Playing the Long Game With Suppliers
Times are tough. Inflation is on the rise, input costs are escalating, and companies are tightening their belts. And, when the pressure is on, it doesn’t take long before companies start to squeeze their suppliers in an attempt to find cost savings.
Unfortunately, your suppliers are facing exactly the same pressures you are. Their costs are rising too, and they’re experiencing the same difficulty in finding and keeping their best people.
Knowing how to manage your suppliers for optimum long-term benefit is critical, especially as you seek to outsource more and more of the company’s non-core work. But how do you strike a balance between the lowest price, the best service, and an acceptable level of risk?
The contract you have with your supplier sets the tone for how the relationship is managed. It has to be robust, and the terms clear. But in the best customer/supplier relationships, once the contract is negotiated, it goes into the bottom drawer, and rarely sees the light of day.
This is because you manage the day-to-day delivery, based on the core principles of the relationship – with give and take – and try to serve the intent of what’s been agreed. If you go by the letter of what you’re entitled to in the contract, that’s all you’ll ever get.
I want to give you just three core principles to think about when establishing a new supplier contract, that you should find pretty useful:
- It isn’t a zero-sum game. Think about the size of the pie. The more value you can create in the overall deal, the more there is to share between the you and your supplier, so don’t be transactional
- Think about the outcome you want. What does a good negotiation result look like? You both walk away satisfied that you’ve got a good deal. If not? You’ll have problems later on. The core concept here is that the best price isn’t necessarily the best deal!
- Think about the appropriate allocation of risk. You really have to know what you’re doing here. The risk should ultimately be taken by whichever party is in the best position to manage it. But it’s how you price the risk that’s critical.
When I was negotiating multi-year, high-value contracts as a supplier of bulk rail haulage, we understood the risks we were taking on profoundly. We had teams of analysts performing complex statistical analysis of historical patterns, so that we could accurately price our risk.
If we were in a negotiation, and one of our customers said, “we think you should take on this risk of a catastrophic event at the load-out facility”, we were able to determine the likelihood and consequence of that risk, in a way that enabled us to price it.
So, we could say, “Sure, we’re happy to take on that risk… and it will cost you an additional 7c per tonne”
If you squeeze your suppliers too tight, they will end up cutting corners. Remember, you can outsource the activity, but you can’t outsource the risk!