business trouble

The trouble is, in downturns most companies feel

caught in a bind. Do they devote their efforts to

generating fast money by renegotiating with suppliers?

Or do they invest to build the broad purchasing

capabilities that will help them come out of the

downturn with a stronger competitive position? Too

often companies think they need to choose between the

two.
Acting under pressure they often take reflexive actions

that end up damaging them in the middle to long term.

They fail to align their purchasing strategy with their

corporate strategy. They grab whatever costs they can

for short-term gain (sometimes even driving promising

suppliers to the brink of bankruptcy), when slightly

more effort would deliver better-and lasting-results.
Sizing-and understanding-the opportunity for

purchasing gains is the first step in strategic

purchasing. How do companies objectively determine

how much of their cost saving targets can be delivered

by purchasing-and, crucially, link it to strategy?
A company we'll call Food Co. wanted to use its scale

to gain competitive advantage in purchasing. As a

broad effort to set cost saving targets, Food Co.

conducted an "experience curve" analysis aimed at

understanding how much its supplier of plastic bottles

should be charging, based on the fact that the

supplier's costs to produce each bottle should have

declined during its years of experience. The exercise

was spurred by the fact that the supplier wanted to

increase its prices.
For its part, Food Co. also conducted a make vs. buy

analysis to determine if it would be more cost effective

to produce the bottles itself, and also used broad

benchmarking-looking beyond its company and

industry for benchmarks-to set savings targets. Thus,

Food Co. was not only able to strategically set

accurate saving targets for purchasing in a critical

category but also turn around supplier negotiations in

its favour.