As the uncertainty over Brexit lingers it is crucial that procurement professionals understand the different pressures on their supply chains so they can negotiate realistic prices with suppliers.
Speaking at a CIPS/Fusion 21 event on how to maximise value for money during economic uncertainty, Mark Chadwick, director of business services for consultants Fusion 21, said although uncertainty caused by Brexit had made it harder for teams to control costs, early stage analysis would help businesses prepare for any circumstances.
“Putting a lot of effort now into understanding the wider environment your suppliers are working in and what’s affecting them and what pressures they are facing will best prepare you for what you might be asked in the future,” he said.
“We found that if you don’t do that analysis and preparation you’re often going to find that you’re on the back foot and that you’re really starting to react to situations as they emerge rather than being proactive and trying to manage those situations.”
He said that although early stage analysis and knowledge gathering might seem laborious and unnecessary at the beginning, procurement professionals would reap the benefits at a later stage.
“One of the things I learnt is that a boiler is made up of 50% steel, 9% copper and the rest is made up of other commodities, overheads and profit – while that kind of knowledge seems excessive, by being able to break down a product like that into its commodities helps us when we are tracking things like commodity prices, exchange rates and where cost pressures might be coming from,” he said.
“By having that knowledge we get a better sense of what issues our supply chains are facing and what’s realistic.”
Giving an example Chadwick said his firm had been asked many times for arbitrary price increases with the only justification given being “Brexit” – in one case he said a manufacturer had asked for a 10% increase because of unnamed Brexit costs.
“So we went through the model that we had and broke down the components – we looked at CPI, exchange rates, we looked at the commodities and material costs and showed them the model, sent them away to have a look at that, had some conversations with them and they had some conversations internally,” he said.
“In the end we agreed on a 2.8% increase instead of 10% and that’s because we both came to an agreement that that was the true cost of the pressure they were facing and the 2.8% was a more realistic increase than what they originally asked for.”
He said had they used the traditional “negotiation by haggle”, the negotiations might have started with 10%, with a counter offer of 5% and ended with a meeting at the middle with 7%.
“So there is something to be said about going through and gathering all the knowledge into a model and trying to understand from both sides of the equation what the pressures are,” he said.
“Businesses are starting to move away from just beating down suppliers over prices during negotiations and using the tools they have and emotional intelligence to build a relationship and come to more realistic outcomes. Having that knowledge to negotiate and understanding what we are negotiating is actually leading to a significant advantage in that process.”
☛ Want to stay up to date with the news? Sign up to our daily bulletin.