Too often, customers and suppliers are trapped in a vicious circle of mutual abuse: a game everybody plays, and nobody wins. Meanwhile, major cost savings go unnoticed.

When an industry declines, buyers gain the upper hand and they use it to squeeze cutthroat prices from their suppliers. When the industrial cycle picks up, demand exceeds supply and power shifts back to the suppliers, who take the opportunity to jack up prices and claw back the profits they were so unfairly forced to forego. Both have focused so narrowly on price that they often miss greater opportunities to profit.

Buying the cheapest is often a false economy. A couple of years ago, I bought a Chrysler Voyager, a sleek American people mover with tinted glass and luxury seating. I drove a hard bargain, getting a discount for cash and many extra features thrown in. My kids loved it. They said they felt like movie stars as we drove them back and forth to school. Less good, the vehicle returned 18 to 20 miles per gallon and the depreciation when we sold it was wicked. Glass’s Guide would have told me that the total cost per mile of the even-smarter Mercedes people mover was 15 per cent less than that of the Chrysler.

This is an important lesson for even the most sophisticated. I saw it vividly demonstrated when advising a major British manufacturer on their sourcing strategy. They spent £12 million a year on one unglamorous category of purchases, Perishable Tooling. This included items like grinding wheels and tool steels. A more thoughtful approach yielded savings of over £20 million a year in this category alone.

Seems impossible? This is what we learnt. The Procurement function – who measured their performance on the reductions in price they were able to negotiate – had become frustrated with the Production people’s demands for only the best and most expensive tools. Therefore, they bought lower-cost equivalents from new suppliers.

The cheaper grinding wheels just did not last. The inexpensive tools steels were an even greater folly. The company produced titanium components out of expensive raw materials through a lengthy manufacturing process. The cost of scrap and rework caused by substandard tools was horrendous.

Using total cost, not just price, to pick suppliers saved a fortune.

The most shocking part of this story is that people on the shop floor knew the problem and complained about it frequently. Because nobody would listen, they assumed buyers or management were taking kickbacks.

It might seem soft in the head to claim that improving the dialogue at interfaces (between Production and Procurement, between Supplier and Customer, between Employee and Manager) will improve performance. But there is nothing soft-headed about the millions it can save.