In the current economic climate, organisations are looking to their procurement departments and their supplier partners to deliver more in terms of real, tangible bottom line cost savings. How many times have you heard the CFO or CEO say the only real saving is one that can be removed from the budget and in year!

This demand creates a real challenge for the Procurement team. They could end up asking themselves;-

In order to deliver the cost savings, do I:-

 Look to renegotiate pre-existing deals?

 Change current contractual terms e.g. payment terms

 Focus on short term spot deals with regular tenders/e-auctions to deliver instant cost reduction

 Offer longer term commitment with suppliers to gain additional discounts?

OR

 Reduce the specification

 Step down the quality of product

 Reduce the Service Levels currently delivered to the end customer?

 Automate parts of the process to drive out cost?

Different individuals come up with various plans to achieve the aim of cost reduction. There are different drivers which affect the decisions made. For example, a company in survival mode should be ruthless in seeking to drive out immediate cost to survive. The business drivers greatly impact the wider engagement with the supplier community.

The problem is, the end customer whilst maybe applauding the sentiment to drive out cost, does not appreciate the degradation in the perceived level of service.

On the one hand you save the company money, on the other, the end customer feels the level of service and product is being degraded. What can you do to balance what appears at face value to be conflicting demands? There are a few steps you can take to improve your chances of striking the right balance:-

Understand Your Current Service

You should examine the deliverables and service currently received from your suppliers. This should include a review of the “gimmes”, these are the things they do for you but they are not contractually obliged to do so.

Undertake a Process Review

How do you build up demand and order the products and services. A suggestion would be if there is a large enough spend area and there is complexity that you would look to use six sigma experts for assistance in this space. You could also offer to extend this service into the vendors operations and supply chain.

Understanding Your Supplier Segmentation

You need to have reviewed your supply base and the products and services criticality to your business. Again, it is common sense, but trying to force a strategic supplier with a product which is critical to your companies’ performance into a tactical relationship would be a big no- no.

Assess the Marketplace

You must understand the competitive nature of the marketplace and the relevant power of the suppliers and buyers. It is no good recommending a short term approach and spot deals if there is a shortage of product and suppliers in the marketplace.

You also need to understand what competitors are doing. If you are looking for deeper relationships with key suppliers and seeking to get ahead of your competition by taking advantage of new features and supplier product developments, this wont work if they are about to do something similar with your main competitor!

Involve Suppliers

Whether you are changing your strategy to simply spot buy and go for short term deals, or are looking for longer term and deeper relationships, communicating with suppliers is key. It is something that sometimes is forgotten, but from a supplier perspective being kept in the dark as to your plans breeds an unhealthy situation. Sometimes the supplier will be willing to assist and offer an insight into what you could do to drive efficiencies as obviously it is in their interest to be viewed as on board and adding value.

Map Your Customer – Who really is your customer? Is it the requisitioner, the head of department or in reality Joe Public? By understanding who will physically use the product or service and what they will actually use it for, will give you a better understanding of the impact of any changes.

Meet with the specifiers

In a collaborative fashion, look to challenge the specification. Seek to understand what can and cannot be modified and the reasons behind it. Explain the importance of your review and impact it could have on the bottom line of the company.

Offer up Options

If you are endeavouring to change a specification, always look at various options, assess the impact and look to discuss with the customer/specifier. No one likes a fait accompli! You need to explain the changes and obtain input.

Obtain buy in before you execute the strategy

It is really important that you line all the key stakeholders up and gain their buy in before you execute the strategy

Baseline Current Service Satisfaction

You need to understand how happy the end customer is with the current service and how much they value it. You should then continue to track service perception to see what impact the changes are having.

In Summary, you need to:-

 Place a value on the current product and Service

 Look to save money through process efficiencies before you look to cut elsewhere

 Segment your supply base and products effectively – use this data to shape your approach

 Manage the engagement with the customers and suppliers

 Research your options

 Obtain Buy In

 Execute the plan and track performance

 Stay close to your customers and suppliers

Hopefully, through this type of approach, the CFO will be happy with the improvement to the bottom line, the customer does not complain about the service being delivered and your suppliers still want to supply to you.