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.

Surprising Ways to Get the Best Pricing From Your Suppliers

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?

© 2017 – Rick Pay – All Rights Reserved.

Getting the Highest Value in Purchasing

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.

 

A Manufacturing Comeback…or Not?

The author of a recent Wall Street Journal article presents four optimistic cases for a manufacturing comeback in the US…along with four corresponding rebuttals:

Optimistic                \\\                Rebuttal

US costs are becoming competitive It isn’t just about costs – worker skills and available suppliers are also essential
Companies are more eager to produce near their customers Customers are emerging in India and China
The political climate for manufacturing in the US has improved It still isn’t that great
Foreign companies are betting on US manufacturing The flow of jobs goes both ways

As I see it, this is not a black or white situation. It turns out all of the above are correct. As companies develop their operations and supply chain plans to put their business strategies into action, they should consider all of the above issues as well as several others. For example, companies not only need to consider total cost of ownership, but also labor availability and the quality of local suppliers when choosing plant locations.

Planning for on-shoring vs. off-shoring is just one of a number of elements in operations planning. Executives need to consider all of the ramifications to make the best decisions for action.

© 2014 – Rick Pay – All Rights Reserved

Benefits of Vendor Managed Inventory

Vendor Managed Inventory (VMI) is a collaborative approach that has great value for both the customer and the supplier. With VMI, the supplier has access to customer inventory information and is responsible for maintaining required inventory levels. It can be applied to more than just parts, and is often used for printed materials, supplies, equipment repair and so on.

Benefits to the customer include:

  • Reduced total cost of ownership
  • Improved service levels (lower stock outs)
  • Improved inventory turns
  • Reduced floor space
  • Reduced efforts on the part of buyers for replenishment
  • Reduced obsolete inventory

VMI can improve profitability and use of assets. Consideration needs to be given to which suppliers can be relied on, which parts should be covered, and what access the supplier will be given. Good planning and management are critical for success, but the rewards can be great.

© 2013 – Rick Pay – All Rights Reserved

Looking for Cuts In All The Wrong Places

A recent article in the Wall Street Journal says, “US companies have had one route to push profits higher: cut costs and squeeze suppliers. That strategy is running out of steam.”

There never was much steam in that strategy, because cost cutting and supplier squeezing are not sustainable. For one thing there is only so much you can cut. For another, that strategy typically damages relationships both internally (with employees) and externally (with suppliers). Cost cutting in any area creates a one-sided, win/lose relationship. It’s like a drug: when it wears off, the pain returns.

A Better Approach

Is there a better route to sustained profit improvement? Yes, and it involves partnerships with employees and suppliers. Partnerships focus on long-term relationships that are a win for both parties. They get everyone focusing on improvements that can be sustained far into the future.

Partnerships tend to encourage innovative approaches that continuously improve profitability. This happens by not only reducing Total Cost of Ownership (not just part costs), but also by providing a competitive advantage to help increase revenues.

It’s always easier to improve profitability while growing, and the leaders of industry continue to grow even in hard times. Partnerships are a vital element to that growth.

© 2013 – Rick Pay – All Rights Reserved.

Moving Back Home: The Re-shoring Story Continues

Many manufacturers, both US based and foreign owned, are continuing to come to the United States. A recent article in IndustryWeek suggests it is because of low natural gas prices (US natural gas prices have dropped significantly, recently to as low as one quarter of those in Europe). Because natural gas is used for energy and as a raw material, lower prices have helped contribute to industrial growth in the US of 5% per year since 2009, double the rate of the overall economy.

Factors in the Off-shoring Decision

Many companies that moved production away from the US in the 80s and 90s did so pursuing low cost labor. When labor rates in Asia began to creep up, many decided that logistics and inventory costs to ship finished products back to the US weren’t worth the cheaper labor. Now, it could be low-cost energy that is prompting companies to reconsider the US.

A Wider Perspective

I believe companies have broadened their thinking and are taking a total cost of ownership (TCO) perspective, which takes into account not only the base materials, but also logistics, inventory, quality, reliable supply, energy, regulations, political climate and more. Innovative companies are looking at the total return on investment and assets as well as the impact on speed to market to determine where the base for their global supply chains should be.

