Value beats price, a CPO perspective
Every procurement professional knows the aim of the game is not to get everything as cheaply as possible. Good supplier management is about achieving maximum value from the supply chain, not minimum cost.
When negotiating an agreement with a supplier (whether new or existing) it’s important to look for opportunities to deliver additional value within the relationship. Remember, any negotiated agreement needs to benefit both parties. If it’s all ‘take’ and no ‘give’, the relationship won’t last.
Value can be derived from a wide variety of sources. What I’ve done here is identify six key considerations that should help keep the conversation focussed on maximising value.
Know what you want. With as much detail as possible, describe the goods or services that you are looking to purchase. Beyond that, make sure you also specify how you want them delivered and what kind of post-purchase support or training you require. Don’t forget to include payment terms, returns policies and rebates.
Once set in stone, this specification should become the benchmark against which you measure any and all costed proposals. Think of this as your minimum requirement. If you receive proposals that exceed these standards, you’ll need to decide whether the organisation wants, or needs the additional benefit. This decision should be based on the additional value derived.
When I say sustainability, I don’t mean green credentials (though they are important). I’m speaking more about credibility. Does your supplier meet your CSR requirements? Can they sustain the service levels they bid for without sacrificing quality standards? If a price seems too good to be true, it probably is.
It’s vital to have clearly defined how and where you want your good or services delivered. The logistics of a supplier relationship include such diverse considerations as minimum and maximum drop sizes, preferred delivery days and times, whether you will accept substitute goods and what happens if you don’t and a supplier fails to fulfil an order.
For organisations running lean processes or just-in-time ordering systems, lead times are of particular importance.
To measure the success of any supplier relationship, it’s important to establish key metrics, against which the performance of both parties can be assessed. Define what reports you want, both internal and external. What data will the reports include? How frequently will they be published?
What happens if the supplier misses its SLA? Make sure you have a clearly defined remedial plan in place that identifies key milestones on the path to improvement. Also, make sure everyone understands the consequences of repeated failure.
OK, it’s inevitable that there will be a price negotiation element to any supplier agreement. However, the price needs to reflect all of the elements that have gone before. If the supplier can satisfy all of your requirements and still hit a low price point, happy days.
Once everything is agreed, it’s time to negotiate the contract. Your supplier agreement needs to detail all the elements we’ve discussed, including price schedules and general terms and conditions of trade. Be clear, and concise, about termination or exit clauses. If your contract is subject to a trial period or initial term, make sure you document the path for contract extension and renewal, including any price escalators or volume discounts. The more unambiguous your contract, the easier it will be to manage the relationship.
Above all, supplier management is about delivering maximum value to the business. Focussing on price alone can result in a “race to the bottom”, where quality is often sacrificed in the name of cost savings.
If you are looking for ways to add greater value to your day-to-day and would like to discuss your requirements, contact our team today.