Author: Asif Khan
“Alone we can do so little; together we can do so much” (Helen Keller)
According to economic growth theory when a company grows in size it should have a better chance in decreasing its costs whilst increasing its own production or what is also known as realisation of Economies of Scale.
Yet, many large organisations today are guilty of new ‘bully-boy tactics’ by demanding price reductions.
Many suppliers will eventually (if they not already done so) succumb to the size and market power of these larger organizations. It was only last month that I read in The Telegraph that Tata demanded a 30% reduction from its suppliers. Come on 30%?! If I was the CEO of one of its suppliers “Oh, my God” would be the first words going through my head (and that’s putting it politely). Similarly, BP have recently set meetings with its suppliers across its operations in order to reduce their costs to reflect the fall in the price of oil. Boeing too, with its ambitious $6bn cost savings target through its own supply chain. Walmart, Tesco, Debenhams have also been in the limelight on this exact same thing and the list goes on and on.
My first question is “How can these large organisations justify some of these ludicrous demands?” Their answer to this and I am only going on what I have found and read is that “there is opportunity to work with our contractors to drive that capital efficiency.” That is according to Andrew Inglis, BP’s Head of Exploration and Production in an FT Article. Similarly, Chris Chadwick, CEO of Boeing Defence, Space & Security stated that "There continues to be tremendous opportunity in the supply chain for efficiency, cost reduction."
But, what exactly are these ‘opportunities’? To be honest I don’t really know as I can’t seem to find much more information on them. Now, although I am questioning and being skeptical of what these ‘opportunities’ could be I don’t deny that they won’t be any. But, do these ‘opportunities’ in their defense create or result in a FAIR share of the economic benefits arising? If not, then, well…. it’s not much of an opportunity is it?
Now, some of you may be curious to know what I mean by a ‘FAIR share of the economic benefits arising”. By this I mean as long as a supplier can maintain or increase its profit margins whilst at the same time is able to reduce the costs to some of its customers (especially those that demand a reduction in price). Now, those of you who are suppliers reading this will shout out that it’s ‘counter-intuitive’ or ‘impossible’. But, allow me to articulate my argument and present my case.
Firstly, it’s universally known that suppliers waste vast amount of money in bombarding target new customers with sales and marketing approaches, I mean they spend billions and billions to win new customers. However, 99% of approaches by suppliers to win new target customers result in failure. It is this new customer acquisition which is key to all suppliers, however because of the ridiculously low conversion rates it make new customer acquisition a challenge. All this translates into a very high cost to winning a customer. Furthermore, it also becomes too expensive for the supplier to sell its own spare capacity which also goes to waste, adding to the cost of doing business. Thus, and ultimately it is the suppliers’ customers that pays for these wasted costs and/or there is a squeeze on your margins (that’s probably why they want a reduction).
So how do you address this issue by in winning new customers, reduce your own procurement costs as well as giving that reduction to that customer? Well, the answer is very simple and has already been highlighted - by working together for a FAIR share of the economic benefits arising.
INNOVO Network is a free online B2B market platform which has been set-up to address this very problem. It shares in the value of this unlocked potential with both the buyer and supplier. It is a new way for companies of all sizes to do business. It is based on collaboration rather than opposition, by allowing companies to deal with each other more efficiently and cuts out waste at every phase of a transaction. Efficiency is the key to INNOVO - suppliers are presented with customers who are ready to buy, and buyers benefit both from the suppliers’ resulting reduction in marketing costs, and from economies of scale that are otherwise out of reach. Everybody wins because the savings are derived from prevented waste.
Image courtesy of Stuart Miles at FreeDigitalPhotos.net