In yesterday’s Part I of this series, I stated that a massive supplier reduction initiative could either be viewed as good purchasing practice or an indictment of previous years’ purchasing performance. However, I also believe that many supplier cuts are driven by senior management without intimate knowledge of the company’s purchasing operations. They have to show their stockholders that they are doing something to boost profits.
Imagine this conversation…
CEO: “Our stock price has been floundering. We need to regain investors’ and stockholders’ confidence. What can we do?”
CFO: “Well, consumer demand is down for the entire market. The top line is almost impossible to increase. Cutting costs would be an easier way to boost our margins. But we already cut 10% of our workforce and we’re struggling to keep up as a result. I don’t think we can do any more layoffs without seriously jeopardizing our ability to deliver.”
CEO: “I remember reading something about ABC Company announcing a supplier reduction effort that would save them millions of dollars a year. I think that their stock went up right after that announcement. Could we do that?”
CFO: “I don’t see why not. Last year, the finance organization wrote checks out and transferred payments to about 60,000 companies. There has to be some of those that can be eliminated.”
CEO: “Sixty thousand, huh? Let’s start chopping!”
CFO: “Do you have any concerns about what that would do to our operations? I mean, we did kind of shoot ourselves in the foot with the layoffs.”
CEO: “No. We’ll just tell Purchasing to find a way to make it work.”
CFO: “Will it work? Can we just eliminate all those suppliers and still be the same company we are today?”
CEO: “Look: the stock price will go up immediately after the announcement. That means your net worth will go up and my net worth will go up. I don’t think that any supplier reduction initiative has put a company out of business. It may be uncomfortable for a while, but we’ll survive.”
CFO: “Yeah, it would be nice if that stock price got a boost. Should we involve Purchasing in the decision?”
CEO: “You and I both know what kind of excuses we’ll get. It is what it is. We need to cut the supply base in half. Get it done.”
Following a conversation like this, the purchasing department is usually given a mandate to limit business to a certain number of suppliers. While the number is not negotiable, which suppliers are cut and which remain on board is up to them.
Is this an unrealistic conversation?
I don’t think so.
It may be exactly why you will soon be given a supplier reduction task and told to make it work, irrespective of how little detail was considered in pulling this “magic number” of suppliers out of the air (or some other unnamed place). So, would you be able to sever relationships with half your supply base?
It may be wise to have that answer in the back of your head. You never know when the mandate will come down.
To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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