Is it acceptable – or not – to send your supplier a letter asking for a discount? You would be surprised…
Here at Procurious, we’re always trying to be progressive, challenge the status quo and push for our profession to be more innovative and value-adding. And in good news, we’re starting to see that many in our community feel the same. How do we know?
In a now-viral post on LinkedIn, our Founder, Tania Seary, posited the question: Is it fair, or not okay, to send your supplier a letter asking for cost cuts? 50,000 views and 60 comments later, we now know this is a hot topic for our community!
It’s something we’ve debated before, but not to this degree. So in times where businesses all over the world are struggling, and there’s more pressure on procurement than ever before to secure discounts and keep organisations moving (or afloat?), is it fair game to demand cost cuts from your suppliers? Here’s a snapshot of what everyone thought … see if you agree.
‘A stuck in the nineties’ approach
The vast majority of people who commented on our post did agree that this year has been a particularly challenging one for businesses and by association, for procurement. One Senior Procurement Director summed it up when he said:
‘Procurement leaders need to be looking for cost reductions to support the strained financial positions of their organisations.’
Yet should those cost reductions come from a demand letter sent to your supplier? Many people did not think it was okay to send your supplier a letter demanding cost cuts, regardless of the organisation’s circumstances. In the main, procurement professionals thought this approach was akin to a ‘power play’ and was a little arrogant, giving off the attitude that a big organisation is simply ‘a big brand, doing it because they can.’
Many procurement professionals recognised that while this tactic may have been appropriate at some other time, it no longer was. In fact, many people made reference to the nineties as a time where this may have been acceptable … but realised that those days were far gone. One person noted:
‘This practice [the practice of demanding reductions] was used at Volkswagen in the 90s under its famous CPO. Though it showed a lot of success at the time, I believe such a practice belongs to the 90s – a lot has changed since then.’
Why doesn’t this approach work?
Beyond the fact that the practice of sending a letter asking for a discount seemed ‘old-school,’ many professionals noted that for at least a few reasons, this tactic doesn’t actually work.
The first reason why people thought this wouldn’t work was because essentially, demanding a discount goes against all the good work that procurement usually does in developing meaningful and strategic supplier relationships. Procurement professionals always need to remember that suppliers exist within a delicate business ecosystem, and it’s best to manage this responsibly:
‘Customers depend on suppliers and vice versa. It’s a big ecosystem, and [we all need to remember that] if you squeeze out small suppliers and competition lessens, costs will inevitably increase.’
Beyond this, though, when making demands of suppliers, procurement professionals need to remember their negotiation training, insomuch as:
‘Blind one-size-fits-all letters are a forced outcome, not a negotiated win-win discussion.’
What’s the alternative?
It seems that within the procurement community, sending letters requesting discounts is absolutely a no-go. But in a time where discounts might, for some companies, be needed more than ever, what is the alternative?
Being the savvy community that it is, procurement professionals had plenty of better options when it came to negotiating a better price.
The most popular suggestion was to employ a process to assess cost saving opportunities in partnership with your supplier. This would lead, according to a few different people, to the supplier further negotiating, and then a potential automatic reduction in expenses for both.
The other option available is to negotiate better terms, a tactic used often, but which should be done through a strategic lens. One person recommended that we all should:
‘Engage with our suppliers and explain what we need in terms of realistic cost savings and the end goal.’
‘You’ve got many tools at your disposal, including SRM and category management, so much so that you need never revert to the dreadful “give me money off or else” letters.’
Do you agree? Or would you still send a letter requesting a discount if you needed it? Let us know in the comments below.