to adjusted agreements
These responsibilities can lead to much broader cost reductions than just cheaper materials costs. The overall supplier relationship can provide savings in many categories leading to 5 to 20% annual reductions and much lower inventory levels, freeing up cash.
How do you use your buyers? Can they be a major profit producer for your company? If you would like to explore how to make that transition, contact me.
© 2017 – Rick Pay – All Rights Reserved
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.
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.
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
Competent suppliers and competent staff are essential for increasing business value. The higher your staff and suppliers’ competency, the higher the value provided by partnerships. Your supply chain staff’s skills need to go beyond those of buyers to those of supplier business managers. Those duties include analyzing materials and services as they relate to the design of your products and services to optimize quality, cost and lead-time. The more competent your suppliers are, the more they will be able to participate in planning and design to help optimize those things as well.
One of my clients has been implementing a partnership program with several key suppliers and just announced a 12% increase in their stock price over the last quarter. A good portion of that came as a result of the increased margins, service levels and cash flow that came from the partnerships. My client has spent about a year changing the focus of their supply chain team and building supplier partnerships. As a result, their performance has risen to world-class and the value of the business has increased dramatically. That’s a huge ROI on a short-term investment.
© 2014 – Rick Pay – All Rights Reserved
Paying suppliers faster can actually increase profitability and strengthen your supplier partnerships. Most accountants will tell you to slow your payments to suppliers, thus building accounts payable and allowing your suppliers to finance your inventory. It’s a basic cash flow principle. But this practice has several downsides.
First, your suppliers will figure out how to charge you interest on your debt to them, especially if it’s more than 30 days old. They may not charge direct interest, but you better believe it’s buried in the price somewhere.
Some companies really stretch out their supplier payments. One large company pays in over 100 days. For their small suppliers, this creates a terrible cash crunch and can even threaten their existence. Remember, most banks won’t lend on accounts receivable that is over 90 days old.
Take Advantage of Discounts
Second, using very short payment terms is a strong lever in negotiating early pay discounts. I know a company that got a large cash infusion and took advantage of the one time opportunity by offering to make their payments (which were usually around 45 to 60 days) within 10 days if the suppliers offered an early pay discount. Most did, and the discounts ranged from 2% to 3% and more. For middle market companies, this can represent hundreds of thousands of dollars in added profitability.
You can finance this by reducing your inventory and collecting your receivables on time; you don’t need to go to the bank or investors the find the money. Those two actions also produce even more profit, and soon the value of your company begins to really move up.
© 2014 – Rick Pay – All Rights Reserved
As part of my participation as a speaker at the Institute of Supply Management International Conference back in May, I did a short video interview on what supplier partnerships really are, and what their true potential is. The interview is up now on the Supply Chain Brain website, which does require you to create an account, but if you choose to do so, please have a look – the video is listed under the All Videos category.
© 2014 Rick Pay – All rights reserved.
A video I made back in 2012 on the five stages of purchasing management continues to be the most-watched of my YouTube videos. It’s about the continuum of value in purchasing management and what the most effective companies are doing.
You’ll see Total Cost of Ownership
there in the middle of the line, but over on the right are more sophisticated approaches like supplier partnerships, demand management, and design for supply chain management
(DSCM). Where is your company on this continuum?
© 2014 Rick Pay, All rights reserved.
Executives at most small and middle market companies have goals and objectives that are often very personal in nature – providing a great product or service to their customers, living a good life contributing to their own well being as well as that of their employees and community, perhaps accumulating a good number of “toys” or that house in the mountains or at the beach. Many want to make a good profit, make a name in the business community and build their company’s reputation among their peers. People define “success” differently, but their business is almost always a key part of the picture.
Your suppliers have the same goals and objectives. Many companies treat their suppliers as someone with whom to negotiate a better deal, to beat into submission and to use until they can no longer perform, only to replace them at the drop of a hat. Perhaps if more buyers and supply chain people treated their suppliers as they would like to be treated, (hmm – I’ve heard that somewhere before) the result might be better than one could ever imagine.
Suppliers are people too. Treating them as partners in your business (and you in theirs) can yield amazing results.
© 2014 – Rick Pay – All Rights Reserved
Collaboration seems to be the word of the year. Everywhere you look companies are collaborating on this or that. Articles suggest you should collaborate with your customers, suppliers, strategic partners and others. But does collaboration represent a true partnership?
The technical definition of collaboration is “the action of working with someone to produce or create something,” in other words, simply working with another toward a joint outcome. How does this impact each party? Working together may not provide a well-balanced outcome resulting in a win for both sides.
True partnerships benefit both parties where the whole is greater than the sum of the parts. It is the win/win relationship that both parties want, as well as the opportunity for to achieve success beyond what they could do on their own.
Collaboration is certainly a worthy thing, but to really gain the amazing results that both parties seek, a true partnership is necessary. Are you just collaborating, or are you partnering? Are you seeking a joint outcome or world-class success? Click here for more on creating true partnerships that produce amazing results.
© 2014 – Rick Pay – All Rights Reserved