Clorox outlines supplier management strategies for tough times
Procurement teams finds innovative ways to help suppliers in recession
By William Atkinson -- Purchasing, 4/30/2009 2:00:00 AM
In these economic times, it can be a full-time job for a company to try to keep its head above water. There really doesn't seem to be any additional resources or time to try to help anyone else out. However, forward-looking purchasing organizations realize that, since they are inextricably linked with certain suppliers, it is in their best interest to help their key suppliers out—especially those that are struggling. And, in some cases, it may even be important to help those suppliers' suppliers (the tier two suppliers). After all, if your supplier's key supplier fails, that will put pressure on your supplier, and ultimately your company.
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CPOs looking for examples of a company that understands the importance of providing various forms of assistance to suppliers may want to look at the Clorox Co. in Oakland, Calif. "Struggling suppliers have definitely become more common as the economy has continued to weaken," says Ken Black, director of global strategic sourcing for packaging materials at Clorox. "We are seeing more and more suppliers in financial distress, as well as some of our suppliers' suppliers."
Clorox has developed several clearly defined strategies to help its tier one and tier two suppliers, which Black recently shared with Purchasing. Of course, most of them are predicated on the idea that these suppliers will eventually pull through. Only one strategy (the first) is useful even if the supplier ultimately ends up failing.
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A Collateralized Loan. If the problem that your supplier is experiencing is considered to be short-term, then offering a collateralized loan to that supplier might be a useful strategy. This would make the most sense when the supplier has a particular intellectual property (IP) or specialized equipment that you need in order to make your product. "The purpose of collateralizing the loan is so that, if the supplier does end up going under, you will have access to that IP or specialized equipment," explains Black.
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Short-Term Price Increase. Another strategy that can be useful if the supplier's problem is perceived to be short-term is to accept a temporary price increase—one that has a specified period of time. Later on, when the supplier is back on its feet, you could make up for the loss you experienced by arranging a price decrease with the supplier.
"This is particularly useful if a supplier is experiencing a short-term cash flow problem, where a temporary infusion of cash can help them out," says Black, adding that one example of this was when the price of oil was going through the roof. This posed a problem for suppliers that didn't have the right kind of escalators and de-escalators in their contracts. "As oil prices increased, their margins began to shrink, and their ability to pay their bills began to decrease," he says. -
Reduce Payment Terms. According to Black, this strategy can be useful for suppliers that are experiencing either short-term or longer-term problems. With this strategy, you can reduce payment terms as a way to help the supplier improve its cash flow. "By paying them faster, you can help them improve their cash flow," he says. For example, buyers may consider reducing 30-day terms to 10- or 15-day terms, or reducing 60- or 90-day terms to 30-day terms.
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A Co-Buy Arrangement. This strategy is mostly effective when a supplier is experiencing longer-term problems. It makes the most sense with smaller suppliers that don't have much leverage when making purchases from their suppliers. "By combining your leverage with theirs, you should be able to reduce their financial burden," explains Black. That is, identify commodities or other items that you and the supplier both purchase in common. Then, you can arrange to make the purchases at a discount because of your additional leverage, which will ultimately reduce costs for your supplier. "This can be effective when you feel that the supplier needs longer-term assistance, but that you also think they will be able to pull out of the financial situation they are in," he adds.
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Offer Your Expertise. Black recommends this strategy at all times, not just when suppliers are experiencing problems. "It is particularly useful for smaller suppliers," he states. For Clorox, assistance can come in the form of offering the expertise of its Six Sigma black belts, sourcing professionals, process engineers and others experts to suppliers that may not have that level of resource. The goal of this strategy should be to help make the supplier more efficient and sustainable in the long run. "We have access to world-class manufacturing processes, procurement processes, and so on," he notes. "By helping suppliers improve their productivity, they will be able to realize better margins."
Currently, Clorox is using these strategies with some of its first-tier suppliers. However, in realizing that some of its second-tier suppliers are struggling, the company is currently working to gain more visibility with its critical second-tier suppliers. "We want to understand what they are doing and how they are doing it," says Black. "We also want to understand the business continuity plans of our tier one suppliers as they relate to the situations with their suppliers."
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