This article is One of the many articles still to come in which I will discuss very basic yet proven
techniques that you could use immediately in your encounters with your suppliers.

Oh but wait, to find any value in this article, you must be a firm believer that Purchasing
strategies have evolved from just 1) focusing on price and 2) focusing on quality, reliability,
responsiveness and total cost to a much broader focus of building supplier relationships.

Did you know that for each $1.00 you save in your “total cost of ownership” reduction efforts,
you will improve your bottom line profitability by $1.00?  And did you also know that most
companies do not get this concept and continue focusing their resources in all the wrong

Now is the time when I want to share with you 4 basic rules that have proven to work and work
very well to help you create the partnership relationship with your supplier and allow them to
equally benefit from the experience as well.

Rule #1:  Getting direct cost savings is really a thing in the past. Getting savings has become
increasingly difficult to achieve as your suppliers face similar predicaments themselves and
operate with very little room in their margins to wiggle.

Rule #2: To affect your bottom line, using 80/20 rule, work on reasonable incentives to
approach your top 20 suppliers with and build a “preferred” supplier base.

Rule #3: Communicate to your suppliers on “how to” earn a “preferred” supplier status and what
is required of them to remain a “preferred” supplier.

Rule #4: Tell your suppliers what’s in it for them (WIIFT) as they partner with you and build a
“preferred” relationship.

To earn a “preferred” status means that your supplier will have the first shot to quote on new
business, parts and project.  In fact you can go so far as to create “earn a point” program every
time you achieve your cost reduction goals using these techniques as they apply to your

Supplier earns a previously agreed upon point(s) when:

1)        Shared tooling costs or shared engineering costs on a project

2)        Extended terms: 60 or 90 day billing terms for a period of One year

3)        Certified as “ship to stock” on all supplied parts or assemblies for a period of One year
and remain compliant for every year thereafter

4)        Ship zero defects for a period of One year and continue as such for every year thereafter

5)        Work with purchasing, manufacturing or engineering to add value

Working with your suppliers to explore these techniques not only presents opportunities for you
to reduce your “total cost of ownership” but also helps your suppliers to review, improve and
streamline their processes and grow internally to be able to meet your expectations and earn
that “preferred” supplier status.

Use this “total supply chain cost” model as your guide to isolate and focus on the actual cost
elements impacting your bottom line profitability.

Total supply chain cost=

Buying price=

+Supplier performance cost

+Cost of acquisition

+Out-of-sync planning

-Speculation returns

+Speculation cost

+Mfg. cost

+Selling cost

+Distribution  cost


=Selling price

Vera Haitayan, Principal Consultant of The Leadership Laboratory., a California-based
employee development and process improvement consulting firm and is the senior editor of The
Stepping Stone Newsletter featuring leadership and process improvement best practices.

Article Source:

Suppliers as Your Partners in Cost Reduction
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