I’ll begin this post with a disclaimer. I’m not for one moment suggesting that you shouldn’t address your company’s suppliers as an approach to supply chain cost reduction. I’m not even suggesting that you shouldn’t be prepared, when necessary, to negotiate aggressively.
There is a time and a place when aggressive negotiation for price reductions and discounts make sense. In this post, I simply aim to point out that like anything, a considered approach should be taken and that dangers exist for the unwary. In other words, I want to make sure that you are no longer unwary.
Why am I raising this? Just because it seems a good time to do so. Amid symptoms of a slow-down in the global economy, some corporations—leaders in their respective industries—are turning to supplier-squeezing tactics as a way to attain supply chain cost reductions and safeguard profits.
Supplier Squeezing in the Headlines
Some companies are famous for supplier squeezing. Some observers would even go so far as to call it supplier bullying. Perhaps the most famous example is that of Walmart, which has been taking an aggressive stance towards its suppliers for some years.
The retail giant even began to outrage suppliers at the end of 2015 by graduating from demanding lower prices, to levying charges upon them for use of its storage facilities and store-shelf space. As if that isn’t shocking enough, Walmart also extended its payment terms to suppliers from 30 days to as much as 90 days.
Other famous companies that have recently hit the headlines for supplier squeezing include:
- Tata Steel, which wrote to its suppliers in the latter part of 2015 asking for an immediate 10% reduction in prices
- Carlsberg Breweries, Mars, Halfords, and beverage manufacturer Diageo, which all extended payment terms to 90 days or even more (120 days for Mars)
- Kellog—another company that now takes 120 days to pay its creditors
- Proctor & Gamble, which extended payment terms to 75 days
Whether demanding lower prices to cut supply chain costs directly or extending payment terms to reduce working capital, these massive market players have all used their size and importance to play hardball with those on which they rely for their material resources.
If your company is considering similar measures to reduce supply chain costs, there are risks and drawbacks to consider, which unless your company is a Walmart or P&G, should not be passed off as inconsequential.
The Drawbacks of Supplier Squeezing
The first thing to understand about leaning on suppliers is that it is at best, a short term fix to a long term issue. Your company will always be under increasing price pressure from your own customers, but at some point the squeezing has to stop, as your company will either refuse to play with those customers or will go out of business. The same is true of your own suppliers.
Even if your suppliers can and do comply with repeated demands for price renegotiations, other risks exist. Enough research has shown that building strong partnerships with suppliers is a key to profitability.
Reduced Partnership Opportunities: Every hardball match you decide to play though, makes partnership a little more difficult to achieve. The relationship with the supplier is likely to remain purely transactional, offering little in the way of mutual benefits.
Decreased Service Levels: In fact, supplier squeezing can even harm existing relationships, never mind souring the hopes of future strategic partnerships. You could easily find that your supplier demotes your service provision to a lower level of priority in order to protect its margin.
Repute Among Potential Suppliers: Word gets around and the more your company bullies suppliers, the more its reputation will precede it. When you find yourself talking with new suppliers, they may well price aggressively, knowing that they will have to hedge against potential future approaches for price cuts.
This will put you in a position where you will have to push hard for savings which might otherwise have been yours with little effort. If you supply business customers rather than consumers, you might also find that your own customers—on learning about your penchant for driving a hard bargain—will become more demanding when discussing prices.
Beware the False Economies of Supplier Squeezing
In the long run, making a point of continuously aggressive supplier negotiation may prove to be a false economy. Encouraging suppliers to reduce costs is sensible, but there are many ways to do this. The most fruitful approaches are those in which buyer and supplier both reap some reward for supply chain cost reductions.
There may be times when your company has to play hardball with suppliers. If you have a reputation for fairness and a collaborative business ethic though, those times will be fewer and further between. Moreover, the negotiation game will not be such a hard one, even during those hard times when you really need to put the squeeze on.