Undervalue suppliers at your peril, warns Sarah Spivey, managing director at Modulift.
Most businesses are part of a supply chain; they consume products and services in order to market and sell their wares. In many cases, if a company's suppliers walked away, they'd go out of business just as fast as if all their customers did the same. What makes it even worse when suppliers let a company down is that it often means the firm is left unable to deliver to what becomes an unhappy customer base. Yet, the importance of suppliers is frequently overlooked.
Part of the problem is that the bottom line and profit margins too readily obsess business owners and accountants. As a result, suppliers are dumped in the costs section of spreadsheets and treated as a necessary evil. In some cases, CEOs even need convincing of their necessity. We've all heard stories about a company cutting costs and trimming a percentage off its spend to swell margins and boost the bottom line. Instead of spending £100k on suppliers, let's spend £50k and clean up on director dividends, it might be said.
There is probably a business studies lecturer somewhere now educating students on the 2% theory, whereby a company improves revenue and profit by adding 1% to every bill and demanding a 1% cut from every supplier. It's fine in principle but it makes a dangerous implication that a business can be grown and managed on a spreadsheet alone. Think of the extremes that can be taken by a greedy CFO. The Excel document would look great if they took the aforementioned concept to develop a 20% theory, but in reality it's likely to derail the whole operation.
Most smart financial people know that but they still put too much pressure on suppliers. At Modulift, we felt we understood the importance of suppliers better than most. However, we still implemented a programme of management recently to ensure this important cog in the wheel was working as efficiently as possible. That didn't mean we wanted it to cost less, just work better and contribute to an aggressive growth strategy. I'm keen to share some takeaways from the programme.
We rely on all manner of suppliers, whether they are responsible for IT, PR, marketing, steel, components, hardware, software, or something else. Each contributes to the company that we present to customers. As a growing business that means they're part of a success story so essentially we were looking to enhance something that was already working well. Perhaps the fastest way to increase a margin was to spend 5% more on suppliers, not less. We went into the exercise open minded.
The first thing we did was get every department to look at the suppliers it had, wanted and / or required. We didn't assign them the task as a cost-saving exercise; that wasn't the point. When marketing, engineering, sales, manufacturing, management, etc. had each made a list we got to work on making sure this part of the business was contributing to our mission statements and plans as best it could. Spreadsheets were only used to fact check, not demonstrate worth.
Of course, there was fat to trim, but never for the sake of it. If a product or service was no longer required and / or it contributed to something that was now redundant, we got rid of it. Where a margin looked small, we didn't assume this was because the supplier was overpriced; we looked at other factors and considered how that division might work better.
If a business is making something from wood and is struggling to make a 5% margin, it doesn't necessarily mean the wood is overpriced. Make a rash decision and the best, most cost-effective wood supplier around could end up getting the boot. Imagine then what happens when the same company is forced to become reliant upon a supplier providing worse wood and charging more for it, when all along the problem was elsewhere. Maybe there wasn't even a viable market for the benches, fences or door-frames.
A lot is spoken and written about effective communication and managing relationships with customers. Businesses spend time and money on networking with clients, entertaining them and making sure they feel valued and important. As our programme of management reinforced, such connections are just as important with suppliers. Just because a company pays for a service or product, it doesn't mean they should put that supplier on the naughty list. It might be that what they're providing is actually adding to the bottom line. Speculating to accumulate could be the order of the day.
Knowledge is power
We found that the more our suppliers understood about our business, the more effective they could be. And I bet it would turn out to be the same for readers of this blog too. Our steel provider, for example, was very interested in learning more about spreader beams and below-the-hook equipment. We discovered that there was even more information we could give to our IT providers about the mechanics of our business. Others were keen to get more details about our target markets and diversification strategy. Then there were those who simply got a better understanding of what we actually required from them; in these cases productivity and value soared immediately.
As a consequence of these meetings and, where possible, site visits, we felt our suppliers became more passionate about helping us achieve our goals. It might sound cynical, but they're also far more likely to go the extra mile or keep costs down as they have personal relationships with their points of contact at the company and understand the lengths that they go to in order to deliver world-class customer service to those further down the supply chain. We do everything we can to avoid a blame culture where everyone hauls their respective suppliers into question just because they pay them to do something.
Consider if the opposite was the case. Imagine if a supplier had been pressured every year to reduce costs, make delivery faster, provide greater bulk and received nothing but negativity from their customer. It's unlikely that when it came to that 11th hour order or out of hours request, they'd be willing to pull out all the stops to help. In fact, when they were in a position to do so, they'd probably be looking to cancel the agreement such is the negativity endured. Thusly, driving down costs can be counterproductive.
Longevity is important too. In a niche market like the lifting sector, it can be difficult for a supplier of a generic service or product to get up to speed. Imagine then how much time and money is wasted in constantly initiating new suppliers. A firm's CFO might have thought he was clever knocking the steel companies down by 2% every quarter but he pushed them all so hard they walked away and far greater money was lost replacing them. Businesses typically value their long-term customers greatly, which, as we've explored, can pay dividends further along the road.
As always, we've got a prominent exhibit at this year's LiftEx show, which takes place 29-30 November in Telford. However, while the exhibition will be the centrepiece of the two-day event, organiser LEEA (the Lifting Equipment Engineers Association) is staging its AGM on the opening morning. Given the volume of issues that we need to tackle this year, it's important that as many full members as possible attend. I welcome the decision to move the meeting from the day after the show to the first day and I hope it results in bumper attendance.
LiftEx will conclude a run of participation in trade events, following last week's Associated Wire Rope Fabricators (AWRF) meeting and Product Information Exhibition (PIE) in Minneapolis and KHL's World Crane and Transport Summit, which takes place 7-8 November in Amsterdam. It was good personally to get stateside for the first time in a while but the team is equally excited about engaging a largely European audience in the Netherlands.
Thank you for reading!