Why ‘Good Customer’ procurement?

This is not a plea for being nice to suppliers. It is meant as a methodology to get the best out of your suppliers.

Any commercial entity recognises the benefits of dealing with ‘good’ customers. Given the chance they will chase business from these customers and will price competitively to get their business. They do this because they know that this business costs less to carry out, it has less risk, is easier, has better relationships and in the end is more profitable.

Would it therefore be a successful procurement strategy to set out to be a ‘good customer’?

These notes advise on what it takes to be a ‘good customer’.

All Procurement

  • All suppliers favour “good customers”. You need to identify what makes a “good customer” for each supplier and then seek to share the benefits.
  • Know what you want – in addition to the best product at the cheapest price.
  • Recognise your own costs/risks/overheads for this product/supplier and reflect in your own estimating etc. Don’t just use blanket overhead mark ups. (Note: When you identify savings ensure that the cost is really removed)
    • Be realistic about supplier performance and reputation and how you recognise this.
  • Look for suppliers who fully understand their own costs and who recognise “good customers”. (They may need some education).
  • Identify their cost drivers, their problems (niggles), their timings and their opportunities. They will probably be very different from yours.
    • Typically they will include:
      • Early commitment; early design involvement and advice; long notice periods (not necessarily in detail) to allow production planning and early material procurement; payment timings and payment mechanisms; communication methods; problem handling; “fairness”; simple trading terms (construction contracts are often irrelevant to the nature of product procurement); use of standard products and components. Not getting these right will often add cost to no overall benefit.
    • Where is each issue most effectively and efficiently dealt with?
    • In reviewing problem handling ensure that suppliers’ marginal costs are factored in rather than full costs.
    • In particular beware of items which may save your direct cost but add more to the supplier.
  • Prepare a procurement profile setting out what you expect and how you can help the supplier.
    • Include performance KPIs and who will compile them.
  • Go to great lengths to show commitment and mean it.
    • Just using this process will be refreshing for the supplier.
    • Sensible and fair treatment of payment issues will count for a lot.
      • Often easy and predictable payment mechanisms are more important than speed; but the supplier will probably be paying more to borrow money than you earn on your bank balances or pay on your borrowings. (You will pay it in the price somewhere.)
    • Be realistic about your promises.
    • Talk to and involve them early.
  • Only then finalise on price and terms.
  • Once agreed, train and discipline your own teams to ensure adherence to any commitments.

How much of this you apply will depend on the financial or strategic significance of each supplier.

Supplies of low significance products are almost certainly best handled through long term procurement, focusing on removing transaction costs.

Long Term Procurement

  • Manufactures can be much more flexible with long term arrangements than you may think.
    • Exact knowledge of future volumes and requirements is less important than security of commitment, early involvement and the elimination of waste in time and material.
      • Again the manufacturer may need some education to recognise this. Sales staff in particular may struggle with the concept.
  • In operation both parties need the ability to adjust prices when new circumstances come about.
  • Recognise the costs of dealing with a potential new supplier.
  • Is the competitive offering truly comparable? In particular we often accept lower service levels from overseas suppliers
  • Discuss price issues openly with existing suppliers.
  • Will the new supplier commit to long term arrangements?
    • Competing suppliers will try to ‘buy’ in business and will try to destabilise long term arrangements; probably not to your long term advantage.
  • If a new supplier appears with real and significant savings you must be able to switch.
  • Ensure that regular reviews are scheduled and carried through.
  • The effort and cost of putting arrangements in place can be spread over many more projects.
  • Full benefits only come with time and maturity.

Project Procurement

  • On significant purchases use as much of the above as time and cost allows.
  • For other purchases prepare a generic procurement profile recognising some of the more common issues listed above.
    • Insist that the supplier factors in the issues. Again, education may be needed.
  • Factor in your past experience of the supplier.
    • A QS rarely knows the costs and implications of dealing with different suppliers. Ensure that you can explain differing cost and overhead factors.

This blog is the eleventh in a series prepared by members of the Constructing Excellence Procurement Theme Group to provoke debate and seek to provide thought leadership on a crucial aspect which we see as a major barrier to improving the productivity of the sector. Comments are welcomed on the Constructing Excellence LinkedIn page or on Twitter using the  hashtag #CEProcurement.

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