Actively Managing Your Suppliers to Cut Costs
Your supply chain plays a critical role in the cost and profitability equation of your company. Your suppliers both enable and limit the services you provide to your customers, and help shape the financial matrix you operate within. It’s no wonder businesses place a great value on their relationships with their suppliers.
As you develop meaningful relationships with your suppliers, it’s important to understand that your initial deals aren’t fixed. Rather, you can actively manage your deals with key suppliers to create new conditions that benefit both parties. These new arrangements allow you to cut costs and bring more business to the supplier, creating win-win scenarios for the parties involved.
On this episode you’ll hear:
- Why you’re only as good as your suppliers
- How to analyze your suppliers using the Kraljic matrix
- Useful tips for working with your leverage clients
- How to set up beneficial agreements with your strategic suppliers
- How to gather feedback on your suppliers
If you’re looking for some ways to get the most out of your supplier relationships, then this is one episode you won’t want to miss.
- Free Chapter of “Profit Leaks” by James Kennedy and Garret Carragher
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Transcription of This Episode
The gross profit podcast is your one stop shop on the path to profitability. Each week we share authentic advice on the positive practical steps you can take to make the company you love more profitable. If you’re looking for a positive plan to help you avoid common spending mistakes, control costs, and increase your profits, then this is the place for you.
I’m Ryan Cowden and this week we’re joined by James Kennedy and Garrett Carherr. In this episode of the gross profit podcast, James and Garrett share some profitable ways to manage supplier relationships.
Your supply chain plays a critical role in the cost and profitability equation of your company. Your suppliers both enable and limit the services you provide your customers and help shape the financial matrix you operate with it. It’s no wonder businesses place a great value on their relationships with their suppliers. As you develop meaningful relationships with your suppliers, it’s important to understand that your initial deals aren’t fixed.
Rather, you can actively manage these deals with key suppliers to create new conditions that are beneficial to both parties. These arrangements allow you to cut costs and bring more business to your supplier, creating win-win scenarios for both parties involved.
On this episode, you’ll hear why you’re only as good as your suppliers. The right supplier can be a competitive advantage if used correctly, and it’s important to remember that not all suppliers are equally important to your business.
Next, we’ll discuss how to analyze your suppliers using the Kraljic Matrix. The Kraljic Matrix is a simple model that allows you to organize your suppliers according to their profitability and supply risk. Then we’ll go over some useful tips for working with your leverage clients. You’ll want to help these clients consolidate their costs to gain a competitive advantage. After that, we’ll talk about how to arrange beneficial agreements with your strategic suppliers.
With these suppliers, you will want you use key performance indicators or KPIs, to set meaningful agreements and review progress. Finally, we’ll share some ways you can gather feedback on your suppliers. By rating your suppliers and checking your views left by other customers, you can reward good performance and quickly address other problems. If you’re looking for some ways to get the most out of your supplier relationships then this is one episode you won’t want to miss. There’s a lot of actionable advice in this episode. So grab something to write with because you’re going to want to take notes. As always. I’ll be back on the other side to wrap up any loose ends. So without any further ado, here’s our conversation with James and Garrett.
Hello and welcome to another episode of growth profit podcast. My name is James Kennedy. I’m the CEO at procurementexpress.com.
We help hundreds of companies spend billions of dollars safely each year. I am joined by my regular cohost, Garrett Carherr who is a secret CFO working somewhere in the bowels of industry in Ireland with over 20 years of experience in finance. And we are just about nerdy enough, the two of us to get excited about things like supplier management, and account coding, and project management. And if you are also interested in that sort of stuff, you are in the right place. Garrett, how are you today?
Good James. How is things, and I don’t work in the bowels, I work in the upper echelons of finance here in Ireland. So it’s all good, you know?
The ivory tower of finance [inaudible 00:03:29] Okay. So today we debated a little bit about how to title this, but it’s all about actively managing your suppliers to cut costs. Subtitle, at the very least you should know about managing suppliers. And we’ve got five points we’re going to run through today about how you should, and maybe why you should, look at your suppliers, an often under appreciated resource in your company. So maybe Garrett, you can kick us off with our first point.
Yeah, so I think an important point that some people don’t realize with suppliers is if you think of the supply chain from Porter supply chain. If you think about that, it’s all about … One of the key aspects is your suppliers and supplier can actually become a competitive advantage for your business if used correctly.
