The benefits of supplier relationships management: real or fictitious?

srm-benefits

I must admit I am not the biggest fan of fluffy things in the world. Theories, tools, systems by themselves are neither good or bad (that is why i say “fluffy”). It is about what you do with them and how good you are in what you do. Claiming, that a company has SRM in place or that you have supplier evaluation and feedback system in place does not mean much. “So what?” is a crucial question to answer. Does it bring benefits to the business? Does it REALLY make a difference?

There are companies who implement tools because someone “said so”. It might be certification organisations, big customers, auditors. Others rush to adopt new systems, because they are chasing the fashion: competitors, “market”… “Just because” can also be a reason. The systems become deeply embedded into the company. Well, at least, drawers of the desk. And the biggest benefit it brings – prevents from more systems and tool being implemented into the same drawers – because they occupy space.

On the other hand – do you need SRM in place to treat your suppliers like human beings, like business partners – with respect and honesty? Probably not. If you really put effort into any relationship – it works. It works better, when communication is proper, when information exchange is consistent and open, goal-oriented.

And here is the trick – as soon as you start working hard with a bigger number of suppliers to maintain and develop relationships, to achieve mutual goals – you start needing help. This is when tools and systems come into hand. They are there to help you do the job that needs to be done. Or the job that you would be doing anyway, without even having a system.

Let’s get back to the initial question: can we measure “good relationships”? Do they give any benefits?

Let me give you an example. We were having negotiations with global services company.  We needed several Europe-wide spread businesses to be put on the same pricing matrix – let’s call it “special”. Unfortunately, two of our twenty-many locations had signed a deal before the central procurement got their hands onto the subject. Therefore the supplier’s global account manager implemented the “special” pricing for everyone BUT those two (biggest spend) locations. Where is the “good relationships” you ask? Well, one of our team members had good relationships with the supplier’s local account manager. He did not use any systems or tools – simple calls, honest conversations, open position regarding the overall situation. The outcome was very creative: the local account manager proposed to review the contract that was signed three months ago and was supposed to last for three years. She could not put “special” price list in place – because it would have to go through central sales team for approval and we were once rejected there already. However, she agreed to match the prices of the “special” price list. In other words – we got everything we wanted, but under a different name. And everyone was happy. So here is your answer – Ka-ching!

Do you have any samples of situations when good relationships with supplier brought you benefits? Please do share them in comments!

Thanks for reading!

 

 

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The benefits of supplier relationships management: real or fictitious?

Capex buying: another clue for leaning supply chain and finding savings

engineers

I love technical staff. Engineers, architects. Who doesn’t, right? But procurement has always had special relationships with engineering. Sometimes it goes all wrong, but sometimes – the other way around. Working together can bring benefits where nobody expects them. This blog is about one of such occasions: finding standard pieces in bespoke piece of equipment and benchmarking the margin that the main contractor is making.

Reducing costs and leaning supply chains is a challenge not only for procurement department. Technical department, logistics, operations – everyone is under pressure.

CAPEX is always one of the most difficult categories due to complexity of the projects and people involved. It is difficult to benchmark the price of the equipment if it is bespoke:

  • If it is somewhat standard, you can try to find some information from your colleagues, working in other markets.
  • You can always go for “material weight value” strategy and negotiate hard.
  • Another option – google. Google will tell you “market standard” markups and profits (only due to the quantity of information it is up to you to decide if you want to believe 12%, 6%, 3%, 0,5% or “cost only” margins – there are no “standards”), which, again, you can use for negotiations.
  • “Should cost” model. Be ready for good sales people in engineering / constructions companies. If you choose to push them for “costs only” pricing model and reduce their prices, motivating with “being overcharged”, prepare for a push back. They will ask you, what do you think “real cost” is. Therefore, studying cost models will give you better understanding of true costs AND will keep all your arguments within reach.
  • Decomposition. I used this one recently and had quite good results – please read on below.

