All too often I hear the same story from my clients concerning their relationship with incumbent suppliers. "Oh we've been with Joe from so and so company for 30 years. He stops by at least once a week and brings donuts...everyone in the warehouse knows him." Joe's hospitable donut offering leads them to believe they have a good working relationship with the supplier, creating what I like to call perceived value. Perceived value is defined as, "the worth that a product or service has in the mind of the consumer."

I don't doubt that the supplier is providing adequate levels of service, delivering the product in a timely fashion and essentially providing the client with what they need. But when you peel back the onion, the services that the supplier is providing ultimately are standard across the industry. The fact of the matter is the client hasn't tested the market in 30 years. they don't know what the market has to offer or what the benchmark realistically should be. Not only that, but they don't know why Joe's company was even selected as the supplier to begin with. Generally, Joe's company was an existing supplier predating the buyers and procurement managers currently in place. However, since Joe brings donuts and there really are no complaints about the product that he is providing he must be doing a good job. On top of the weekly donut deliveries he just gave a 10% cost reduction as a show of good faith because of the long standing relationship!

Was the supplier asked if there was any reason other than the long standing relationship  as to how they were able to reduce cost by 10%? Have purchasing volumes increased significantly? Was there a reduction in raw material cost? Did they increase operating efficiency or leverage their overall supply chain? In most cases the answer is no across the board, and many times the client has no idea what they should be paying in regards to what the supplier provides. This generally indicates that the supplier is working with a large profit margin, so large that they can give 10% away like a piece of candy, or in this case a box of donuts.

To me, these are all tell-tale signs that it's time to do your due diligence and properly evaluate your suppliers pricing and current service levels. One way to do this is by testing the market through a request for proposal (RFP) process. A RFP will allow you to review what other suppliers, as well your incumbent are willing to offer from both a pricing and overall capabilities perspective. Many times, the hunch that a 10% cost reduction is not enough proves to be true. I have even seen cases where the incumbent supplier is charging ten times more than what the items should actually cost. Not only that, but alternate suppliers are willing to provide superior value added services and robust inventory management programs. Now with real market data, Joe is much more willing to negotiate. But would you really want to stay with your incumbent if he's ripped you off for 30 years? Are the donuts really worth it?

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Michael Croasdale

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