How To Make The Cost Cutting Buyer Your Ally
Today’s buyers are hell-bent on cutting cost. However for sellers that need not be all bad news. Indeed, the latest wave of buyer cost cutting, with its broader and more sustainable focus, has the potential to take buyer-seller relationships to a new level. It means that cost reduction is something that can now unite, rather than divide buyer and seller.
The 6 buyer strategies for cost reduction and their implications for sellers
Traditionally, buyers have turned to two strategies in the pursuit of immediate cost savings:
Strategy 1: The RFx
We are all too familiar with the rise of the competitive tender and the increased volumes of RFPs (request for proposal), RFQ’s (Request for Proposal), etc.
Strategy 2: Price Negotiation
The traditional jaw-boning’ where buyer and seller go head to head on price reduction.
The bottom line is that the progressive shaving of the supplier’s margin is not the only strategy for cost reduction. For buyers who have already ‘gone to the well’ on a number of occasions in pursuit of supplier margin cuts, that is good news. After all, in many cases much of the scope for shaving supplier margins may have already been exploited. So, buyers are exploring other ways of cutting costs.
New Buyer Strategies For Cost Reduction
Buyers are adopting an increasingly sophisticated approach to the challenge of cost reduction. This is reflected in the range of strategies being adopted.
Buyers have moved beyond the more obvious strategies of the competitive tender (the RFx) and supplier re-negotiation, to adopt a more integrated, holistic and ultimately more strategic approach. So it is that buyers are being advised to adopt a third strategy for cutting costs:
Strategy 3: Partner with suppliers in identifying more creative cost savings
‘Ask and you may receive’ is the new motto for the progressive buyer, who has come to see that two heads are better than one when it comes to finding new ways to cut costs. In this way cost reduction becomes the joint responsibility of both buyer and supplier.
Sellers who recognize the inescapable fact that buyers are targeted with delivering additional savings, year on year, partner with buyers in finding more innovative win-win ways of cutting costs.
However, buyers are cautioned to take a holistic view of cost reduction in working with their suppliers. That means finding new ways to remove cost, rather than simply hitting supplier’s margins. The focus then shifts to greater innovation, process efficiency and so on.
This has implications for sellers, as it means that they can co-operate with buyers in the pursuit of cost savings, without the defensiveness that the direct assault on supplier margins entails.
Suppliers who come to their customers with new ideas as to how costs can be reduced can really distinguish themselves. For example; if we did it this way, added more of this, or less of that, if you followed this process, etc. With every dollar, or euro they help the buyer to save the seller protects, or perhaps even grows, their revenue and margin.
How can you partner with the buying organization to delivery cost savings through innovation?
Strategy 4: Demand Management
Buyers are increasingly focusing their attention on the origin of cost, addressing the issue of managing demand, or spend for the various products and services used throughout the organization.
This rather obvious strategy makes total sense. For example, if the buyer can curtail demand for new software licenses in the organization by 10%, that is going to deliver up to 10 times more than a 10% reduction in software license costs from the supplier (which incidentally will be sought anyhow).
The starting point of demand management is spend analytics – the process of exposing what the organization spends, how and where (and more importantly how this can be reduced).
The seller can play a role in helping the buyer in respect of profiling, understanding and managing demand, often without suffering any margin, or revenue reduction. For example, ‘we received 30 individual orders in the past 6 weeks from various departments in the buying organization… If we combined orders into weekly delivery schedules that could reduce transport costs by 30%, while also preventing ‘impulse orders’.
How can you help the buying organization to curtail unnecessary spending, or waste in your area?
Strategy 5: Consolidation / Aggregation Of Purchases
The first port of call after the analysis of spend is typically the consolidation, or aggregation of purchases. This may involve any, or all of the following:
– Getting managers, departments and business units to pool their orders to generate bulk discounts
– Framework agreements with selected vendors (covering more items for a longer period)
– Reducing supplier numbers, with preferred and approved vendor lists
– SKU (Stock Keeping Unit) consolidation – reducing the number of individual/unique items purchased (e.g. “we purchase 18 different types of ball bearings, lets reduce that to 6”).
– Specification reduction – where specifications are simplified or reduced so as to open up new / cheaper sourcing options.
– Category management – that is the focus on particular spend pools , or categories of purchases.
How can you help the buying organization to consolidate, categorize, or aggregate what they spend in your area?
This strategy can present both opportunities and challenges for the supplier. However, as it is an obvious and almost inevitable step in many buying organizations, the supplier who proactively engages with it can become more embedded.
Strategy 6: Re-engineering the supply chain
Procurement is increasingly the focus of strategic, or joined up thinking that sees buying in the context of the total supply chain with its multiplicity of inputs and outputs, customers, suppliers and partners. That means procurement is looking for economies and efficiencies in new areas.
The focus has shifted to total supply chain efficiency and in particular to leveraging supplier partner innovation in getting their product/service into the hands of the customer. It has also shifted to the suppliers of your suppliers (e.g. raw materials) in terms of seeking cost reduction.
How can you help the buyer to optimize their supply chain efficiency – from raw materials, or inputs to outputs, or finished products provided to their end customers?
When buyers see their business as a supply chain, they quickly begin to see that certain steps in the supply chain could be done by others. That may mean outsourcing the procurement of particular products, or categories, or it maybe the outsourcing of stages/steps within the supply chain.
In a world where the biggest one time manufacturers don’t own factories, or fleets of delivery vehicles, but instead manage supply chains what matters is the end to end performance of the business (or supply chain), not who owns the various pieces in between. With companies focusing on core competence, the trend is towards outsourcing everything else and that presents opportunities for suppliers to become strategic partners.
As buyers are regularly reminded the issue of outsourcing requires asking not ‘Who is best to do it?’, but ‘Who is best at doing it?’ This of course can present opportunities as well as challenges for the supplier. Sellers need to see them selves not as suppliers, but as links in a supply chain. They need to adopt a full customer supply chain focus.
How can you help the buyer to outsource and thereby focus more on their core competence?