Can You Cut Costs Better by Collaborating?
Is it possible you can save more by working together with vendors or clients than you can through hard bargaining?
Conventional wisdom says the way to cut costs is to lean hard on outsiders, demanding better deals. In a downturn, firms commonly press each other with gut punch offers, insisting, “our budget/our changed cost structure/our CEO demands we get a big concession from you.” That approach is particularly common- though not at all unique- in supply chains. As Abe Eshkenazi, head of the Association for Supply Chain Management, notes, for decades most purchasing agents have simply taken the view, ‘I must get a bigger discount this time.’ In downturns, they say it even louder. But that approach, Eshkenazi observes, is naive, and conceals a great deal of potential savings and value you can realize if you treat outside stakeholders as partners. Really?
Collaborative Supply Chain Negotiation with Vendors/Clients Can Help You Save and Invest.
Proctor & Gamble faced serious headwinds in the early 2000s and realized it needed to cut costs. It could have simply told its thousands of vendors it was going to squeeze them for lower prices. But instead, P&G got collaborative. Looking closely at vendors’ needs as well as its own, it realized vendors needed less expensive capital and better cashflow, but typically lacked the credit to get inexpensive loans. But P&G had a great credit rating, and it knew banks would be more willing to lend to vendors with P&G contracts. So P&G offered a program to its vendors: if you will let us pay our bills 120 days later (instead of 60 or 90) so we save money from a bigger float, we will help you get less expensive loans by showing banks you have contracts with us. Over 700 vendors took the offer the first year, and most actually saw their cashflow, capital access, and net revenues increase. And by paying later, P&G saved $1 billion in the first year and $5 billion in the next five, much of which P&G invested, which fueled growth. In short, a counterintuitively collaborative approach helped everyone, and especially helped P&G transform its costs.
MainePointe, a leading supply chain management consulting firm, has championed a more enlightened approach to vendor negotiations for years. Combined with in-depth review of a company’s supply chain process and cost structure, MainePointe has advised dozens of companies to save a total of hundreds of millions of dollars by striking collaborative deals with strategic suppliers. I have done similar work with clients who have had similar results.
Three Keys to Collaborative Negotiation with Vendors/Clients
1. Hard Data– Elite firms- firms like P&G that save more than others- first master the facts, often analyzing the data to master their contract terms, their financial condition, their supply chain processes, and other costs.
2. Interests & Options- Elite firms also think carefully about their interests- that is, their underlying needs- and, critically, also think and listen to understanding their counterpart’s interests. Of course the client wants a lower price and the vendor a higher price, but why, and what other needs does each have? With interests well identified, elite firms shift to finding creative options that satisfy everyone. These shifts helped P&G save billions and create better relationships with hundreds of vendors.
3. Common Goals– Elite firms explicitly signal to their vendors and clients that they want to find ways to work together better, discover creative ways to share savings, and build a respectful relationship in specific, measurable, actionable ways. One oil and gas firm did this in a tough market by saying so in its Requests for Proposals to dozens of suppliers. Some suppliers found the idea puzzling- that’s how inured they were to rough treatment. But other suppliers were willing to try, and many of these were able to enter deals that were way better than they’d dared to hope for even as it saved the oil & gas firm tens of millions of dollars.