Tips on dealing with business storms before they hit
Between technology changes and globalization, the tools available to modern purchasing departments for cost reduction are indeed powerful. By writing specifications and using modern outreach tools to identify possible suppliers, a buyer can receive bids from suppliers across the world and choose the lowest cost supplier among those deemed to be qualified … and even groom an unqualified candidate into a future low-cost supplier with a modest effort. In cases of low switching costs, this can be repeated almost real-time each time that another purchase occasion arises, substantially reducing costs as technology and competitive changes occur. Some buyers have become even more creative by holding multiple rounds of bidding to drive costs lower.
It can seem to the suppliers involved in such situations like a game being played with loaded dice. Moreover, from the supplier’s perspective, the customer that ignores everything other than price often ends up worse off., failing to sustain leadership along dimensions such as product quality and innovation. The same executive made these points in describing the outcome of the auction run by this customer:
“So, we played along and put in our bid. What else could we do? We cut to the bone, reducing our margins and substituting cheaper materials where we could do so without reducing the quality we typically engineer into our products. We managed to get our bid to the point where we were confident that it would be the lowest, so our internal celebration began because we thought that there was no way we could lose given our aggressive bid and the superior quality of our product. But then, we got a call saying that we had lost to another supplier. We later learned that the winning supplier had put in a bid that was only about 1.5 percent lower than our bid. We learned that they got the exact same score in the 10 percent element for the quality of product, even though this supplier has a history of quality and delivery problems that are well known by everyone in the industry. At this point, we concluded that this was no longer a customer that valued us or that we could be successful with, if they were willing to pass us over with a process like this. From our perspective, they were willing to make a horrible long-term decision, trading off all the contributions we had made to their success in order to gain a very small price concession up front.” [Ingredient Supplier Sales Executive]
Unfortunately, case histories like this one emerge all too frequently in discussion s among suppliers about their experiences with customers that are implementing new approaches to purchasing. In this instance, we also had the opportunity to speak with executives in the organization that was making the purchase decisions described by this ingredient supplier sales executive. Like most stories, there were two sides to this one.