In yesterday\u2019s 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\u2019 purchasing performance. However, I also believe that many supplier cuts are driven by senior management without intimate knowledge of the company\u2019s purchasing operations. They have to show their stockholders that they are doing something to boost profits.<\/p>\n
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Imagine this conversation\u2026<\/p>\n
CEO: \u201cOur stock price has been floundering. We need to regain investors\u2019 and stockholders\u2019 confidence. What can we do?\u201d<\/p>\n
CFO: \u201cWell, 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\u2019re struggling to keep up as a result. I don\u2019t think we can do any more layoffs without seriously jeopardizing our ability to deliver.\u201d<\/p>\n
CEO: \u201cI 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?\u201d<\/p>\n
CFO: \u201cI don\u2019t 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.\u201d<\/p>\n
CEO: \u201cSixty thousand, huh? Let\u2019s start chopping!\u201d<\/p>\n
CFO: \u201cDo 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.\u201d<\/p>\n
CEO: \u201cNo. We\u2019ll just tell Purchasing to find a way to make it work.\u201d<\/p>\n
CFO: \u201cWill it work? Can we just eliminate all those suppliers and still be the same company we are today?\u201d<\/p>\n
CEO: \u201cLook: 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\u2019t think that any supplier reduction initiative has put a company out of business. It may be uncomfortable for a while, but we\u2019ll survive.\u201d<\/p>\n
CFO: \u201cYeah, it would be nice if that stock price got a boost. Should we involve Purchasing in the decision?\u201d<\/p>\n
CEO: \u201cYou and I both know what kind of excuses we\u2019ll get. It is what it is. We need to cut the supply base in half. Get it done.\u201d<\/p>\n
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.<\/p>\n
Is this an unrealistic conversation?<\/p>\n
I don\u2019t think so.<\/p>\n
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 \u201cmagic number\u201d of suppliers out of the air (or some other unnamed place). So, would you be able to sever relationships with half your supply base?<\/p>\n
It may be wise to have that answer in the back of your head. You never know when the mandate will come down.<\/p>\n","protected":false},"excerpt":{"rendered":"
In yesterday\u2019s Part I of this series, I stated that […]<\/p>\n","protected":false},"author":12,"featured_media":4072,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-2734","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-procurement"],"yoast_head":"\n