Hidden Costs to Switch Supplier

Bogdan Büchner

Many companies retain relationships with their product suppliers for many years. But sometimes the relationship changes and the issue to switch supplier comes up. Most often the item price rises without explanation, but sometimes delivery schedules or product quality suffers.

1. Evaluate savings

To switch supplier, the first thing to consider is the amount to be saved.

The next thing is to evaluate the cost to the company to switch supplier and achieve those projected savings.

Suppliers with complicated designs and high learning curves enjoy significant switching costs.

Supplier contracts generally include fees for early termination and others that encourage the buyer to stay in contract. Departing customers face financial switching costs (early contract termination), procedural switching costs (time and effort in locating, adopting and using a new product) and relational switching costs (personal relationships with supplier employees).

It may turn out that to switch supplier may not be as attractive as originally thought. If the current supplier is willing, renegotiating the existing sales contract might highlight a better deal for both companies.

2. Make a plan to switch supplier

A detailed plan to switch supplier must be thought through and reviewed by all users. The plan will include monitoring existing and anticipated inventory and any changes needed to accommodate the new product. There should be two suppliers at a minimum of the current product to avoid current inventory depletion and production halt. Know in advance where inventory must be managed or additional product ordered from the current supplier.

3. Organizational Impact

Change is difficult and people resist change. Many people will not see the value offered by the new supplier and why the company had to switch supplier. They are experienced in their job and would prefer to keep it that way.

If the company has more than one buyer, make sure all buyers place orders with the preferred new supplier only.

4. Communication

Communication among all participants is powerful. It can turn criticism into support. Users must ‘own’ the process. They must consider themselves ‘stakeholders’ with a real contribution to the change.

5. Timing the Changeover

Changing over during peak times in the work process is a mistake. This is a time when people should be at the top of their game, not learning to use something new. Implementing the new product in the work process takes time as people work with it and become comfortable with it.

6. Acceptance and Compromise

As people work with the new product, get their feedback. Work with them to gain acceptance of the new product. Adjust the implementation plan and schedule accordingly and feed comments back to the new supplier. Work to compromise the use of the new product in the work process.

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