Rack up Savings

Rack Up Savings

Cut your Costs by Helping Suppliers Cut Theirs

Stan Hankowski, a seasoned Buyer at Home Depot, tells an intriguing story that shows how Purchasers can help themselves by helping their suppliers.

He went to market last year to buy steel racking. He expected higher prices because he'd been tracking steel costs (through Propurchaser.com) and knew they had gone up sharply.

Surprising discrepancy

What he did not expect, though, was that his preferred supplier (let's call him Metalshelf) would come in almost 10% higher than one of the competitors! Metalshelf was a well-managed, low-cost producer that had been competitive for several years.

Stan needed to know what was going on! He called in Metalshelf and told them they no longer seemed to be competitive. Metalshelf, more surprised even than Stan, said they had no choice: steel had sky-rocketed (as Stan knew) and they needed the increase just to stay in business. They even showed Stan invoices from their suppliers.

Cheap is good, but can you believe it?

Then Stan contacted the low-bid supplier to find out how they could quote so low. He was concerned they were "low-balling" just to get a foot in the door. The last thing Stan wanted were the headaches of entering into an unsustainable agreement. He needed to know if they were able to make a profit.

Some subtle digging soon turned up the answer. They were using off-shore steel, which was priced lower than North American steel. They were indeed able to make a profit.

Win – win – win

Stan went back to Metalshelf and suggested (without explaining why) that they might want to look into sourcing off-shore steel. They listened carefully, did some research, and were surprised to find that lower-cost steel of suitable quality was indeed available through certain import brokers.

In the end, Stan split the business - and everybody won. The low-cost supplier wound up with a new contract; Metalshelf became more cost competitive and attracted new customers; and, of course, Stan enjoyed better pricing and a stronger supply chain, now with two preferred suppliers.

Sit on the same side of the table

Knowledge-based negotiation saves time & money for both parties. Instead of hassling over prices, buyers & sellers can focus on more productive work, such as reducing costs. Success has a better chance when everyone is pulling in the same direction.

Icing on the cake

There is another good reason to insist on negotiating from a knowledge perspective: it attracts the right kinds of suppliers - those who like transparency and will talk openly about their costs. These suppliers would rather spend time on joint cost reduction projects than on adversarial negotiations.

You might want to forward this article on to suppliers.

Help Suppliers

It could get them thinking about sharing information, and cooperating creatively to reduce their costs and your prices. Perhaps their own purchasing departments would want to participate.