By Steve Jones, sales director, MIDEL Asia-Pacific.
We all love a good bargain – the thrill of securing a great deal and even the relentless haggling involved – it’s just part of our cultural DNA. So how do we evaluate success or failure in these interactions? Your answer will differ dependent on the size of the purchase, the type of product and possibly which part of the world (or market) you operate in. But if I had to take an educated guess, I suspect most people’s top answer would have been ‘price’.
I agree that price is an important element of making a deal, but rarely in business is this the only criteria; it is merely part of the equation – and before I go any further it’s also important to note that we shouldn’t equate ‘price’ with ‘value’ – they are two very different things!
Picture this: You’re in the Grand Bazaar, with multiple, noisy negotiations taking place as shoppers look to secure the latest textiles, freshest produce, or most charming locally produced ornaments. It’s quite an experience and to the casual observer these deals appear to be concluded quickly. However, don’t be fooled into thinking that no criteria (apart from who shouts loudest and most aggressively) have been applied to these purchasing decisions. Let’s say you’re a seasoned visitor, approaching your favorite vegetable stall where you know the owner and that the stall has been in the family for 30 years – this knowledge gives you reassurance that they will still be around to support you if the produce isn’t its usual high quality. You know they have a strong sense of customer service and a robust moral compass linked to their reputation. You know that your family loves the taste and freshness of the produce sold here, meaning that your customers (the family at the dinner table) will be satisfied. Even if you decide to cook something different that evening you have the peace of mind that the vegetables will last another two or three days which you know is part of your stall owner’s quality promise. Sure, the stall next door is 15% cheaper, but it doesn’t match your criteria and you don’t want to compromise all of the above to save a little – the risk is too high for the reward. These principles are important in other scenarios, too.
But look! Here comes your neighbor. He prefers to shop at the stall with lower vegetable prices. Making his purchasing decisions with none of the principles noted above, he gets a better price BUT critically it’s unlikely that it was the better deal. Unimpressed by the quality of the produce he takes home, his customers (the family) demand a takeaway instead.
Transferring the above scenario to the world of business, it would be highly advisable to apply the principles I’ve outlined above.
Now let’s add overlaying, conflicting interests of different departments, management perceptions and international factory or business networks – very quickly you’ll see how the need for applying those principles is increased (as is the risk if we don’t). Scorecards are popular now with the larger organizations in my direct industry (the manufacturing of electrical distribution and power transformers). Price, delivery, performance and innovation are the cornerstones of how success is measured in this world. This is a good start but doesn’t take into account inter-departmental drivers or objectives. A perfect scorecard for procurement could cause huge problems to production, the design department or the sales and business development team. I recently heard that “our direct purchasing costs have decreased by 12%” from one department and then another saying “we have a huge bottleneck on quality at goods inbound, we don’t understand some of the parameters and have had an increase in returns from customers”. But guess what? – the root cause of both statements was linked to a supplier change in which price had been prioritized over other key selection criteria. The decision was made independent of considering the rest of the business impact internally and externally. They were too quick to commoditize a material that was not at that stage of its product lifecycle; they had undervalued the support and value-add services offered and the net effect was a negative one – the 12% decrease on price proudly secured had quickly evaporated and much more with it.
You might just have landed the best price for a product that your industry does not want or will accept. Your departmental KPIs look fantastic but ultimately the business suffers – you spend more time convincing customers to take the new product, the team are unsure how to handle it properly and you encounter compliance issues. All these factors accumulate costs, increase risk and exposure, and create damaging reactions in the marketplace. Saying “I operate in a price sensitive market” is not an excuse, the fact is we all must strive to compete effectively. Numerous factors define success other than just securing a low price.
Risk is something we must live with at times but make sure you calculate for it; have you accounted for a big enough risk factor? An industry benchmark for this could be as high as 20%.
Competition is a good thing – it keeps us engaged, promotes creativity and drives innovation. In the same way, selecting high quality, industry recognized suppliers helps to differentiate you and your business from the competition. You become a stronger presence in the industry, with a robust and proven supply chain. In many cases you will be able to and benefit from your supplier’s industry experience to then improve the chances of your own success. A good supplier will be able to contribute to other areas of your business performance such as product or process development, or assisting you in opening new markets and sectors. I can’t stress this argument enough – competing in today’s business world is tougher than ever before, so why not partner with a supplier who can add tangible value to your company?
Like the eager child in the classroom, hand up, straining to make fingers reach slightly higher than the other children’s, shouting “Pick me, pick me!” – without finding the right business partners we will all find ourselves in congested markets with distractions and temptations – all jostling for position. Even more so in this digital age, given that a clever marketing campaign of a pop-up company or fledgling product could potentially out-fox even the most experienced procurement professional.
The pressure is on and this is not an easy task but you can make things easier by taking a more comprehensive and considered view. A good KPI in one department that drives down the performance of a KPI in another department is something that happens all too frequently in today’s supply chains. Use solid, coordinated criteria in your purchasing decisions that reduce your supply chain risk, keeps you competitive and that are, ideally, aligned to your business and interdepartmental objectives – not just those passed down from senior management.