News focus: Not our problem, say buyers

15 March 2010

16 March 2010 | Nick Martindale

‘Don’t come to us with your woes’: that’s the message from procurement when suppliers complain about being asked to cut their prices. Nick Martindale tries to find any sympathy at all among purchasers for the plight of vendors

When greeted with the prospect of suppliers complaining about their margins, rarely are buyers so blunt.

SM's latest poll of international purchasers found 62 per cent had little sympathy for “whingeing” vendors, with many arguing that price pressures merely reflected a shift in the balance of power over the past two years.

“Price negotiation is a skill shared by buyer and supplier alike and you reap what you sow,” says John Milne, an oil and gas procurement specialist. “Sellers whingeing about ‘being hammered’ cut no more ice with me than buyers bleating about ‘getting screwed’. It’s all part of the game.”

Samir Boutamdja, head of logistics outsourcing procurement (Europe) at perfumery and flavour manufacturer Firmenich, adds: “I only have tough love to offer to suppliers. They need to constantly feel the pressure from customers. They get better as a result of being constantly challenged.”

Craig Cherry, head of group procurement at Monarch Airlines, points out that buyers have no choice but to push for price reductions as a result of the pressures they are under from their organisation’s own customers.

“Suppliers should be able to react to it a bit better,” he says. “We’re only asking them to do the same to their own vendors, based on what our customers are asking us. If they’re not doing the same to their suppliers maybe we should cut them out.”

He does, however, distinguish between strategic suppliers – which warrant a more innovative approach than blanket percentage cuts – and those that are less critical to the success of the business.

The SM100 results follow a recent survey by consultancy Huthwaite International, which claimed that three-quarters of sales executives believe buyers treat them “like commodities”. Research consultant Andrew Moorhouse says this suits many purchasers at the moment.

There is a feeling among buyers that suppliers took advantage of the good times a few years ago by not passing on cost benefits.

“As we started evaluating our bids we found that contractors had a lot of fat in their bids pre-2009,” says Nigel McKay, head of procurement, supply chain and quality management, at construction firm Bovis Lend Lease.

“We could demonstrate that some of our packages had as much as 25 per cent mark-up in their tenders. A good mark-up in construction is 5 per cent.”

Nigel Coghlan, global procurement development manager at utility metering provider Itron, is “not desperately sympathetic” to the plight of suppliers. But he points out that continually focusing on cost can cause people to cut corners and compromise performance and quality.

He warns, too, that taking a hardline approach with suppliers now could backfire when the economy recovers. “We’re certainly seeing a lot of products in the market start to lengthen in terms of lead time, which is always a sign of things picking up,” he says. “The approach we’re taking is to push on the cost side but also to take a strategic approach by engaging with suppliers on a long-term basis in return for a commitment to achieve certain cost levels over the next three, four or five years.”

But Sarah Billson, director at procurement consultancy Tickling The Trout, says there have been cases where procurement has overstepped the mark. A few buyers believe the hype about 50 per cent price cuts and treat all services and goods as commodities, she adds. “But buyers who bully will regret their short-termist approach and reap the results of damaged relationships and cheap – rather than effective – pricing.”

Cherry at Monarch Airlines, however, suggests that vendors able to respond positively to customer demands will be in a better position.

“Where it really matters, our supply base has responded magnificently,” he says. “The suppliers that haven’t responded so well we shouldn’t have been with in the first place.”

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