SCDigest Editorial Staff

SCDigest Says:

Bottom line pressures can also drive a wedge into more “collaborative” relationships between buyers and suppliers, as the need to cut costs in the short term can, at least temporarily, overwhelm the longer term view of the relationship.  What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

Most procurement and sourcing professionals with tenure of more than a few years have been here before – a declining economy starts to pinch the top line and therefore the bottom line, and the first place that executives often look to cut supply chain costs is the purchase price of direct and indirect materials.

While there are many strategies that companies can employ to reduce supply chain costs, the handiest target – and the one that can have the most immediate impact - is often an edict to cut the prices paid to vendors for purchased goods and materials. That strategy can work, especially if demand is slacking in a particular category industry wide – but there are challenges.

“I have customers all of a sudden demanding price decreases to help them cut costs,” Aaron Jennings, an independent manufacturer’s rep of industrial adhesives based in Ohio, told Supply Chain Digest this week. “But for my products, being oil-based, the bad news is that prices are going up, not down.”

That’s true in many other product categories, from steel to corn syrup, that continue to be impacted by commodity costs that are still increasing in many categories even in the face of slowing economic growth worldwide.

Bottom line pressures can also drive a wedge into more “collaborative” relationships between buyers and suppliers, as the need to cut costs in the short term can, at least temporarily, overwhelm the longer term view of the relationship.

That was true for one procurement manager at an industrial equipment manufacturer, who told SCDigest that “Right now, it’s sort of like “Forget about all that strategic stuff.” We need to lower our costs right now.”

Notes SCDigest editor Dan Gilmore, “I think it’s important that procurement managers have a dialog with senior management when these kinds of edicts come down, so they can explain as appropriate some of the nuances of individual goods and relationships. It’s also critical to be very well informed on the dynamics of specific product-markets in terms of cost drivers and supply-demand scenarios.”

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That said, Gilmore recognizes sometimes you just have to go with the flow.

“If the COO says “cut purchasing costs,” in the short term, you probably just have to do it even if it does some damage to the relationship,” Gilmore added.

Mickey North Rizza, Research Director at AMR research, agrees that it's important to balance short and longer terms considerations.

"While containing costs is an imperative for every company, the real issue is that companies need to understand the value that is brought by a partnership and supplier. Within that, a cost-value analysis must be made.  The most advanced sourcing technology products provide input areas to measure and address the value with the cost," Rizza told SCDigest.

Is your company putting pressure on vendors to lower prices? Is this thinking short sighted – or what’s absolutely right for most companies right now? How do you balance these short term needs with the longer view of more strategic, collaborative relationships? Let us know your thoughts at the Feedback button below.