People can be fairly predictable at the best of times, and certainly in tough times. As a service provider, I can almost guarantee I’ll get two types of requests from customers when the economy enters a period of downturn; first, “we want lower rates” and second, “we want better service at those lower rates”. Fair enough, both of those scenarios are understandable and can be negotiated and resolved (even if it results in a negative resolution with companies changing suppliers).
But then what? Where do you go for continued savings or improvements once you’ve renegotiated with suppliers?
To begin with, an understating of “where” savings can be found is essential. It’s common to look outside first, at external suppliers, since “savings” appear immediately when suppliers reduce their rates. However, “better service at lower rates” may be more of an oxymoron than a successful negotiating strategy. Let’s face it, when was the last time you bought a bottle of wine (at a lower price) that advertised “better taste with half the grapes”, or an automobile that claimed “better performance with half the quality”. In other words, it might work, but there is probably a better chance it won’t, or of it does, it might only work for a short period of time, or until the supplier can replace you with a more profitable customer.
The downside of this strategy of course is the potential for administrative (and service) disruptions and, eventually, even higher rates if new suppliers have to be sourced. Which is why every good cost reduction/service improvement strategy should include both external and internal sources.
In other words, don’t forget to look at your organization’s internal practices as a source of potential savings. There are many internal processes that can yield savings or service improvements, including the use of consolidations. From a transportation perspective, the principle of “consolidating” is relatively simple: combining orders so you can ship in bigger lot sizes, thereby lowering unit costs at the higher weight level.
The same principle can be leveraged with suppliers. In the case of inbound collect shipments for example, requesting that suppliers ship inbound orders once, or twice, per week rather than daily, will increase load weights (and reduce unit costs). Additional savings can be obtained by having inbound carriers pick up and consolidate orders from suppliers in close proximity to one another.
Consolidations on the customer side of your operation can be more difficult. Take the example of a customer who places orders with your firm every day before a noon cutoff, in order to receive next day delivery. Oftentimes a company will resist asking customers if they will entertain changes in shipping policy for fear it will impact negatively on their sales. Nonetheless, its an opportunity worth exploring and some customers may well be willing to receive your orders fewer times per week without impacting their business operations (i.e. even though your customer orders daily, the orders may be to replenish safety stock; or having fewer orders to receive may enable your customer to better schedule receiving personnel, etc).
There are many ways to reduce operating costs. Renegotiating supplier prices is one method, but reexamining internal processes, such as the use of consolidations, can also be effective and should not be overlooked.