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Challenging Times For Procurement: Will Suppliers Show Pity?

April 24, 2008

At a recent IACCM meeting, a senior member observed: ‘Our industry, and industries like automotive, have destroyed trust and collaboration (with the supply base). Shame on us. Now, as markets tighten and power moves to the supplier, we will reap the consequences of our behavior.”

In essence, he was suggesting that many in Procurement have been walking down a blind alley. For all the talk of strategy and of reaching the top table, the reality is that many sourcing organizations have been pushed into short-term objectives to grab price reductions, at the expense of longer-term strategic thinking. Globalization appeared to offer a never-ending source of cost reduction and fierce supplier competition. The emergence of today’s dramatic supply shortages has caused a crisis for many. Far from being able to sustain price reductions at this time of growing cost pressures, procurement is in some cases struggling to even find a source of supply at any price.

As worldwide wealth grew, what did ‘strategic visionaries’ expect? Two years ago, IACCM was warning its members that the change was coming and that suppliers were shifting their loyalties – for example, they were investing their marketing dollars in emerging markets, rather than their traditional (disloyal) customers.. We alerted buyers to the fact that they would pay a price for alienating the supply base. But the good times rolled on – commoditization, reverse auctions, confrontational contract terms – these were just some of the ways that buyers showed their lack of loyalty to the traditional supply base in their haste to grab low prices and exert their dominance.

For those in the West, who led this charge, the cost will be especially high. As we reported last year, their risk-averse behaviors have already resulted in suppliers looking East when it comes to innovation. Now they will also be exacting revenge through price hikes to recover from the years of buyer domination and abuse of power.

The result will inevitably be a further hit on the competitiveness of the leading western corporations. They will be faced by choices between higher prices or lower quality – neither being a recipe for success.

Is there a solution? Yes, but companies must act fast. They need to redeploy their resources to focus on trading relationship outcomes, rather than the short-term, input based ‘savings’ mentality. They must oversee contract life-cycles and ensure accountability for results.

Through such approaches, combined with a portfolio view, they can drive substantial efficiencies.

Another priority is to ensure a shift in measurements and to develop new terms and conditions that reward collaboration. IACCM has been working on such terms for more than a year.

Applications and skills will remain challenging. Since software inestment has largely assumed supplier compliance, it is questionable how much of the recent investment will survive. And skills – there is a desperate need for leaders who can oversee this latest transition.

Measures such as these will steadily restore the damaged buyer / supplier relationships of the ill-considered commodity era. But Procurement is going to face some tough times in the interim.

  1. If suppliers can’t or haven’t gone global they often feel trapped by procurement’s relationship erosion .

    Hopefully, procurement will value suppliers in a new relationship. The Service Contract Manifesto is an attempt to simply outline principles for better results from better relationships.

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  1. The poor, misunderstood reverse auction « Where Next

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