Item: In mid-November, the Financial Times noted that one of the "Big Three" U.S.-based automobile manufacturers had presented an interesting mandate to its suppliers: Cut your prices by 7 percent. Up until the downturn in economic activity, the U.S. automotive industry was awash in supply chain initiatives. There were programs for dealers, programs for suppliers, and joint industry programs. There were collaboration initiatives, joint e-commerce portals, just-in-time (JIT), programs with vendors, and, of course, "Vendor of the Year" programs.

But what happens to these initiatives—and to the suppliers in particular—when a 500-pound gorilla at the end of the supply chain starts throwing its weight around? What can a supplier do when negotiations are settled by the exercise of economic power? What recourse does anyone really have when that mandate for a 7-percent cost reduction is issued?

There appear to be a limited number of options available. The supplier can walk away from the business and look for customers that are willing to pay for the value it provides in the marketplace. This option can prove to be dangerous, however, when the search for new customers is conducted in a soft, price-sensitive market. And it borders on suicidal if the existing customer represents a large share of the supplier's business. Most business executives would agree on the difficulty—if not the impossibility—of replacing a large customer in today's economy. Further, even if a new customer could be found, the switching costs alone might be more than a 7-percent supplier price reduction.

A second option might be for the supplier to go along with the 7-percent price cut, leave all the supply chain initiatives in place, and simply try to survive until the economy turns around. With the economies of scale provided by the customer's volume and the dedicated equipment and personnel already in place, the best decision for some suppliers might be to put on their game face and try to ride the wave.

A third option for the supplier might be to "share the pain" with its own supply chain. If the supplier is a 500-pound gorilla to its own suppliers, then it may be able to allocate some or all of that 7-percent reduction back into its supply chain. Of course, the supplier's suppliers will not be pleased with this decision and could, in turn, walk away from the business. Or they could undermine any supply chain initiatives that might be in place in order to cut their own costs.

A fourth option might be to search aggressively for cost-reduction strategies to meet some or all of the mandated 7-percent price cuts. This option could include multiple courses of action—ranging from outsourcing production offshore to using new materials, to revamping production processes. These types of actions typically have a longer development cycle and incur a fair amount of risk. In any case, the transition to a lower overall cost structure through this option does not happen overnight. Managing through the required change process, moreover, can pose a real challenge to supplier management.

There are probably other options available to specific industries or companies. But these four represent the likeliest responses to an arbitrary mandate for price cuts. It's important to recognize, however, that the options outlined here are not mutually exclusive. Indeed, a company's typical response would likely include components of several of these options.

So what does all of this mean for the supply chain management process? Does the whole infrastructure of supply chain relationships come tumbling down when a big customer reverts to the law of the jungle? Should we be surprised when, after 10 fat years, a big customer demands that its suppliers tighten their belts? Is it wrong to suggest that suppliers, and maybe even customers, share your economic pain?

In an earlier column in this series, I suggested that one of the fundamental elements of a partnership was a willingness to share benefits and burdens. Over the past 10 years of economic growth, companies in the supply chain had plenty of opportunities to share the benefits—but very little experience in sharing the burdens. Now is the time to start sharing in the bad times as well as the good.

Reflecting on the actions of the U.S. automotive manufacturer that mandated the 7-percent price reduction to suppliers, several things come to mind. Perhaps it isn't the level of the reduction that creates the ill will but rather the arbitrary way in which a price reduction is made. We might argue over whether the price cut should have been 7 percent or 3 percent, but we would most likely agree that this unilateral action is simply an exercise in raw economic power. There are kinder and gentler ways of reducing costs, and they generally focus on working with the supply chain rather than simply proclaiming the new rules.

We've used the auto industry to illustrate a less-enlightened side of supply chain management. But across almost all industries there has been a great deal of pressure on cost reduction during the current economic downturn. It is probably accurate to say that, during the 10 comfortable years of expansion, we have developed some economic "love handles." Now we have to get back in shape and trim down so that we are competitive in domestic and global markets.

It's not too much of a stretch to view this downward pressure on costs as an opportunity for supply chain creativity rather than as a problem. To be sure, this is a difficult time for management, and the stock market is quick to punish inaction or the wrong action. However, if there ever has been a time during the last decade when companies have an open field to work together for enhanced productivity and competitiveness—all the way from the loading dock to the boardroom—that time is now.

But to capture the payoff that is certainly there, we have to think differently about how we design and execute our supply chain strategies. We have an opportunity to execute some of the strategies that our customers might have been hesitant to bless a year or two ago. In a down economy, the incentive for supply chain partners to act in a truly collaborative manner becomes all the more compelling. To paraphrase the words of Benjamin Franklin, we can either hang together or we can get hanged separately in the marketplace.