COLLABORATION IS KEY TO SAVING MONEY IN AN INFLATIONARY ENVIRONMENT
When inflation shoots through the roof and budgets get out of whack, the management team in every business looks to the supply chain team to work wonders. Forecasting inflation is always hard and planning for it is even harder. Budgets are poured much before the reality sets in and companies are forced to update their spending plans quarter after quarter.
The traditional approach to dealing with inflation is to go after suppliers and launch a deflation campaign. Send out letters or call suppliers with a clear message that costs are spinning out of control and let the suppliers know that its their turn to lend a helping hand. The argument is that supplier’s margins are inflated and it is time for the supplier(s) to sacrifice their margin so they can continue to be in business. In some cases, suppliers are asked to stop charging for their fixed overheads and be willing to be compensated only for their variable costs. For e.g, when you look at the construction service industry, companies that have paid off their equipment are able to offer much better deals than those who are still paying for the cost of their equipment. This approach to reducing costs has been time tested and delivers immediate cost savings but ruins relationships and eliminates trust and goodwill between a company and its suppliers. The suppliers are back knocking doors as soon as the market turns and are livid when the company hesitates or delays accepting their requested increases.
There are much better ways to approach an inflationary environment that can sustain and build the trust with suppliers and can be more effective in reducing costs in the long term. Underpinning this approach are leadership, transparency, ownership, accountability and true partnership.
Leadership and transparency go hand in hand. Senior management need to engage employees and suppliers together in workshops explaining the challenges and encouraging them to come up with creative solutions. Transparency is key in these conversations as it helps build trust. It doesn’t help if people leave the room thinking “Bah Humbug”. I am reminded of an All Hands Meeting I attended early in my career. The COO of the Industrial company I was working at spoke to the employees about our earnings that quarter and how great the company was doing. By the time we got to our desks the analysts were screaming at the poor performance of the company and our stock had started to tank. Within weeks our stock had shrunk to ⅓ its value. We all learnt that day that we could never trust this senior manager. Clearly he spun a good story at the meeting but his credibility was shot soon after.
With employees, transparency could also mean increasing access to internal information. Many companies have Chinese walls that prevent their own employees from having access to data and information. If you work in a large corporation these walls are harder to break, because no one knows how to provide access to data in the system. Role definitions in ERP systems are so antiquated, no one really understands it. So even if you obtain permission to view data, getting access to the data is hard.
Why is it important for employees to have access to information? It’s easier to illustrate using an example. Let’s take the example of a mechanic working in the field repairing equipment. He or she is usually called to fix a problem. When they arrive at the job site, they find out a particular component is malfunctioning. They have a brand new replacement in their truck, so the solution that is easy for them to adopt is to replace the defective component with a new one and move on to their next chore. Usually the mechanic does not know the cost of the component they replaced. They are trying to restore service and do not own the operational budget. If they were aware that the valve they were replacing cost $ 2,000 and that they were replacing 15 such valves every week, they might think - “Wow, that’s a lot of money? What might be causing these valves to fail so often? What can be done to stop the valve from failing?”. Now, without knowledge of the cost the mechanic doesn’t think that way, their job becomes more corrective than preventive. They do not engage in root cause analysis and end up fixing the symptoms and not the problems.
To be successful with this approach it is critical for leaders to build trust within their own workforces. Most employees do very well managing their budgets at home but seem to be spend thrifts when spending their employers money. Taking them into confidence by sharing information, setting expectations by letting them know that the expected behavior is not fixing a situation but solving a problem, and providing recognitions to those exhibiting the right behavior.
This approach can work with suppliers also if the supplier is confident that the whole exercise is not to have them shrink their margins. While shrinking unrealistic margins makes sense, recognizing that the suppliers margins are what is allowing them to be a successful business is also important. In a true partnership the two parties, the company and suppliers can work together to identify means to reduce costs to both parties. For e.g, providing monthly forecasts can help supplies better plan their production and reduce their unnecessary inventories. When working with service companies, having dedicated crews working for a period of time helps reduce fixed overhead for the supplier and helps them become more competitive with their pricing.
Having a meeting with suppliers to discuss opportunities to reduce costs with out asking for the suppliers to shrink their margins works wonders some times. Needs vs wants become more apparent in these meetings. There is a tendency by company employees to over specify the needs. The supplier is then forced to supply what has been asked. For e.g if a particular job requested a fork lift on site for the duration of the job, the cost of the forklift and a person to operate it is charged for the duration of the job. But in reality the forklift might have been used only for four hours during the three days it was on site. A better understanding of this could have helped supplier propose alternate approaches that would have guaranteed availability of the equipment when needed but would have cost the company much less.
Addressing the cost challenge is a collaborative exercise and is not something an organization should pass on to its suppliers. Companies that show leadership and engage their employees and their supply base and transparent with their approach and are open to sharing information are more likely to be successful. Employees and suppliers working collaboratively assume ownership of the cost challenges become accountable for finding creative solutions and in doing so establish a great partnership that lasts a long time. The trust between companies and their suppliers increases in leaps and bounds and is sustainable for a long period of time.
