How should procurement work with suppliers at low commodity prices?

Alan Day, Chairman and Founder of State of Flux
The recent drastic fall in commodity prices has driven companies in the oil & gas, mining and dairy industries to take a long hard look at their cost base. We have recently seen a number of companies cancel very large projects and look at their workforce, and now the focus is on spend with suppliers. 
The immediate reaction is often a drastic one – many organisations in these industries will resort to unethical behaviour: the ‘give me 20% off’ letters, demanding suppliers reduce their pricing, cancelling invoices or simply refusing to pay the full amount of invoices. But there is a way to reduce costs that will get the same or a better result, which doesn’t damage long-term supplier relationships, and will even position organisations well in the future – when the focus switches back to growth. 
To illustrate: An organisation spent four years working with a key supplier investigating how to change the design of their product packaging, where the supplier was working to pioneer some breakthrough coating technology. The credit crisis struck and the buying organisation used this as an opportunity to issue the ‘20% off’ demand letter and bullied the supplier on their pricing. This resulted in the supplier taking the innovation to a competitor and ultimately the buying organisation lost their market-leading position. The short-term, small savings was not worth the future drop in market share. 
These approaches don’t respect the fact that suppliers could be valuable partners in taking cost out of the business. Working collaboratively with suppliers to review each area of the value chain, to identify more cost-effective ways of doing things, is a much better way to achieve the same result. Here are a couple of reasons why it’s important to get this right. 

Stay ahead - focus on your supplier relationships

Suppliers will remember both the positive and negative aspects of a relationship. When it comes to sharing the next innovative idea, they will remember who behaved collaboratively and fairly during difficult times. Given low commodity prices, now is the time for buying organisations to build solid relationships with key suppliers by showing them they recognise and appreciate the position suppliers are in as well.

Feedback is essential

Unlike a lot of businesses, it’s difficult for organisations in the oil & gas, mining and dairy industries to get direct feedback from their customers. They sell and operate in a global commodity market, and they are not likely to have a direct relationship with an end customer to understand how well they are performing. The focus is on traded commodities, so while the rise and fall of the commodity price is feedback in itself, this doesn’t provide clues for how the organisation can improve. 
Suppliers can provide this critical feedback. They often have a better view of what is going on across the buyer organisation and where competitors are doing better. Yet our annual SRM research shows that getting feedback from suppliers is not something many oil & gas, mining and dairy organisations do. For example, in 2014 only 48% of the oil & gas organisations and only 42% of the mining organisations gathered feedback from suppliers on how they are perceived as a customer, either by conducting a voice of the supplier study or a 360º relationship diagnostic.

Be a customer of choice for your key suppliers

It is evident that with the current low commodity prices, many companies are struggling to grow (or even survive). But companies can and should use this drastic fall in commodity prices as an incentive to re-think their traditional supplier relationships. They should start thinking about how they can further improve their relationships with their key suppliers, and ensure they work collaboratively with them for mutual benefit. Working closely with suppliers will help organisations find ways of effectively and efficiently decreasing their total cost. For example, it might encourage suppliers to become more innovative, and create technologies and machinery that can save the company money in the future.
The results from our annual SRM research highlight that there is already lots of opportunity for improvement: only 60% of oil & gas organisations report achieving cost reduction benefits (see chart below).

Business drivers and benefits reported by oil & gas organisations –
State of Flux 2014 SRM report

An initial step forward is to gather feedback from key suppliers on how they are perceived as a customer and identify the main areas for improvement. Conducting a voice of the supplier study or a 360º relationship diagnostic can help to improve the communication and openness between the two parties, and is something they can build on to achieve mutual benefit.
Being a customer of choice – a company that through its practices and behaviours consistently positions itself to receive preferential access to resources, ideas and innovation from its key suppliers, giving it a competitive advantage – should be the aim for organisations now. An excessive focus on price could ruin a relationship or trust that may have taken years to establish.

Call Alan on +44 (0)2078 420 600 or email us on to find out about our voice of the supplier and 360° relationship diagnostic services.