It's happening again: Big Manufacturers Tightening Up their Supply Chain
By Frank Hurtte
Over the past several years Mega-Manufacturers have settled on a strategy to sustain profitability in a slow growth economy: Tighten up their supply chain. To the unaware, this sounds like a solid strategy. Improving the flow of goods, creating more symbiotic relationships with those providing services, eliminating waste, streamlining, re-engineering and a tassel of other business buzz words, all resonate with Wall Street types.
Distributors have been through this a couple of times before, but unfortunately a good many sales managers have forgotten the lessons. Many of our Millennial-generation sellers were still in school. But, this is another page from the playbook of previous recessions. Recalling the pain of the mid-90s, 2001-2002 and the Great Recession, allow me to review.
Our largest customers jauntily inform us they "love" doing business with us. They want to formalize our partnership and do more to strengthen the ties. Mostly, it's a love-fest. Midway through the conversation, the kind words turn sour. Being a partner requires efficiency, effectiveness and lower supply costs for the customer. If you worked with anyone in the Automotive sector back in the 90s, you heard the pitch followed by a directive to immediately drop prices by five percent.
After a three-year reprieve, the practice is back in play. Here are a couple of examples: In April 2015, Business Day ran an article outlining the new strategy of delayed payment. Here's a juicy tidbit:
"Adopting a tactic widely used by 3G Capital, the Brazilian private investment group behind the recent merger of Heinz and Kraft Foods, a growing number of the world's largest food and packaged goods companies are asking their suppliers to give them as much as four months to pay their bills – even though they typically require payment from their own customers in 30 days."
That's right, suppliers to these very large companies now get to provide banking services. Typically, distributors expect payment in 30 days. Part of the wholesale distribution model takes advantage of a "float" period; the time between when the distributor sells the product and when the distributor must pay their supplier. Getting paid in 120 days interferes with the balance.
In December of 2015, The Wall Street Journal ran an article which was later picked up by other publications. Quoting from "The StrategicSourceror" a blog dedicated to "articles in business topics surrounding strategic sourcing, supply chain, procurement, purchasing and spend management:"
"Due to a slow economic growth, manufacturers are tasked with re-strategizing supply chain operations to increase profit margins and reduce costs, the Wall Street Journal indicated."
And this little gem…
"The weak link in our whole manufacturing process remains the supply chain… As good as our factories can be, if you have a crappy supplier, it doesn't matter. You need all the parts."
Distributors and the Purchasing Teams face off
Distributors will find themselves facing off in negotiations with some of their largest customers. In many ways this is a combination of the strategies carried out during previous downturns. Strangely, very few distributors have equipped their sales teams for the battle.
Negotiations are going to be tricky and mean. In some instance, the Purchasing Dude (or Dudette) will imply there is no option, our way or the highway. Procurement teams will practice their lines. Implications will be made: Everybody provides the same stuff and exactly the same service as you. Or my perennial favorite, suppliers like you are a dime a dozen, say no and we'll just go down to the mission and pick up another.
What should you be doing?
Don't wait till you hear the message from the customer. Practice your value pitch now. Train your salespeople on the unique stuff you provide and why it would be darned hard to replace at the customer. Teach them to make conditional price concessions. Stuff like, "I will give you a discount but if I do you will need to begin paying for my specialist's time" or "If we provide you with the additional payment terms, what added business will you provide to me?"
At the very least, you need to get your team some negotiations training. Last month we said, "Don't send your sellers into a knife fight armed with a fingernail clipper." In my opinion, this is not an optional investment.
Invest in a pricing process. David Bauders and his team at Strategic Pricing Associates has a number of tools which will allow you to boost your margin. Knowing what to negotiate on is critical. Understanding which products have price sensitivity is golden.
If you are running into some of these situations, shoot us an email. You are not alone. We will be happy to share some of our experiences in other industries and other parts of the country.