So if you have the right suppliers supplying you the right items, the right products at the right time, you can use them to cut your costs, deliver better value to your customers and also reduce waste. So someone, if we think about in Ireland, someone we can straight away, we can think about is someone a large business here, which was Dell and that was based down in Limerick. And what Dell brought was, they’re just in time suppliers and they basically had their suppliers right beside their factory and the suppliers could login to the Dell systems and they would know when a delivery was required.
So effectively Dell were holding no stock, no component stock or par stock to be able to build their items to build their computers. So Dell would actually receive in an order from the website looking for picture of computer this within the parts that were needed to build this would go down through their systems. They would go right to the suppliers who were actually based around their plant down in Limerick. And the supplier then would load up the exact amount that was required and that would get delivered in to Dell for them to manufacture the laptop or PC and ship that out the same day. And now obviously they weren’t just delivering for one part, they’re also delivering for thousands of computers at a time. But it’s an incredibly smart way to leverage their supply chain or really make that part of the competitive advantage. You can think about the advantages there. The massive advantages to not holding, they’re not going to have any obsolete stuff. They’re not going to have any stock that is wasted. They’re not going to lose stock through pilferage or someone misplacing stuff. So it really was, and those are the [inaudible 00:06:08] components. So it was really a super smart idea. So let’s kick off there. Why supply chain is so important and why you need to understand this and really actively manage it and use it to cut your costs.
Well, it’s strikes me that, I mean in a lot of companies, the line’s share of costs, will come through third party to your downstream supply chain, and it hits me that here at Procurement Express, we use something called the entrepreneurial operating system where we have quarterly reviews for our staff, annual reviews. We have targets, we have KPIs out the wazoo, and we don’t actually do really any of that. Even though some of our supply with our suppliers, like some of our suppliers have a bigger impact on our profit than our staff do. And yet we spend way more time managing staff for human obvious reasons for best practice. But there’s an opportunity there for a lot of businesses I think to maybe think about your suppliers in a different way and how you can leverage them for sure.
I mean that’s the classic, but maybe also if you were to consider them as a resource, like anyone else, you have your human resources, vendors or suppliers can be more than that if you bring them into the fold, show them a little love. So we’re going to talk about some ways of doing that. The first step is to identify not all suppliers are born evenly and none, not all of them have the same impact on your business. So the first step you want to do in getting more from your supply chain or your suppliers is to do an analysis. Now there is a definitely famous in Procurement’s circles. If you hang out with those people, they will tell you all about the Kraljic Matrix, which is a two by two matrix use to categorize suppliers and try and identify which ones you should be investing time in, which ones you should be not, which ones you should leverage, which ones you should build strategic relationships with. And the Kraljic Matrix evaluates every supplier along two dimensions.
The first is their profit impact. So effectively how much money are you spending with these suppliers and how much are they impacting on margin? So some suppliers will be, you’re spending a lot of money with them, but they don’t impact, or you won’t be spending much money with them and they won’t impact on margin, but others will have a bigger impact. So Garrett, would you say the total amount you spend with someone impacts on the profitability or can you be spending comparatively smaller amounts on some suppliers, but actually they can have a disproportionate effect on your profitability?
Well, as you said, there’s all about going through that matrix and putting the different suppliers into different parts of the matrix. And it’s all about having the information there to allow you to do that. In relation to your question, from my experience, if you have a large spend with supplier, then you can leverage that. Or you can do something with that. If you have a smaller spend, it’s hard to do something. So really with purchasing size, those matter, James, unfortunately. So if you’re not spending the money, it’s very hard. If you can say it to someone, I have 10 million pounds spend, I can reduce it by one percent, that’s 100,000 of saving. Whereas if you’re only spending 100,000 with someone and you say, I can reduce one percent that’s only a thousand of saving.
So you really need to look at your big suppliers first of all because they can really move the bar. So small changes with your big suppliers can really make it easier to negotiate as well because you can talk to them and run through stuff with them. Something else we did in a business we were in was we decided to, and this is how you can actively manage your suppliers and cut cost immediately, is we decided to set up a preferred supplier skill. So the way that worked was we looked at who we’re spending a lot of money with. So in that particular business, turnover was 80 million euros a year. And when we looked at who we’re spending money on and we’re spending a lot of money on the business, we supplied facility management to companies, big pharma companies and other companies like that.
