"True Leverage" -- How Do You Approach Potential Suppliers?
Everyone is familiar with the concept of leverage when it comes to procurement. We as buyers approach a potential supplier and make the case for lower prices due solely to the total amount we spend with the company. With this approach, we have all experienced success -- and we have all experienced the feedback, "you already buy at prices lower than much larger customers."
When we hear this, is it usually true, or is the sales person merely placating us to protect his or her company's margins and his or her commissions? I think I could successfully argue that it's both. We would be naive to think that just by merely asking for lower prices, or threatening to go to another supplier, that our incumbent supplier would automatically lower the price.
Instead, after the threat of changing suppliers, incumbent suppliers figure out how to give us the price without losing margin. The easiest of ways to do so is to lower the quality of the product or services, lower the stocked inventory to meet our orders in some other manner that ultimately affects our total cost of ownership.
We've all heard the saying that "it's who you know, not what you know" that dictates success. Often this adage is just sour grapes, coming from people who do not understand true leverage. Successful businesspeople don't knowingly enter into business deals that adversely affect them. Instead, they figure out how to structure win-win deals.
Many have heard me speak before about win-win versus win-lose agreements. I maintain there are only win-win or lose-lose relationships in supply agreements. Win-win agreements embrace the full meaning of true leverage.
True leverage involves leveraging the full capability of both sides of a supply agreement. The leverage points in these type agreements address the many of the following:
Suppliers
- Relationship
- Capacity
- Market Knowledge
- Product Quality
- Supply Chain Capability
- Flexibility
- Engineering Expertise
Buyers
- Total Spend Dollars
- Total Committed Dollars
- Long-term Market Plans
- Strategic Direction
- Predictability of Demand
- Market Knowledge
Is your company exercising true leverage, or just asking for discounts with no concessions? I know in my business, just accepting lower margins is NOT a compelling argument.
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This is such an interesting topic. I was just talking about this exact subject last week. We were musing that there is probably a lot of sourcable spend that is missed because it doesn't fit the one criteria that people usually look at: the amount of spend in a category. If you look at all of the leverage points, you can not only figure out how to negotiate a more mutually favorable deal, but you may realize that it's beneficial to source categories that might otherwise go unnoticed. Thanks for the great insights, John. Keep 'em coming!
