Intel, UNC’s Coal Supply and Abbott’s Bottles: When the Shoe is on the Other Foot
It was interesting in that as I was reading the story about Intel in which it is alleged that the company “Used bribery and coercion to maintain its dominance in the microprocessor market,” I could not help but think that this was not the first time that the proverbial shoe was on the other foot in terms of the sometimes strained relationship between buyer and supplier.
I remember in 2004 the head of procurement for the University of North Carolina bemoaning the fact that due to the paucity of options for transporting the coal that kept the institution’s “lights on” he was forced to make a deal with a supplier who held all the cards.
I can also recall the story of Abbott Laboratories’ challenges when, after being informed by their supplier that prices would be going up for a particular bottle (re container) the pharmaceutical giant used, they attempted to stock-up on the said product at the current day price.
The supplier “diplomatically” told them that they no longer had supplies available for shipment under the old price.
In each of these instances, the individuals involved on the buyer side felt that they were being unfairly treated. A refrain that is often made by the suppliers.
This of course leads to an interesting question . . .being painted into the corner due to a lack of supplier choice, why are vendor rationalization strategies pursued so vigorously by the buyer?
Why is the illusion of transactional reductions and the mirage of lower administrative costs combined with volume discounts so enticing as the flame is to the moth?
This past summer’s decision by P&G to reduce the number of production companies with whom their brand agencies could deal from 125 to 30 through what they referred to as a “preferred vendor status” program made very little sense. It actually reminds me of the commercial for Angus Beef, where only 1 in 10 cows “qualifies” for the certification.
The cow upon hearing the news that he has made the grade stands up on his two hind hooves and begins to do a celebration dance taunting the other cows saying, “that’s right I’m the best.” He then pauses for a second and then asks” what do I win? We all know what happens to Angus beef.
The point here is simply this, there are going to be circumstances in which a reduced supply base is warranted or unavoidable, especially as it relates to the procurement of certain goods and services. However, the continuing persistence on pursuing the strategy as a means of reducing costs across an enterprise’s entire spend has never made sense in the real-world.
Rather than saving money, it has led to an erosion of supply bases that leaves the buyer with only a handful of vendors with whom to deal. Those remaining suppliers are often times the least desirable or, can deliver to the requirements yet extract a high price in the process.
The Intel situation clearly demonstrates the old adage that “absolute power, corrupts absolutely.” While options are naturally limited in some areas of spend leaving companies vulnerable to the vagaries of a narrowed playing field, self-inflicted actions such as the ones by P&G or Kraft Foods makes one wonder why any company would be so eager to replicate the Intel-type scenario through an expanded rationalization strategy.