So when we looked at our spend, we were spending a lot of money on catering and a lot of money on cleaning consumables and cleaning equipment, cleaning materials. So what we did immediately was we got in our suppliers, we got in our catering suppliers, so we’re buying huge amounts of them in Ireland that would have been [inaudible 00:10:57]. And we also got in, people were buying a lot of cleaning stuff off and what we were able to do then is we said to them was that currently we buy off your sales and we buy off maybe four of their suppliers. What we will do is we will make you a preferred supplier and we will consolidate our purchasing with your sales. This of course is very attractive to any sales person in any company. They’re always looking for more sales.
So if you can offer them something like that where you say we are going to move on or spend, and spend would have been substantial obviously in an 80 million turnover company and we said we’re going to move to spend to you. That’s very attractive and they will agree then to different terms. So first of all we say bring them in and say we’re going to make you a preferred supplier. We’re going to offer you something that we’re going to move on to spend to you. And the final thing then is you need to monitor or follow that up because a lot of them will say to you then yeah that sounds okay but I know that your Gallway branch always buys of this particular supplier in a local supplier. How are we going to become a preferred supplier in that area? So you need to say we can actually follow this up and enforce it.
And the way we enforce it actually at the time was using the procurement express software because we can allocate on that that this was a preferred supplier. And then when people went to buy particular items, they would show if they were buying off of preferred supplier or not. So at the time the people might still buy off, they might still go and say, oh, I’m going to buy off this local person. I have a relationship with this person. But actually the way it was enforced, then it went for approval for the approval matrix to the next level and the manager then will come back and say to the person, hold on, you’re buying off a local Joe, so you need to buy off the preferred supplier list because we’re getting a lot of money back by buying off them. So we’ve said we’re going to buy off these people we need to buy off them now to get our money back.
So that’s the way it was enforced. And the way that we got our money back of course was through a thing called rebates. So we would say based on spend of five million, we get half a percent back in rebates and that will go straight back to our bottom line, so straight back as profits. So it actually worked out very well for the business on, and I know for a fact we must have saved maybe 200,000 on the first year of that and that went straight to the bottom line and with no loss of service, no loss of, we’re still getting the same product, the same good, same materials so no effect really. And for very little work just bring in the man and chatting it true with them. So that was my experience anyway of leaving and setting up a preferred supplier strategy and on monitoring and using it.
The interesting thing about those two examples you [inaudible 00:13:50] cleaning supplies was that they are both what you might call, have a low supply risk and that you can get commodities effectively and you were able to [inaudible 00:14:00] your choice in the market. So people were able to, you’re able very easily to effectively pitch one against the other, which is the second step of the Kraljic Matrix, which is to basically once you’ve identified your top suppliers, I think we can roughly say that’s going to be your top 20% of suppliers by spend. Take a look at those and go through and mark out the ones which have a lot of choice in the market. So there’s a lot of market choice, which means they can become leveraged suppliers for, a strategy like that actually is a nice strategy where you can get a rebate going, not necessarily always about pushing them down on price, but you might be able to actually add value to them.
I mean the traditional idea is if you’re leveraging people, you’re playing one off the other to try and minimize price. But what I like about your story, Garrett, is actually everybody wins, right? There was a way of doing that. It was obviously your preferred suppliers were happy, everyone was happy out of it. So yeah. Nice story. So the next thing is you’ve got to look at the items for which your top suppliers by gross band, who for whom there is not a lot of market choice but are still important to your business. So these guys are going to be the ones that you may want to consider doing some of the basics you might do for some of your staff, but maybe for the suppliers as well. So this is for suppliers where there isn’t a lot of market choice, there are not many alternatives for it, but they’re very key to running your business.
So the important thing here is to treat them like you would any other important resource which is consider setting up perhaps annual or even quarterly review meetings with them, ingrain KPIs for performance like you would for any staff member, perhaps considering as well as policies possibly but as well equally weighting incentives so that you can sort of come up with a win-win strategy so that both people can win at the same time. So those two strategies we’ve identified there can actually make a big impact. Like you said, like Garrett’s story is straight to the bottom line and it’s something that the finance team can actually take a lead on to impact on profit straight away and it’s nice to be adding to the profit rather than just worrying about cost all the time. Or maybe not. Maybe just worrying about cost is the natural homestead of the finance team. What do you think Garrett?
I think a lot of what finance can affect is cost. So that’s maybe why they look at that a lot. But on the other side, I think a good management or commercial accountant should be able to help a business drive in a particular direction to increase their profitability and not always just cutting costs, you know? So there’s two sides to any finance team. One is to have the cost go down, but they should also have commercial acumen to help drive the business forward.
