An Unfortunate Exit

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I once worked with a client who complained bitterly that even their most important suppliers weren't giving them good service. That was an understatement.

My client wasn't even receiving an adequate service, so much so that their business was exposed to more risk as a result. PO’s went unconfirmed, phone calls weren’t returned, expected delivery dates came and went.

?We discussed why this might be the case. This led to lots of head-scratching and no answers.

An example they later shared with me proved revealing, though. It showed how focusing on short-term results and failing to invest time in managing the supplier relationship can bring risk to your business and leave you unable to get the most long-term value from the supplier.

Despite having a supplier relationship that can, at best, be described as transactional, an important supplier to my client had very proactively stated that the company was over-consuming the product that they supplied.

Some suppliers in this case may have remained silent and let the additional revenue flow-in (“Happy days – my bonus is secured! That’s 2 weeks at the beach for me and my family. Maybe we’ll go to Wales this year – somewhere truly exotic”).

However, the supplier didn’t sit on their hands. They jumped onto this problem and provided some free advice, helping my client to reduce consumption to normal levels almost immediately, saving them hundreds of thousands.

To me, at least, this is a great example of a supplier who genuinely cares about the customer, wanting the customer to succeed so that they can, too. These suppliers should be nurtured and treasured. After all, in my experience, suppliers that exhibit this kind of drive for their customer’s success don’t grow on trees.

But in this example, how do you think the supplier rewarded? Go on, have a guess.

Well at the next contract renewal that supplier lost the business entirely…on price. We're talking only by a couple of percent. In defence of the Procurement team, their hand was forced by the more powerful lobbying of the Finance function.

It gets worse, too. The new, low-price supplier that was awarded the business couldn't provide the quality or service that my client needed. The new arrangements were completely unacceptable for the users of the product as well. Unnecessary risk was incurred.

The Procurement team had to go back to the original supplier and beg them to supply once again. The supplier agreed, but on new, revised terms. Punishing, “teach you a lesson” terms. Doh!

There’s an old saying isn’t there? “The bitterness of low quality remains long after the sweetness of a low price is forgotten”.

What can we learn from this?

Well, the best Procurement professionals recognise that there are more fundamental business requirements that must be met before price and commercial requirements are considered. Quality and service are two such requirements.

Selecting suppliers of key products or services on price alone might get you a quick price win on paper but could lead to increased total cost and more risk to your business.

If this is the case in your company, it’s your role as a Procurement pro to help educate the business, and influence key decision-makers (including those that define the selection policies) to adopt supplier selection criteria that best reflect the needs of the whole business.

Additionally, mature businesses who depend upon collaborative and long-term supplier relationships (especially when there’s a lack of supplier choice) should consciously invest time into building and nurturing those relationships. This provides a clear indication to the supplier that they’re important to you, and valued.

This should involve you leaving your office and actually visiting them and regularly meeting with them too (in person or virtually), among other things. A topic for another newsletter…

Which influence principles could you use to help you convince your decision-makers to make these changes?

The two principles of influence that I’d recommend in cases like these are:

1.?????? Social proof – cite the practices of your competitors or companies recognised as leaders in Procurement. If many (especially, similar) others already do what you’re suggesting, then this should be a catalyst for your business to adopt the same approach.

2.?????? Scarcity (loss aversion) – as we’re doubly motivated to avoid loss rather than to seek a gain, point out what your business may lose if it doesn’t make the changes you’re suggesting.

Not only will these actions help increase total value to your business and reduce risk, they’ll also result in growing the maturity and credibility of the Procurement function as a whole, and of you as a practitioner.

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