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OpinionThis Week in Procurement

TWIP: Penny Wise, Pound Foolish?

By June 24, 2018February 23rd, 2020One Comment

Peter Smith of Spend Matters UK has written a pair of important articles over the past couple of weeks. One deals with fairness, the other, our responsibility to treat our supply base with respect.

While both pieces are offered up in the context of Carillion’s collapse, they are relevant to all of us in procurement.

Making Choices

At the very beginning of my procurement journey, when I bought automotive components, I figured that the supplier knew better than I did about presenting a sustainably, attractive price. So, I’d keep pushing until I got to the price that was “affordable” based on the Bill of Material for the end product. What I didn’t realize at the time was that I may have been putting these suppliers in an impossible position; particularly those who had built their business around being able to supply my industry.

Basically, my suppliers had a choice of accepting an unprofitable price or walk away. Walking away had its own costs: leaving assets, in this case production lines and workers, idle. Both choices relied heavily on the hope (never a productive strategy) that it could quickly find more profitable business to fill the void. Based on how many suppliers acquiesced to my price requests, I’d estimate that most chose to lose money on my business. Ironically, we would wonder why we had such a large number of financially insecure suppliers….

Leaving a Mark

Should we even care? Should we be exploring ways to protect a supplier from itself?

As a community, we always benefit from robust explorations of ideas and debates. I agree with Peter that there are no easy answers and, partly because there are no easy answers here, we would elevate ourselves and our ecosystem by engaging on this subject.

Does the value of the intangible benefits of being a responsible customer outweigh the benefit of the cash that we may leave on the table? This is especially important for those suppliers who, under a traditional supplier segmentation model, we would identify as non-core and replaceable. One study I am aware of suggests it does and significantly so. A 2014 Automotive Industry study by John Henke found that non-price benefits can greatly exceed (between 4X and 5X) the economic benefit realized from suppliers’ price concessions.

As a community and as individual actors are we building social capital or eroding it? (We discuss this in some detail with Rory Sutherland, Vice Chairman @ Ogilvy and Founder of Ogilvy Change, when we interviewed him on Art of Procurement recently…watch this space, we will be publishing this episode shortly.)

How do we value, and what is our perspective on, the importance of reputation and brand value on an individual, professional level and for an organization? For many, the question of “doing the right thing” is an economic decision rather than an ethical or social one.

My own view is that all these questions are addressed and get expressed inside of outcomes. What are the strategic, tactical, transactional and relational outcomes that we are buying from a particular supplier, or they are materially contributing to? What would happen to those outcomes if the supplier needed to cut corners to reduce their cost to win, keep or maintain our business?

What do you think? I posed these questions on LinkedIn – if you have any thoughts you would like to share, please share them in the comments to the LinkedIn post.

Generating Fulfillment

Some questions to ponder:

  • Are there times when I have to protect my suppliers from themselves? If so, when?
  • Am I disrespecting my suppliers when I think them incapable of taking care of their own interests?
  • What outcomes do I want to produce for my supplier(s)? her stakeholder? her team? her?
  • What outcomes do I want to produce for my firm? My stakeholder? My team? Myself?
  • Am I building social capital or eroding it? How?

Being a Catalyst

As always, if you come across an article, whitepaper, video or podcast that you would like to share with your fellow catalysts, please send a quick email with the details. I read every email and am eager to read yours.

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