Buyers and suppliers team up for greater savings
Both sides see benefits of working together on costs
Wayne Forrest -- Purchasing, 3/3/2005 2:00:00 AM
In this era of managing costs, buyers are working more closely with suppliers to find ways to both can reduce costs that go beyond price reductions. Today the most valued suppliers are those lending a helping hand in helping buyers realize greater profits, in the long run, for the entire supply chain. "With most companies, everyone thinks sales first [as a way to grow profits]," says Mark Alperin, president and COO of Vertex Fasteners, based in Pawtucket, R.I. "But sometimes the real savings in looking backward in the supply chain can be just as great in terms of improving the bottom line."
Vertex, for example, supplies corrosion-resistant fasteners to major distributors, which, in turn, market the products to a broad range of manufacturing buyers, including marine, chemical processing, electronics, food processing, oil and gas drilling, and environmental companies. It's a market where, in the last two years, "everyone's price has gone up, because the [price of] metals have all gone up," says Alperin.
To help ease the sting of higher prices, Vertex is working more directly with its customers to help lower logistics costs, optimize the packaging of a customer's order and to access information and track deliveries electronically. These are the value-adds that are winning customers in today's cost-conscious buying community.
For example, buyers of Vertex's products can electronically access a variety of information electronically including: inventory availability, product price and specifications, placement and confirmation of purchase orders, and shipment tracking. The efficiency and savings, says Alperin, comes from fewer hands involved in the purchasing process—especially in tracking deliveries, which he says has become the "biggest burden and time element. It is not productive as far as purchasing product. It is a follow-up [process] that should be more readily available electronically."
Vertex also interacts with its customer's shipping and receiving departments to determine how best to label and pack a customer's order. For instance, when filling an order, the first item off the shelf normally would be placed on the bottom of the pallet, while the last item collected is on the top. Chances are that is not the way the buyer wants the shipment delivered. By prioritizing outgoing products to the buyer's receiving process, Vertex can reduce the time and expense it takes its customer to reorganize the shipment.
A third area of focus is the logistics of shipping Vertex's product to its final destination. "Sometimes we have tracked orders that go from Rhode Island to Chicago to another warehouse in Chicago then back to Maine," Alperin says. "The only one making money there is the freight company." To save freight costs, Vertex confirms approval with its customer to ship its fasteners directly to the end user.
Market analysis
Of course, evaluating suppliers based on price is not a lost art today. It's still critical that a buyer know their respective markets to determine whether it is getting the best price or value from its suppliers and renegotiate, if necessary. Suppliers today are getting more accustomed to providing detailed information on their cost structures that factor into their market prices.
George L. Harris, president of Calyptus Consulting Group in Lexington, Mass., says companies need to perform adequate due diligence and market analyses to know the going prices for products and components, which negotiating strategies will be most effective, and where price breaks may come into play.
Harris has developed a detailed 40-point plan for a purchasing organization to reach its cost reduction targets. The advice includes asking a supplier to provide a cost breakdown of the quote and to identify the elements of cost. Included in the assessment should be the supplier's profit and what factors or cost drivers most influence the price.
Also Harris suggests that companies ask if the supplier will certify that they have submitted the lowest pricing for the services or goods. If the supplier says 'Yes,' and the buyer finds a lower price elsewhere, Harris says the buyer should see if the supplier is willing to match the lower offer.
"In the final analysis, the most important job of the buyer is when they tell their company they are getting a fair and reasonable price from a supplier," Harris says. "Just getting three bids doesn't do it; just doing a reverse auction doesn't do it. A buyer has to do a price-cost analysis and review cost curves, and know the price breaks from suppliers."
The art of renegotiating
And if a market evaluation shows a supplier's cost structures suggest they can come down in price, it's time to renegotiate. A case in point: CXtec—formerly known as Cable Express Technologies—renegotiated contracts on everything from telephones to the cardboard boxes it uses to ship its products on its way to six-figure savings in 2004.
CXtec buys networking equipment such as phones, overhauls and upgrades the technology and resells the equipment to customers with a lifetime warranty. Its customers primarily are companies with 1,000 employees or more. The company says its revitalized equipment has an uptime of 99.4%.
Since joining the Syracuse, N.Y.-based company five years ago, CXtec vice president and COO Barbara Ashkin's duties have included finding the best value in corporate purchases beyond simply finding the best price. CXtec now negotiates its supply contracts and rates for one year to take into consideration commodity price fluctuations, as well as technology advances that decrease cost and improve the services.
CXtec also decided to funnel all buying through its new corporate purchasing manager, effectively centralizing all company procurement under one person, rather than among various departments, to gain greater visibility into its spend.
"As you can imagine, the more people you have buying, the more you will spend," Ashkin says. "In our new system, every purchase needs to go through this purchasing manager."
The renegotiation of contracts and the addition of a corporate purchasing manager alone, Ashkin says, saved CXtec roughly $234,000 last year off its bottom line.
"It is not so much that the cost savings drops to the bottom line, but in 2005 I think one of the key challenges that this company will face is that our employees are our greatest assets," Ashkin says. "We can take the money that we save from perhaps a careless purchase and be able to use it to provide training or additional incentives to our employees."
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