In today’s marketplace, how you procure your company’s outside materials, parts or services is as important as what you procure. Companies using a procurement strategy based upon transactions have driven up the cost of doing business with their suppliers; whereas companies who have adopted a relationship-based strategy have seen their costs for bought-in materials, parts and services reduce dramatically.
Historically, companies followed a procurement strategy that was based upon a transaction. The company ordered a material, part or service and expected that it met the quality, cost and delivery terms that were negotiated at the time of the purchase.
Basic information was provided to the supplier. But for the most part, the supplier was not given a view past the part or service that he or she provided. Information about the company’s final product was not shared with the supplier, nor were technology road maps or the company’s future business strategy , effectively keeping the supplier at an “arm’s length.”
Transactional procurement creates additional costs in the supply chain. Many times suppliers are forced, in the absence of reliable data, to speculate on how best to meet their customer’s needs.
Forecast data provided by the procuring company is often outdated or unreliable, leading the suppliers to over- or under-manufacture; manufacture at an incorrect level; or utilize premium shipping methods to meet a last minute schedule shift.
– Suppliers Need To Be in the Loop
Suppliers are unable to develop solid business plans because they lack knowledge of their customers’ plans, leading to planning missteps that result in over- or under-capacity. As the communication is generally one-way (procuring company to supplier), problems or challenges which arise cannot be openly discussed and are generally approached in isolation.
The result , costs escalate, profits erode.
Companies today are shifting to a relationship-based procurement strategy. This strategy includes early supplier involvement in the design of products or services, sharing of information and technology roadmaps, and aligning the companies toward fulfilling the customer’s needs.
The cornerstone of relationship-based procurement is partnership and communication with the supply chain. When procuring companies work in concert with their suppliers, unnecessary processes can be eliminated, business practices can be streamlined, costs can be reduced and profit margins can be increased.
When the business plans of both partners are shared, suppliers can better respond in a timely manner with materials, parts or services. Suppliers have a view to their customer’s future strategies and can align their strategy to their customers.
– Developing Mutual Business Strategies
There are many methodologies for moving a company into relationship-based procurement. One short-term approach is to conduct a series of workshop-based team events with selected suppliers. These sessions will identify cost reduction opportunities in design, process, business practices, and supply base that will benefit both companies.
A long-term approach is to establish an executive council with the company’s strategic suppliers.
The executive council works together to develop business solutions to challenges that arise for all companies and to design new ways of working together. This group is responsible for leading the cultural change that must take place in each of their companies, as well as providing resources and removing roadblocks as working groups implement cost reduction ideas.
In today’s competitive arena, companies must work together to re-examine business practices to ensure a cost-effective corporate environment. By monitoring how they procure, as well as what they procure, companies can identify and eliminate unnecessary costs.
Beck is the CEO of Value Innovations, Ltd.
