Thursday, December 3, 2009

Lean on your Suppliers

There are risks and costs to a program of action. But they are far less than the long-range risks and costs of comfortable inaction.
~John Fitzgerald Kennedy

Going through these very difficult economic times, controlling cost is one of the major things that you can do to really help your bottom line. Now is the time to renegotiate everything from rent to cost of goods sold.

So many of your vendors are having such trouble with falling sales that they are now willing to take significant price reductions, but you must ask for them. Your suppliers need to retain you as a customer now more than ever, and they should be willing to do most anything that is reasonable to keep your business.

We were helping a firm that purchased over $5 million a year from its primary suppliers. These suppliers had quickly passed along their cost increases—particularly transportation costs—to this business. Now that sales were falling off, the company needed some relief if it was going to survive.

When asked why they had not requested a price break before, the comment was, “Our purchasing agent just does not feel comfortable in asking for these.” As you can imagine, I went livid and asked the owner if a savings of $1 million (20% of $5 million) was worth asking for.

He finally got the point that now things had changed and that unless he was willing to demand price reductions from his suppliers, he might not be around much longer. He was able to get his purchasing agent to buy in by giving him a percentage of the savings from the cost reductions they secured and by very clearly demonstrating how to ask vendors for price breaks.

At first, the purchasing agent just wanted the vendor to give them a better price. The owner, however, mandated that the purchasing agent start off asking for a 20% price reduction from those suppliers that they knew had nice profit margins and could afford it. Starting with a number established an expectation that was reasonable rather than just asking for any type of price break.

When asking for price reductions, nothing should be off limits. Whether it is consultants’ salaries or office supplies, you must demand price reductions in these market conditions. You must ensure that your company has a cost structure that is workable in today’s economy. Your viability depends on this.

Even if you have signed a contract for service, these should be renegotiated as well. A recent study found that six out of every ten chief information officers are renegotiating existing contractual agreements. When renegotiating, your leverage is that these contracts will have to be renewed in the future, and your willingness to renew is going to be a function of this renegotiation process.

Now go out and initiate a process of renegotiating each and every one of your purchase contracts. This just cannot wait. It must be done as quickly as possible to get the benefits flowing into your company.

You can do this!

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