Understanding the Costs and Margins of Your Suppliers Builds Trust
Many sourcing professionals focus on their own costs first. I would recommend that understanding the costs and margins of your suppliers will build trust in the negotiation process. Relationships built on trust and transparency will yield higher profits for both parties.
I understand that not every supplier or service provider will be interested in building a long-term partnership. Others may only be interested in making a sale. Minimizing your dealings with these types of companies will be in your best interest.
Recently one of my clients was able to negotiate an important reduction in costs for a significant recurring commodity purchase through due diligence and information sharing.
Last year they utilized Excel, Word and email to conduct the sourcing event. They did establish clear specifications and received 3 proposals, unfortunately all were above their budget. Negotiations with each supplier resulted in only minimal give and they ended up 4% over budget on the purchase. The client also didn’t know if what they paid was in line with the market.
I recommended a different approach and the client realized a 4% savings versus the current budget and 8% under the prior year cost.
Here is what was done to achieve the savings:
The specifications were refined and 2 acceptable options were developed. The first option established tighter specifications and several enhancements over the prior year. The second option included several additional features that would be nice but not necessary.
A cloud-based sourcing tool was utilized for the RFP. All communications and bids were completed in the tool. The tool provided comparative analysis and a repository for all documents and communication in the event. A firm calendar was established at the beginning of the process and provided to all participants.
7 additional suppliers were invited to the RFP to increase the competitive environment.
Market research was conducted to determine the range of pricing available from known suppliers.
Discussions were held with each supplier. The expected purchase volume over the next 5 years was provided so they would know the potential going forward. The minimum goal of beating the budget was shared and open dialog on supplier margins was conducted. We were able to provide pricing on other similar purchases by other clients as a relative benchmark for these discussions on margin.
The RFI was strengthened and only suppliers willing to meet all of the after sale service requirements were then invited to bid.
Each supplier was asked to provide their initial bid with the understanding that we had the option to conduct a reverse auction as a second step.
You already read about the savings but there was an even bigger benefit for both sides.
We did conduct the reverse auction but there was minimal movement in the bids for a very important reason.
The benefit for our client is this – by conducting the RFP in an open manner we received the best bids from almost every supplier on the initial bid. The client had 3 acceptable bids that were all under budget and met all of the criteria. They didn’t need to negotiate further and the lack of movement in the reverse auction supported that decision.
Action Step: What would be the next step if you want to establish more long-term relationships with your suppliers?
EC Sourcing Group is one of the companies I represent because their tools have been created by dedicated and experienced sourcing professionals. They know the day-to-day challenges your team faces and have built their tools to solve them. If you want to know how, I invite you to request a demo or 30 minute discovery conversation so you can experience the platform, process, people, and tools. You can reach me at 973-936-9672.
Next week I will continue on this same theme so your organization can improve your bottom line.
If you would like to know more ways to reduce costs without changing the way you do business simply give me a call or send me an email with your contact information and the best time to reach you.
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Until Next Time, I Wish You Great Success in Your Business and in Your Life