Procurement Intelligence Unit

By common consent there are two kinds of suppliers relationship management – one involves the fist and the table, the other, the outstretched hand and the voice of reason. And while procurement currently finds itself very much in a buyer’s market, the suppliers that have seen more of the former than the latter are likely to have long memories when the economy finally gets back on its feet.

As procurement and suppliers look to find common ground, and develop a mutually beneficial understanding, then companies need to look beyond cost, which is why more and more are utilising cost modelling as a means of ensuring security of supply and, crucially, maintaining long-term supplier relationships.

Earlier this year, Chris Sower, director of strategic procurement at Charming Shoppes, told the annual ISM Conference, that cost modelling had enabled the US fashion retailer to negotiate savings of $1m for corrugated paper.

Sower claimed that collecting reliable industry data before going into negotiations with the company’s suppliers was the single most important factor to Charming Shoppes strategy, with the company’s research identifying that labour costs in this particular market had dropped 16% - findings that contradicting its suppliers assertion that costs had, in fact, gone up.

This is just one example of how cost modelling has enabled firms to gain the upper hand during the toughest economic conditions for almost 80 years and, according to Cesare Businelli, Sr. VP of Anklesaria Europe, supplier negotiation based on this kind of market data has rarely been as important.

“Current economic conditions dictate that companies need to be very careful when negotiating with suppliers because, right now, it’s a typical buyers market so firms naturally think that they can drive prices down on almost everything,” he told the Procurement Intelligence Unit.

“Certainly there are a lot of suppliers that are under pressure and what we’re seeing is that, in some instances, suppliers are supplying a quote that is under cost in order to maintain business – that’s clearly unsustainable.

“A lot of companies have been using a fist on the table approach to suppliers, but we’re already starting to see a turning around in the market, and once the recovery is under way then suppliers will definitely turn to customers that they’re more willing to develop a long-term relationship with.”

Businelli claims that even some of the world’s biggest companies are turning their attention to cost modelling, which means many are walking away from purely cost-focused negotiations.

“We’ve seen companies in the oil and gas sector start to look more closely at their procurement efficiency,” Businelli said. “They’re starting to build some really solid capabilities in cost modelling, which has resulted in them really trying to get their buyers to develop a greater understanding of the true cost of products and services.

“This means they can negotiate a fair, reasonable and, more importantly, sustainable price.”

Like many market intelligence operations, the key is often buy-in at the highest level and investment in a process that will, in all likelihood, comfortably pay for itself. And once the foundations have been put in place, and the most important categories identified then the cost modelling process can, according to Businelli, grow and develop at a fairly rapid pace.

“In the beginning you need to have that commitment, and a minimum budget to fund that commitment,” he said. “In large corporations that have hundreds of categories you start with the most critical and it’s a kind of ripple effect from there on in.”

Once a buyer is armed with the required information, and the supplier is opening up over their cost structure – again, a process that can take time – then procurement finds itself in the enviable position of being able to negotiate from a position of strength, regardless of whether its operating in either a buyers or sellers market.

“There a lot of cultural factors and it’s a real learning curve – in many ways it’s much easier for a buyer to go and ask for a discount,” said Businelli. “Big companies are now, though, realising that they can get much, much more than this. Once you know the cost structure of the supplier you can really start working, not just on reducing the margin, but also working with suppliers to reduce the cost itself – and you can’t do that unless you understand the impact of the single cost drivers on the price that you pay.”