I predict that the current wave of reshoring will continue for a number of years. Not only is US productivity the leader in the world, but also many elements of cost – like energy and reliability – are hard to match in other countries.

© 2013 – Rick Pay – All Rights Reserved

For more on TCO and how it applies specifically to purchasing, click here to read my article for eSide Supply Management magazine.

Three Steps to Highest Procurement Value

Here are three steps that will move you toward the highest value in procurement:

1) Use your suppliers

Strive to use Vendor Managed Inventory (VMI), get suppliers involved in design and concurrent engineering, ask them for suggestions on cutting freight costs, or using different materials than what you’ve been purchasing.

Reducing the number of suppliers can improve your relationships with your most important suppliers and get you lower prices by increasing your purchase volume. You can often cut the number of suppliers by one third. Running a vendor year-to-date payments report will reveal who your biggest suppliers are, and using that list you can find your best opportunities for cost reduction.

2) Make sure that all elements of cost are owned by the purchasing department

Until you own all components of cost you can’t work to lower costs overall. This goes back to the example I used in a previous post of a company who logistics costs were managed by a department other than purchasing. This separation made it almost impossible to take a TCO approach.

3) Identify and manage your cost drivers

When you understand what your real components of cost are, you can move forward. Ask the CFO or controller what your total costs of materials are. He or she will likely be happy to tell you everything that goes into the materials cost line on the income statement. Then you can find out what the gross profit margin standards are for your industry and understand how you’re doing by comparison.

Edwards Deming, in his Fourteen Points, said, “End the practice of awarding business on the basis of the price tag. Instead, minimize total cost.”

© 2012 – Rick Pay – All rights reserved.

The Customer Next Door

An April 24, 2012 article in CNN Money cites examples of Chinese manufacturers setting up new production facilities in the US. In addition to taking advantage of the skilled US labor force and tax advantages offered by states to off-set so called “anti-dumping” tariffs on certain imported goods, these Chinese companies are motivated by a third, and perhaps even more important factor: their customers.

The CEO of a Hong Kong-based consulting firm that is currently working with 30 large Chinese manufacturers who want to expand their presence in the US market says, “For many of these companies, their biggest customers are in the United States. It’s a tactical advantage to be next door to your biggest client.”

Another Chinese company, a manufacturer of aluminum extrusion parts (a category that has been impacted by anti-dumping duties), chose to build a new plant in Indiana because 60% of its market is in the Midwest.

When taking a total cost of ownership perspective, proximity to your customers and your supply base becomes advantageous, even if you could save money on parts or labor by setting up shop elsewhere. Being next door (or at least in the same time zone) as your customers allows both parties to be agile competitors in their respective markets through close communication and partnerships.

© 2012 – Rick Pay – All rights reserved.

Authors: Paige McKinney, Rick Pay

Cost Accounting: Yours and Your Suppliers’

In my last post I looked at two reasons why companies don’t take a TCO perspective on purchasing. An additional reason is the Cost Accounting system. If you’re only looking at part price when you analyze your cost of materials, you’re only seeing half the picture. There is tremendous opportunity for cost savings when you look beyond part price.

The biggest components of cost of goods sold are materials, labor, operating supplies and overhead. Elements of materials cost include freight, scrap, yield loss, obsolete, inventory adjustments, etc. These are all great places to look for potential savings. In many cases, these kinds of cost savings aren’t even low-hanging fruit; they are fruit that is already lying on the ground.

Your suppliers have these same issues, so if you have a partnership in place, you can suggest that your suppliers reduce their costs and pass the savings on to you. Toyota spends 50% of their manufacturing engineering time at their suppliers, working to reduce costs. Encouraging your suppliers to go lean saves you money.

When I was VP Ops at a manufacturer, we asked our suppliers to share their cost structure with us, which made them nervous at first. However, we promised not to force them to go below the industry average for profit margin. We also guaranteed that anytime they found a way to cut costs and passed the savings on to us, we’d split it with them, in essence rewarding them for finding new ways to reduce costs. Over time, we became their most profitable account, and they became our world-class supplier for parts. No one could provide it cheaper than they could because we worked with them to reduce the costs.

© 2012 – Rick Pay – All Rights Reserved