Steps to Take With Your Supplier During A Downturn

Jared Haw
Jared Haw
12 May, 2023 | 5 min for reading
Steps to Take With Your Supplier During A Downturn

As manufacturing companies navigate through a period of economic uncertainty, it’s crucial to pay close attention to their supplier relationships. A downturn can impact manufacturing companies in a variety of ways. Negotiating with suppliers during a downturn is essential for companies looking to maintain profitability and continue operating smoothly. 

In this blog, we’ll explore the key strategies that manufacturing companies can use to negotiate with their suppliers during a downturn. From reviewing supplier agreements to building strong relationships, we’ll provide insights on how to navigate the challenging landscape of supplier negotiations and come out on top. Let’s dive in and explore how manufacturing companies can successfully negotiate with their suppliers during a downturn.

Understanding the Current Environment

To understand the current situation during a downturn, manufacturing companies should keep a close eye on the broader economic landscape and monitor how it’s impacting the manufacturing industry. 

Based on these impacts, a manufacturing company should be able to modify its forecasts based on the economic indicators and landscape. Manufacturing companies should work with their suppliers to modify their forecasts by taking the following steps:

Reassess Demand Projections

Manufacturing companies need to re-evaluate their demand projections and adjust them accordingly. This might also cause further disruptions in the supply chain. 

Review Production Schedule 

Manufacturing companies should review their production schedule and adjust them based on any changes in demand. This will affect certain long lead-time components that your supplier needs to purchase.

Analyze Inventory Levels

Manufacturers should also be assessing their inventory levels and adjust them based on their new demand projections. 

Evaluate their Supply Chain Partners

As manufacturers move into a downturn, they should re-evaluate their supplier relations. A supply is also not immune to a downturn so identifying alternative suppliers can be important to limit the risk of a supplier failing. 

Review your Supplier Agreement

After you understand the current situation, you’ll want to review your supplier agreement. It might have been years since you have looked at this and quickly refreshing and getting an update might be beneficial for you during this downturn Here are some areas you can focus on when reviewing your supplier agreement. 

Pricing 

During a downturn, materials, lead times, and currency exchange rates can be more volatile. All of these factors can have an effect on your pricing. Negotiate with your supplier to make sure the price reflects the price in the market. You can also create some good competition among suppliers.

Payment Terms

In a downturn, managing cash flow becomes more important. Review the payment terms with your supplier to ensure that they are realistic given the current economic climate. You should try to renegotiate payment terms with your supplier to have them be more favorable. 

Minimum Order Quantity (MOQ)

During a downturn, you will usually lower your demand forecasts. However, suppliers still have minimums that you must order. It might be beneficial to negotiate the minimums you need to purchase. This will improve your cash flow as well. 

Lead Time

Due to multiple disruptions, lead times for certain components can be longer. Review your lead times with your supplier to make sure they are current and up-to-date. After receiving the most recent lead times, you might need to evaluate your production schedule going forward. 

Build Stronger Supplier Relations

In today’s economic climate, building and maintaining strong supplier relationships is more important than ever. During a downturn, you’ll be faced with supply chain disruptions, fluctuating demand, cash flow constraints, and more, all pose a significant threat to your company’s operations. If not handled correctly, these can also have a negative impact on your supplier relations.

During a downturn, there are a few things you can do to strengthen your relationship with your supplier. 

Communicate Regularly 

A key part of any relationship is communication. During a downturn, tightening communication is important. Make sure you keep them informed about any changes in demand, production schedule, and lead time that you expect. Regular communication can help build trust and transparency in a relationship.

Turn Your Supplier into an Opportunity 

Certain companies look at suppliers as a threat or a company that produces their products and that’s it. If you understand the strengths of your supplier then you can start to figure out ways in a downturn of how to improve collaboration with them. 

Your supplier can help you initiate cost-down initiatives during a downturn which can look at using alternative components to improve lead time as well as save costs. 

Create Competition

Creating some competition amongst suppliers during an economic downturn will provide you with negotiating power and improve your payment terms. Having a secondary supplier for all of your key components and for as many other parts as well is vital. 

All of these relationships take time to make so it’s important to start the process of vetting and verifying backup suppliers as quickly as possible. 

Having multiple suppliers for the same component will do a few things. First, it will offer composition amongst the suppliers. Secondly, it will limit your risk in case one supplier fails during the downturn. 

Since you are tied to the success of your suppliers, having one supplier that fails can ultimately see you dragged further into a decline. 

Where to Start?

Navigating a downturn as a manufacturing company can be challenging but it’s also an opportunity to build upon relations and create some competition amongst suppliers. 

The first place to start is by reviewing your own data. The way you manage your data will dictate the speed at which you are able to find alternative suppliers, identify components for cost down, find secondary suppliers for long lead time items, and more. 

To start the process, you need a single source of truth. One platform that holds all of your manufacturing data, such as CAD files, BOMs, part info, specifications, pricing, and more. 

OpenBOM is a cloud-based PDM & PLM platform to manage your engineering and manufacturing data. Companies from startups to Fortune 500s use OpenBOM to create a centralized database to bring in, store, and manage their manufacturing data. With this infrastructure, users also use OpenBOM to streamline both their change management and PO processes.

If you need to improve the way you manage your data and processes, share data instantly, or collaborate with contractors and suppliers. contact us today for a free consultation

Regards,

Jared Haw

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