Bashing Suppliers Into Submission

In an earlier post I mentioned that in my conceptual world we are living in a world of partners;  the concept of suppliers (and the associated cost cutting behavior) can not support any innovation in operations and even often conflicts with flexibility or quality requirements.

My real world is the world of contact center operations. It was a great read to see how – according to the author Kevin Meyer – in the manufacturing world these insights gain more and more acceptance! And let’s be honest: suppliers in an E2.0 environment is for me hard to construct!

Found at http://www.evolvingexcellence.com/blog/2009/09/bashing-suppliers-into-submission.html

Artist Anna Kharina http://www.flickr.com/photos/anna_kharina
Artist Anna Kharina http://www.flickr.com/photos/anna_kharina

You would think that one of the lessons from the destruction of Ford, GM, and Chrysler (ok, GM and Chrysler) would be that you can’t beat up your suppliers and then expect them to support you when times got tough.  Unfortunately that hasn’t happened, and the practice of supplier abuse continues to increase.

The art of demolishing a critical part of the supply chain usually takes two forms:

  1. Requiring an arbitrary price decrease under the guise of “partner with us so we all succeed.”
  2. Stretching out payment terms to way past traditional net-30.

I’m battling the price issue every day, even in a niche high technology market.  I’m especially chagrined when the request for an arbitrary 10% or price decrease comes the same week as the news that the customer’s CEO has received a record bonus.  Yes, “partner” with me.  Luckily I can say no, and I continually review pricing to ensure it reflects the value I deliver.  I also continually invest in projects to reduce cost and increase value to my customers, and I share that increased value.  Similarly I must always ensure I’m delivering the value to support my prices in the face of increasing competition.  Price is not value.  The funny thing is that the commodity managers and purchasing agents at my customers understand this, but their directors and VPs seem to have no clue.  I bet they all have MBA’s

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Now we learn that companies, especially larger ones with some bully muscle, are pushing hard to stretch payment terms.  I’ve had many of those “requests” as well, and again luckily I’m in a position to say no.  If they continue to want my single-sourced relatively inexpensive component that goes into their very expensive product that creates huge margins, then pay me on time.  Unfortunately many other smaller companies aren’t so lucky.

Large corporations are tightening the screws on their smaller counterparts as the credit crunch intensifies companies’ efforts to hold on to their cash.  In an example of corporate Darwinism at work, the recent round of quarterly earnings results showed companies with annual revenue of more than $5 billion sped up their collection of cash from customers while slowing their own payments to suppliers.

Yes, “Darwinism”… or bully tactics depending on your perspective.  What’s the advantage?

If corporations can manage their inventory well, collect on their bills faster and take a longer time to pay their trade creditors, they can rely less on borrowings and free up cash for other purposes.

True… once.  It’s not a recurring benefit.  Dropping cash to the bottom line in this fashion is sort of like the benefit of making your January mortgage payment in late December in order to capture the interest for tax purposes in the current year instead of next.  Next year you also have to do it just to keep twelve months of interest in the tax calculation. Sure there may be interest paid or opportunity lost in having some additional cash tied up, but as lean types know, value is not always reflected on a traditional P&L or balance sheet.

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Artist Anna Kharina http://www.flickr.com/photos/anna_kharina
Artist Anna Kharina http://www.flickr.com/photos/anna_kharina

There are other, far more serious consequences to stretching out payments to suppliers.

But in practice that often involves bare-knuckle negotiations between companies and their customers and suppliers.  There is also a balancing act involved.  If companies force untenable terms on their suppliers, they risk putting vendors out of business, which could end up disrupting their own operations.

Uh, yes.  And I bet there’s some value in having a secure, robust supply chain.  Right?  Or how about having a supplier so excited about working with a valuable customer that the supplier is willing to invest in new technologies and methods to create a competitive advantage for the customer?

That would be true partnership.

More interesting reads at http://www.evolvingexcellence.com/blog/2009/09/bashing-suppliers-into-submission.html

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