The improving global economy is pushing prices up – but too much focus on price can blind buyers to the value they can gain by working with suppliers. Just look at Apple’s success, says Bill Michels

1. ADR Business Briefing – January 2011 – Managing value in a rebounding economy
The improving global economy is pushing prices up – but too much
focus on price can blind buyers to the value they can gain by working
with suppliers. Just look at Apple’s success, says Bill Michels
If the 16 straight months of growth in the Institute of Supply volume items and implement leveraging to attack prices.
Management’s manufacturing index wasn’t evidence enough However, that’s not necessarily the best solution. The
that we are in a rebounding economy in the US, the news from opportunity for long-term value improvement also depends on
Detroit is a 17 per cent jump in monthly vehicle sales over last how easy it is to source the category, the level of supplier
year and third quarter profits topping $2 billion for both General expertise, and the potential for a supplier to generate
Motors and Ford. innovations that will generate new revenue for you or open up
new markets.
Certainly within the automotive industry, and likely elsewhere,
growing demand is putting great upward pressures on prices. If you identify your strategic suppliers, the route to continuous
However, one of the lessons learned from the last downturn value is to build trusting relationships with them over the long
should have been the realisation that there are forms of value term. In the first stage of open communication you may be able
other than low cost that suppliers can bring to the table. to identify efficiencies that generate new cost improvements –
for instance, more flexible product or material specifications,
We are already seeing some signs that US companies have sharing market information to set better production or delivery
refocused their procurement approaches on price, and arbitrary schedules, or adapting spare factory space to store supplier
year-on-year percentage price reductions. While there is merit materials and buying it on consignment. At the same time, you
in conditioning suppliers with a cost-saving message, their profit may gain a more secure supply or reduce other risks.
margins are not an infinite source of savings for buyers.
In the second stage of collaboration the frank discussions
Most suppliers will have survived the recession by cutting their may uncover issues within your organisation that suppliers
overhead and profit margins razor thin. New orders have the are “covering” in their prices. An example is a design
potential to be very profitable, based on the lower overhead. On change too close to production.
the other hand, insisting on price reductions when margins are
already thin can push a good supplier out of business – or to a Rather than imposing a penalty if that happens, some suppliers
rival customer. will anticipate it and build an allowance into the original price. In
an open relationship the value comes from identifying and fixing
Many management teams view suppliers as a source of the internal issue instead.
incremental profit rather than an extension of manufacturing
capability. The reality is that suppliers’ margins are not infinite As trust builds you can expect first rights to process or
and you must have healthy suppliers to innovate and invest to product innovations from your strategic suppliers, collaboration
bring your company competitive advantage. Therefore, as on research and development, or reductions in the complexity
buyers move to the new economy, value extraction will become of design.
as or more important than price reduction.
Finally, in the most integrated supply chains every
Consider how Apple worked closely with a core of suppliers to company is contributing to the success of the entire network.
create the iPhone and iPad. The payoff from their collaboration Information flows easily up and down stream, streamlining
is dominance in a rapidly emerging market. If Microsoft moved processes, synchronizing production and supporting new
computers from mainframes to our desktops, Apple is leading product development.
the way putting them in our pockets. There is a lesson in that
We can expect a trend toward competing, integrated supply
for every company.
chains with a focus on value management, because there are
strong rewards for the effort. That kind of collaboration doesn’t
The only way to get consistent value improvement from
just contain costs, it can open or capture new markets.
suppliers is to understand the cost structures in each category
of spend. Most purchasers, when challenged to identify and Bill Michels CPM is CEO of ADR North America LLC, Ann
execute cost improvement, will concentrate on their high dollar- Arbor, Michigan
About ADR International
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development, sourcing, permanent and interim recruitment, technology and audit.
For further information on ADR International and our full range of procurement services please email
info@adr-international.com or visit the website www.adr-international.com