Try ‘partnering’ with your suppliers and customers

Long-term commitment can reduce the cost of doing business without cutting prices

Editor’s Note: Robert Menard’s specialty is supply chain strategies including negotiation — what he calls “partnering” — for companies ranging from Fortune 1,000 giants to entrepreneurial startups. Rental Management talked to him about how to make the most of the supplier-customer relationship on both ends of the supply chain: purchasing of inventory from suppliers and providing rental services to customers.

RM: How do you define “partnering”?

Menard: Partnering is a long-term, committed business relationship between customer and supplier that reduces the costs of doing business to improve the mutual profitability of the partners.

RM: How does that differ from traditional sales strategies?

Menard: It differs in its collaborative rather than adversarial approach. The traditional view of partnering loosely defines added value and encourages an “us-vs.-them” contest that almost always becomes an argument over low price. This ultimately dis-serves both customer and supplier alike.

RM: How does low price “dis-serve” the customer?

Menard: Because low price often comes at a higher cost. A steal on price always costs more when quality is poor, delivery is late and service is incompetent. It is shortsighted for partners to fixate on price. When the total cost of ownership is high, partnering fails. The customer fights to lower cost by cutting the price. The supplier fights back with high prices to counter the pressure from the customer.

RM: I assume that includes trying to cover those other costs — quality, delivery, service — with the higher price.

Menard: The costs must be included in the price, but this is only survival mode. A ploy of adversarial purchasing is to regard quality, service and delivery as givens, making price the only negotiable cost. This tail chase will never lead to lower costs. The best value is simply the lowest total cost of ownership. Customers will pay a higher price if it buys a lower total cost of ownership because it is in their economic interest to do so.

RM: One of the biggest issues in the rental industry is rate erosion. We did a survey at the end of 2002 and it came in as No. 3 among the top 20 concerns in the industry. Rental people are always telling us that they want to support their price realization with customer service. That seems like something you would agree with. Care to comment more on that?

Menard: Service is the one cost element that rental firms control. Quality is a function of the manufacturer lines carried. If the firm can’t deliver, the customer goes to the competitor. So service is where most differentiate themselves and is how they try to sell the added value concept.

RM: How do you define added value?

Menard: Added value is anything that lowers the total cost of ownership. If we perform maintenance for the customer cheaper than the customer can, that is added value. It should always be expressed as a cost, in dollars and numbers. If e-commerce is the added value, specify that it eliminates a specific dollar amount per transaction and back up the figures.

RM: I imagine you would agree with the idea that a good deal must be equally good for both parties.

Menard: Certainly, and cost reduction is the engine of this mutual-win option. If a customer fattens profits by gouging the price, or the supplier hoses the customer, only one side wins. If, however, costs can be wrung out of the process, this cost reduction is the source of profits for partners to share.

RM: How does your partnering strategy address the total cost of ownership?

Menard: Let’s take the customer, then the supplier. A buyer’s definition of best value is the lowest total cost of ownership. The total cost of ownership is the sum of the four elements of cost: quality, service, delivery and price. The cost of quality, service and delivery can and often does outweigh the initial price. Now, from the supplier’s point of view, the product or service is higher profit earned by reducing costs.

RM: I have always added a number of things into my understanding of the total cost of ownership — the cost of capital — debt service — the cost of maintenance and repair, storage and depreciation, residual value. Resale value is really an extension of quality, but there’s more to it than that, like how well it has been maintained and used-market demand. Are factors like that included in your concept of the total cost of ownership?

Menard: Yes. Each element of cost is broken down into finite categories, depending upon the level of accounting sophistication and the specific operations of the company. The maintenance and repair category falls under quality, storage and depreciation under delivery and cost of capital under price. To keep it simple, identify the biggest elements of cost in your own organization and manage those intensively. This leads to being a low-cost supplier — a good position to achieve under any conditions.

RM: Could partnering apply to all rental customers?

Menard: Partners are a select group. The 80/20 rule proves that a small percentage of customers generates the large majority of the sales. Partnering should concentrate on these best customers. A committed book of business — an expected sales volume — is crucial. With repetitive processes eliminated, the supplier concentrates on customer service, having the proper equipment available when needed and other cost-reduction measures. For the customer, an important motivation is that a larger book of business with the supplier generates lower costs, therefore lower prices.

RM: Does a rental company need to be large to practice partnering? Or can a small, local company do it, too?

Menard: The critical ingredient is the belief in a total cost of ownership philosophy by both customer and supplier. The size and geographical coverage are tactical matters, not strategic ones. Any company can do this. Sluggish economies encourage leaders to look at alternative strategies. Partnering is a promising alternative. Willing partners can derive considerable cost savings. And who do you know who has saved too much money?

RM: It sounds like this would call for a concerted educational effort on the part of the company that proposes a partnering relationship. How would you advise a rental company to do that with both suppliers and customers? What should they say? What should they emphasize?

Menard: Most businesses look to sales first, so it is best to test the program here. Retrain staff and customers in the total cost of ownership philosophy. Translate benefits such as convenience to quantifiable dollars and numbers. Resist the urge to use blanket contracts that do little more than establish prices. Secure customer buy-in by selling the partnering strategy to them.

RM: Last October we had a cover story on strategic purchasing, in which rental veteran Dan Kaplan said that even small rental companies could establish long-term strategic relationships with their suppliers if they went about it right. How would you advise them to go about it?

Menard: Business has many more small than large players and today’s babies grow into tomorrow’s giants. Small companies prosper by clever and innovative management and nimble application, so it is wise for equipment suppliers to incubate their future prospects. One plan is for the small rental firm to contact a preferred manufacturer, one that has a proven record with you of superior quality, excellent service, and reliable delivery — in short, the added value that creates a low total cost of ownership. Negotiate an exclusive supply program [in one product category] and mutually cultivate that market. Take that victory and apply it to the next [product category]. A record of success encourages more successful ventures.

RM: Please elaborate on “wasted repetitive processes.” What would you eliminate?

Menard: The seller of a product or a service has a certain volume that it must meet to stay profitable. Call that volume the “basket.” If we fill that basket with five “partner” customers instead of 95 adversarial customers, we eliminate needless duplicate administrative, sales, marketing and advertising expenses. These savings are quantifiable and measurable benefits of partnering. Once the basket is filled, we can then cherry-pick the market, perhaps selling at higher margins to the non-partners.

RM: The 80-20 rule again.

Menard: Yes, and this is economic reality. The non-partner customers cost more to serve.

RM: But look what you have to do with the account customers, the monthlies — outside sales, delayed receivables and competitive pricing that reduces margins, not to mention the higher capital costs, the debt service, associated with the high-ticket capital equipment that they rent. But they are certainly the target group for your 80-20 partnering, aren’t they? How does your view of the total cost of ownership accommodate these other pressures on margins?

Menard: We will never go wrong if we keep our eye on the costs. High-maintenance customers who chisel on price and then pay late and short drive up the costs of doing business. They do not qualify as partnering candidates, even the large ones. Partnering should reward the best customers. Those who contribute to mutual cost reduction should benefit to the greatest extent.