In my last post, 9 Ways to Fight a Supplier Price Increase, I listed approaches to handling a supplier price increase. These involved pushing back.  These days, commodity prices may be at the heart of increases. They can be volatile and unpredictable and offer little room for black and white approaches. Besides using hedging, a technique that only someone who really knows what they’re doing should attempt, other ways to tackle increases can be considered. Sometimes it takes a collaborative effort between customer and supplier to figure out how to avoid the price increase and even to reduce the price by reducing underlying costs. It isn’t done by threatening or bludgeoning the supplier into submission.  Here are 5 approaches for a buyer who is faced with a price increase. Not all are appropriate to every situation, but can be considered, depending upon the circumstances.

• Use competition. This is useful only under some circumstances. If you’ve got a supplier with a highly value-added product or service or one who is sole source, this may not be feasible. If the product or service falls more into the leverage category (rather than strategic or bottleneck), you may be able to hold a sourcing event using software or else use an alternative source whom you’ve wanted to try. Competition can be a useful tool if used cautiously and wisely with suppliers who provide products and services that are more readily available in the marketplace.
• Alternative materials/services. Perhaps the supplier can use a different, less costly material to make the product. Or for a service supplier, a less costly service will meet your requirements than the current one that you are buying. Being creative about alternatives may save you money.
• Value analysis/value engineering. Have you and the supplier done a value analysis of the product? If not, the supplier in particular, may be able to come up with creative ways to make the product more cheaply and potentially improve it at the same time. This can result in mutual benefit to both customer and supplier. Many suppliers, who know their product better than their customers do, are willing and even eager to do a value analysis but are rarely asked.
• Longer-term agreement/contract.  Some suppliers are willing to give their customers a better price in return for a longer-term contract. Extending the contract period can give a supplier the predictability and stability to offer a product or service at a more favorable price.
• Packaging and transportation. Can anything be done to reduce the amount of packaging or make it less costly? Can transportation costs be reduced? Are customers paying inbound transportation markups?  For example, many suppliers make a profit on outbound transportation to the customer by not passing along their savings to their customers.

In Part 2, we’ll look at 5 additional ways to handle supplier prices increases.

Sherry R. Gordon

I couldn’t resist making a few comments about the new show on NBC, “Outsourced” which aired last week. For those of you who haven’t heard of it or seen it, the show is about a call center in the U.S. being outsourced to India. If you think about it, do you know of any Americans who are neutral about jobs being outsourced? Do you know of anyone who is not emotional about the subject?  Outsourcing of American jobs is a sore point. And many of us have had first-hand experience calling customer service and realizing that the rep at the other end was on the other side of the globe. The thought enrages many people, who have been known to get so angry about an outsourced call center that someone wrote an article, “I made an Indian girl cry, and you can do it too.” It provides instructions on how to be so rude to call center employees that they quit. The idea is that if enough of them quit, the jobs will come back to the U.S.

So when I saw that there’s an actual show on NBC about an outsourced call center, I wondered whether it will be a hit or cause anger, outrage, and be quickly canceled.  (The show’s staying power remains to be seen).  The premise is that a manager comes back from management training to find his office empty and workers gone. He is told that the call center had been outsourced to India and that if he wants to keep his own job, he’ll have to move to India to train the new call center manager over there. If outsourcing had a bad name to most Americans before, this show won’t help its image, even with its many funny moments and disturbingly realistic details which are more “funny peculiar” than “funny ha-ha”.

While I was driving I heard the NPR show “Here and Now” where journalist Emily Yellin, author of the book, “Your Call Is (Not That) Important to Us: Customer Service and What It Reveals About Our World and Our Lives” was being interviewed.

According to Yellin, we make 43 billion customer service calls a year. Despite outsourcing and a prolonged a lapse where we seem to have been from taken from “the customer is always right” mantra back to the era of Lily Tomlin as belligerent customer service rep, customer service is a growing industry in the U.S. Businesses are realizing again, that companies need to get customer service right. In addition to rising labor costs in India and other low-cost countries which have made them less advantageous financially, companies are finding that good customer service is a competitive weapon. Poorly considered and poorly done outsourcing to save on labor costs in the end may not save, besides enraging and alienating customers. Apparently some customers have been angry enough to produce videos against the offending company, like the 5 Stages of Comcast , a public relations nightmare. And there are websites for many major companies that have the company’s name followed by “sucks”, which provide outlets for angry customers.

So while outsourcing is done to save labor costs – and not just in the area of call centers – it needs be carefully considered and well-executed. Or it will produce short-term cost savings and longer term loss of business through the exodus of valuable customers.

-Sherry R. Gordon

If you didn’t think space exploration was dangerous enough, here’s something else to worry about. NASA has been looking into outsourcing parts of the space exploration program to outside suppliers, reasoning that this is the best way to speed up rocket development and to save money. They reasoned that private contractors would be able to provide the rockets that would carry astronauts into space much more efficiently and cost-effectively. A recent Wall Street Journal article reports that the Aerospace Safety Advisory Panel, an outside safety watchdog for NASA, has cautioned against this approach. They questioned the safety of this approach, especially the technical challenges that private firms would have to overcome. Many of the potential suppliers have rockets that are unproven and still on the drawing boards. So the advisory panel has recommended that  NASA stick with government-run rather than privately operated manned ventures.

Space contractors Boeing and Lockheed Martin are lobbying NASA not to outsource more of the space program. Interesting that Boeing in particular, which has a huge self-interest in keeping its share of space contracts, is playing the “don’t outsource” card. Boeing’s own outsourcing missteps with the Dreamliner are testimony to the issues inherent in outsourcing a complex system, although I’m sure that Boeing is not  going to emphasize their own supplier management challenges in relation to the the NASA outsourcing issue.

What are some of the important factors in making a decision such as this one?

• Outsourcing does not reduce the responsibility for managing the process or the outcomes. There is still a mangement and coordination function that would need to be performed. NASA would need to make certain that its subcontractors’ product development and other key business processes are robust and can produce the required outcomes.  NASA would need to be able to orchestrate supplier schedules and input so that the project comes together as planned. According to the WSJ, the advisory panel members have expressed concern about NASA’s “hand-off approach” in allowing development of private cargo spaceships. Outsourcing does not mean hands off. Successful outsourcing, especially in real mission-critical products, must be decidedly hands on.
• Contracting in this environment would be extremely complex. Liabilities seem problemmatic. Who is responsible if a rocket blows up and kills people? But on the other hand, if the private contractor is not liable, can NASA take on the liabilities for unproven technologies and unknown supplier performance to contract?
• Sole source issues. What are the incentives to a private firm to invest in technologies so specific to NASA that they might be totally captive to it and might be driven out of business by changing political winds (if the program is reduced or disbanded) or by having no other customers of its products. Or, if NASA finds a subcontractor incompetent or not meeting expectations, how can they fire them? What would be the alternatives?
• Protection of intellectual property. How can NASA be certain of not losing any of the intellectual property and technological capabilities to entities outside the U.S.?

Whether or not NASA outsources, the buck still stops with them. They still need the skills to manage the development of complex technologies, either internally or externally. It just seems that the risks are higher if these activities are external. The public sector has always held the private sector as the role model to be emulated when running a business. Recent events in the financial sector have again proven that idea a myth. Boeing’s challenges in managing its suppliers in a technologically complex product design, development and manufacturing scenario should provide a cautionary tale to NASA and the government about taking on such technologically challenging and complex outsourcing.

-Sherry R. Gordon