Supplier Relation — new profitability lever
During the 2008 crisis and subsequent recession the business community realized that the procurement function can in fact be a profit centre for a business. As sales dried up and the corporate purse strings tightened the c-suite realized that as well as increasing revenues, decreasing costs could be used to protect profit margins and procurement’s time in the spotlight began.
The desperate measures brought on by the recession led to an increased focus on the procurement function, this increased attention and influence giving procurement teams across the world the mandate to act on initiatives that in the past you’d only spoken about. To use a horrendously over quoted business phrase, you initially focussed on the ‘low hanging fruit’. You focussed your efforts here because there was just so much of it. The boom times that preceded the 2008 crisis, meant that corporate objectives were centered primarily around revenue and sales growth and neglected a lot of the opportunities on the cost controlling side of the ledger. Revenue was king and you did what was needed to be done to increase it, even if it was at expense.
In the months and years after the crisis, procurement was called into action. Spend was grouped and leveraged, payment terms were extended and the price per unit was driven down. All of this lead to marginal improvements in your cost base. This activity is nothing to be frowned upon, in fact it probably saved a large number of jobs and indeed some firms from financial ruin. However, it’s our belief that what you’ve achieved so far is only the tip of the iceberg in terms of the profitability a procurement function can deliver its organization.
Supplier Relationships are the Next Frontier in Procurement Profitability.
As we’ve discussed, cutting costs and extending payment terms might have marginally improved profit and loss balances, but the real opportunity for procurement teams to drive profitability lies deeper within supply chains. By working closely and establishing open collaborative relationships with suppliers, procurement can be on the forefront of product development and position itself as the gateway to the wider market.
Today’s markets are merging and evolving more quickly than ever. Traditional products are undergoing huge changes and upgrades through the integration of technology and ‘smart’ thinking. Forces like Big Data, Artificial Intelligence and even GPS are being integrated into even the most commonplace products and services and this is causing the playing field for traditional organizations to fundamentally change. In order to stay relevant, organizations need new products and services to meet this insatiable and evolving consumer demand. Old product mindsets lead to dead businesses, just ask Kodak and local book shop owners.
This cross pollination of tech and traditional businesses means firms always need to be looking for the ‘next big thing’. It’s no longer enough to have a great product that buyers rely on. They need to continually innovate and update market offerings.
But just how are firms supposed to understand the vast array of opportunities out there in this immense and dynamic market place? The answer is that they are not. It’s simply impossible for firms to be linked in on every possible opportunity that might revolutionize their products.
The way to stay ahead is to form close relationships with your business partners. Your business partners will likely know more about your niche supply markets than you do. Take Toyota as an example, a firm with very tight and collaborative supplier ties. Toyota doesn’t understand every opportunity and threat that exists within the car brakes market. They do however have a very close, collaborative working relationship with their brakes suppliers, who have an intricate knowledge of this field. By having an open, transparent and mutually beneficial partnership Toyota is able to stay on top of any developments in car braking systems and in turn, ahead of their competitors.
The short of the matter is that in order to survive, one must innovate and in an increasingly complex, technology-driven marketplace it’s often your suppliers that hold the key to these innovative solutions.
Surely it figures then that you need to start creating stronger bonds with you suppliers if you want to drive new products, improve service levels and ultimately remain profitable?
This is no mean feat. After years of septic supplier relationships where you’ve fought over price and payment terms until you were blue in the face, the task of creating collaborative supplier relationships will take some work. This process requires a rethink of commercial partnerships from suppliers, but more importantly, from the procurement organization. Essentially, you need to rethink and restructure your corporate relationships.