And did sales people fall off their chair when you called them up and said come in, I want to talk to you about giving you a ton more business. And did you do that for a couple of suppliers and see who gave you the best option or did you just sort of make a call on who was giving you the best service?
Well, first of all, you need to talk to ops as well and understand who their preferred supplier would be. So they might say to you, okay, supplier X might be cheaper or might give you a better deal. What actually did cause a lot of headaches for us, and overall it’s actually going to work out more expensive so you’re forced to have to understand if they can actually deliver on what you’re saying. If they can deliver on it. If they can’t even do that, they’re not even at the table. So you need to understand that part initially. And once you’ve got that, then you can bring in a number of, you usually find that one of them is bigger than the others. And that’s probably the one you want to focus on. This probably is the better one so you bring in one supplier who’s already maybe got 60% of the business and you say to him, I can give you the other 40% and all we need is some rebates back or to agree a price decrease from today.
And they’re more than happy to do it because after all they want to get the rest of your business. They want to become a preferred supplier. It’s a win win for everyone. It’s not like you’re saying, I just want a price cut and that’s it. It’s actually, everyone’s benefiting. So most suppliers would be happy. Of course, one of the things you need to be is you need to be buying a good bit off them. So there’s no point in bringing in someone who you’re buying 50 quid water stationary off them once, they’re not going to care. They’re just going to say why have you brought us in here. You need to be doing big spend. And you need to be a company who’s buying a few quid and has options to buy off other people. So there are the key things to begin with. Once you have that actively managing them will work to your benefit and to deliver significant, additional profits straight away.
So the last thing you can do is evaluating supplier performance. So when you set KPIs you can evaluate their performance. A feature, which we just rolled out of Procurement Express in the last month, which I like a lot, is the ability once you take delivery of service is to give your supplier a star rating out of five. What this quickly does is it builds up a database of which suppliers are performing and which aren’t very much like you might see on Amazon. And you might be surprised sometimes where actually, especially if you have a workforce ordering from ticker supplier, they get to add their comments there and each time they are making a purchasing decision. They get to look at those reviews as well to see what other people have been saying about these suppliers. And it’s a quick and easy way of rewarding good suppliers and rooting out problems and escalating them quicker.
Because often times you might find that the finance team have no idea that there’s poor performance being delivered to the ops team, and the ops team aren’t talking. They might be distributed amongst different locations. They don’t realize they’re all getting poor performance. This is a way of identifying that earlier and getting more from those suppliers and possibly switching out the suppliers that are not looking after you properly, giving you a competitive advantage in the marketplace. Okay, so here we are. We’ve talked over five steps when it comes to getting more from your suppliers. First is to realize that you’re only as good as your weakest link in your supply chain and your suppliers may contribute a lot to your company’s success. So it’s worth considering [inaudible 00:00:20:29]. Second thing is you want to break them up by the profit impact, amount of money you’re spending with them, versus risk. That’ll allow you to split them into strategic versus leveraged suppliers.
The strategic guys you maybe want to consider setting up KPIs with to improve performance and share rewards. Coming up with a win-win. Leverage suppliers, Garrett went over a great strategy for helping them maybe so consolidate span to a couple of suppliers in order to gain account cost advantage. And then finally consider having a system in place such as procurement express.com which allows you on an ongoing basis for all your staff to gather feedback on suppliers. Is that good Garrett?
Sounds good James. Is there a email address for people to contact us with any questions?
Yeah, there is. You can catch us on podcast.procurementexpress.Com. You can also get a copy of the book Garrett and I are writing, all about which covers supplier management risk, embezzlement and accounting mistakes, range of other topics to help you improve profitability. You can get it at book.procurement express.Com. Totally free chapter available on embezzlement and how to avoid the worst risks there. That’s all we have. Another one in the can.
Good to talk to you again James, as always.
Cheers Garrett. Talk to you soon. Bye.
All right, folks. There you have it. That wraps up our conversation with James Kennedy and Garret Carherr. They shared a ton of valuable insights and advice today on how you can take an active role in your supplier relationships to cut costs and maximize profitability. We also shared some tools and resources, which will all be linked up in the show notes. Don’t forget to click on one of those links to get a free chapter from the book Profit Leaks by James Kennedy and Garrett Carter. I hope you enjoyed our conversation. Please consider subscribing, sharing with a friend or leaving us a review in your favorite podcast directory. Until next time, best of luck in all that you do and we’ll look forward to seeing you on the next episode of the gross profit podcast.