In the news this last week was that a powerful US politician is desperately pushing to increase taxes on the big oil companies by 10%.
Free money? Far from it. The oil companies will just casually raise the price of oil by exactly 10% and, as with all supply chains, the costs will roll straight downhill to the final consumer. The oil companies don’t pay this tax at all in fact. Just follow the money down the supply chain. There’s no such thing as a free lunch in our profession.
Yet we see this happen in negotiations all the time. Purchasing cleverly negotiates to have the supplier pick something up at their expense. Then purchasing claims victory and chalks it up as a negotiation accomplishment. But be careful when you do this because it could backfire.
Read this twice: your suppliers don’t pay for anything. You pay for all their expenses
If your supplier gives you a free warranty, you’re paying for it. If the supplier agrees to a vendor-managed inventory model, you’re paying for it. If the supplier agrees to free shipping, you’re paying for it. If the supplier assigns a dedicated customer service person to your account, you’re paying for it. If they fly out 15 people to meet with you when only 2 are needed, you’re paying for it. If they fly them, business class, you’re paying for it. If they have 90% manufacturing yield and are eating the other 10%, you’re paying for it. It’s all baked into what they’re charging you, and your suppliers are in the business of making money.
Shall I keep going? Or is it clear now? Suppliers don’t pay for anything. You pay it all!
The advice here is not to stop negotiating for non-price-related concessions. Go for it! But you have to understand how costs roll downhill. Also recognize that when you get the supplier to eat an expense, you haven’t improved the supply chain in any way. You’ve just pushed costs back up the supply chain. From the supplier’s perspective, they’ve cut profitability so you can report more savings – which is obviously not a sustainable approach.
We would rather want you to focus on taking costs out of the supply chain. We teach corporations and government agencies all over the world how to do this, and it’s the way our industry needs to go. If you can get a supplier to eat 10% costs, they’ve made 10% less profit so you can report 10% more cost savings. But the end consumer doesn’t benefit, because supply chain costs haven’t actually changed at all. You’ve just squeezed the balloon and sent them upstream.
But if you collaborate with a supplier to take unnecessary redundant and ill-conceived costs out of the supply chain, those are 100% cost savings (because you didn’t remove a % of a cost, but rather, you surgically removed that cost in its entirety). However, we are always going to negotiate for non-price-related concessions. If you want to avoid having those concessions baked into the price, then negotiate the price first. But don’t be surprised when suppliers push back when you push for non-price-related concessions.
But remember – only 10 – 20% of cost savings opportunities are found in negotiations. The rest are found in SOW/Spec design for TCO and in taking costs out of the supply chain. Chief Purchasing Officers, are you measuring these metrics – where the real pot of gold is – or are you just measuring negotiation cost savings
To be a world-class purchasing professional, you have to deeply understand not only costs but the flow of costs in the supply chain. Just getting a supplier to eat a cost isn’t going to get us to a coveted supply chain management model. And it might even come back to bite you. Our profession is better than that, way better.
Now go off and do something wonderful.