Sunday, May 12, 2013

How Much Savings Justify a Supplier Change?

A member in a recent Chief Executive Boards International meeting was wrestling with a tough question. "I have a good supplier, but someone else has proposed a cost savings. How much savings would make it worth the change?"

Another member really simplified the question. He said, "I use a 20% rule. If a new supplier doesn't come in the door at 20% under an incumbent, I don't even waste the time. New suppliers are a big risk, and there are always unanticipated switching costs. If I don't think I'm going to save at least 20%, I don't look any further."

"Even then", he added, "it's not automatic, even if they present a substantial savings. We've learned over time that switching suppliers for cost savings has lots of unintended consequences. It has to be really serious money for us to make a switch."

If you have rules of thumb you use for supplier changes, please click "Comments" below and share them with others.

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Terry Weaver

Chief Executive Boards International
Chief Executive Boards International: Freedom for business owners & CEOs -- Less Work, More Money, More Freedom to enjoy it

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