When market conditions are tough, the instinct is to rein in spending. Even if strategic investment is preserved, this is a time when many companies will reassess their cost base and shop around on price.
How prudent a strategy is this? As the supply-demand balance tips, the power shifts to the customer, who may now expect more for less. If all is not stable at the supply side, the firm could find itself in trouble.
It's tempting for businesses to put pressure on their own suppliers, to regain control of their cost bases and protect margins, but in an unsteady climate this could be unwise, jeopardising hard-won relationships with core vendors and service providers on which your business depends. The chances are that you need them more than they need you, and if you squeeze them too hard on price they'll walk away, downgrade your service or, in the worst-case scenario, go bust.
"I'm a great believer that you should never simply look at the headline price when re-evaluating your cost base," says Craig Neame, a partner at law firm Holman Fenwick Willan. Neame is a former logistics business consultant specialising in collaborative, risk-reward-based partnerships between businesses and their suppliers — relationships that run much deeper than surface cost.
"In the logistics business, companies will immediately look at freight costs when reassessing where they could make savings," he says. "This is because it's a metric that's easily measurable, but I'd be looking beyond this to what's creating the need for freight and whether changes here could reduce costs on a broader scale."
This might mean reviewing the mix of ocean and air freight, the frequency of deliveries, or the level of inventory being held. "The point is that there are other ways to cut costs," he says. If you've got 20 suppliers for a product line, this will generate 20 invoices and perhaps 100 line items, he explains. Fewer accounts could mean better discounts and less administration for the finance department. Meanwhile, moving to electronic invoicing allows automatic invoice matching. All of this can help bring internal costs down without messing suppliers around.
The larger the supplier, the less likely they are to kowtow to a small customer. Far better to attempt to nurture these relationships for additional benefits that might be available, Neame suggests. "While it's harder for smaller firms to devote the management time to this, if you have the spirit of cooperation you may be amazed by the solutions your suppliers can come up with if you give them the chance," he says.
"There is a temptation to want to keep your business challenges private, fearing that you may lose ground if you own up to any problems, but in my experience it's astonishing what can be achieved if you're prepared to lay out your business model."
While a large supplier may not view a small business as a core customer, the customer relationship manager will be keen to maintain a range of accounts, to minimise the Pareto factor — where 80% of the company's business relies on 20% of customers — and spread their risk, especially with a recession on the cards. It will be a priority to keep your business, so they should be only too glad to help come up with creative solutions.
"In manufacturing and distribution, if you're making a 5% profit margin on a turnover of £1 million you're taking away £50,000," Neame notes. "To generate the same again you'd have to sell £1 million of more products, but if you can save 5% of your costs you've made a million right there. The ideal is to work with your suppliers to do this without hurting their own margins."
A great advocator of nurturing suppliers is entrepreneur Simon Woodroffe, the former Dragon's Den panellist and founder of Yo! Sushi. He admits to agreeing to most prices without negotiation these days, on the basis that if you keep a supplier happy they'll work hard for you. "It's in your interests that they do well, so it's important to recognise their need to make a profit too," he says.