It is rarely a case, that the main supplier (contractor) will manufacture all bits and pieces that go into the fully assembled unit. And the items, that they will use – surprise! – are very often standard. If you can get hold of the item breakdown list and price against items that were not manufactured by main assembler, you can have insights into their general pricing policy. An example follows below.

During one of the brainstorming session with technical department we were discussing everything that came to our minds. Suppliers, types and categories of spend, purchasing and contract renewal calendars, people and processes. And we found some repeating names. Conveyor system supplier was buying belts from the same belt manufacturer that we also had as a strategic supplier. We asked conveyor system supplier to work with us to find some improvements in supply chain for that piece of CAPEX equipment. When you get replies, that “managing director is uncomfortable and fears to damage relationships”, you realise – there is more to this than just that. At the end, this exercise brought us better control and visibility and… 20% savings – after negotiating down from initially required 25%.

Thank you for reading – if you are still here. Please do share / comment if you liked it or would like to know more.

 

Capex buying: another clue for leaning supply chain and finding savings

Time relativity: if you had battery indicator for your career

time-battery

This post is only relatively about buying. It is about a thing that you CAN NOT buy – the time. How worried do you get, when you see your phone (laptop) battery running out and have no spare battery / charger / power source? For me every single percent on those moments is the worth of gold. Recently I had to make some decisions and evaluated time importance. I got slightly worried.

I’m 35. Say, i want to retire at 65. In such case, every six months of my time are worth 1,6% of the rest of my full career. Look at it from a different perspective. Every career has a maturity cycle. I would like to think i will be at my best all the way through to 65. Have you heard the phrase “statistically plausible, but highly unlikely”? Right. Let’s get back to reality. Say, I will be at my best until 55. That changes the value of my time: suddenly every 6 months are worth 2,5%. Every year – 5%.

Think about a business case you are writing. Pieces of equipment you are buying. Private equity investment you are consulting. Most of them have one or the other shelf life. Have you been in a sourcing project for a piece of equipment, which lasts 3 years when life expectancy (yes, for the piece of equipment) is also 3 years? For me that now sounds strange.

Time puts a very different perspective to everything. Sometimes, the worst thing to do is to do nothing. Not to make the decision. If you make the decision and it turns out to have been not the best – you can always fix it. You will never be able to turn the time back. Stop and think. It is Monday. How much can you do before Friday?

Time relativity: if you had battery indicator for your career

The value of longer warranty for the goods you buy… and of a question “so what?”

warranty

Super-duper-all-inclusive-lifetime-premium warranty. Sounds familiar? I’ll give you another example: most daring warranty agreement that I have seen (and, by the way, the items bought were commercial refrigerators) was 17 days. Yes. S-e-v-e-n-t-e-e-n DAYS!

I’ll try to save your time and put logic simply. The company did the research: break-down frequency during the lifetime of these units. and they found out, that if there is anything wrong with the item itself and the fault lies with the manufacturer, 95% of all breakdowns happen in the first 17 days. Afterwards – if the maintenance is done properly – the unit works as it is supposed to work. While the “Super-duper-all-inclusive-lifetime-premium warranty” costs additional €500 per unit. And that is 10% of the price. That means, 95% of 500 Eur are simply spent to cover the risk of events that have a 5% chance of happening. Company chose to save €475 for each unit. And a lot of millions annually.

I have seen some some tender evaluations, where additional scoring is given only for longer warranty. Do not get me wrong – sometimes it might be a smart thing to do. For instance, you do not have data about the break-down frequencies, reliability. Or you have exactly the same items for exactly the same price and one of them offers a much better warranty terms.

But, whatever you do, do not take for granted, that longer warranty is worth more money just “because”. Questions are the tools available for everyone. Ask “so what?”. Thanks for reading, if you are still here. Hope this serves as an idea for your future buys!

 

 

The value of longer warranty for the goods you buy… and of a question “so what?”