Author: David Hornaday , Core Catalysts Executive on Demand
Today’s marketplace is competitive. Businesses in all industries are looking for ways to increase operational efficiencies and reduce costs. Maximizing the supply chain process can have a dramatic effect on the bottom line.
Recently, two of our executives discussed how they help companies to create significant value in their supply chain and how suppliers can do the same for their customers. Marvin Motley was an executive leader of procurement for a Fortune 100 company with a $10B supply chain, and Dave Hornaday is former Chief Marketing Officer of a global leader in industrial manufacturing.
In procurement, there’s a constant tension between buying based on price versus value. How do you balance that?
Marvin: I always try to get my internal customers to focus on total cost of ownership rather than just price. I use the example of desktop printers and the cost of ink cartridges. Sometimes you can almost buy a new printer for the cost of a new set of ink cartridges. This supplier is really in the business of selling you ink. His model is based on getting you to focus on the cost of the printer not the cost of the ink. Factoring in the cost of the ink cartridges, paying a little more for the printer may deliver a lower total cost of ownership.
From the supplier perspective, how did you successfully sell value to a customer rather than just competing on price?
Dave: We were never going to be the low-cost producer in our industry so we had to find ways to sell the value we could provide. That took many forms depending on the customer. It’s interesting that Marvin mentioned total cost of ownership because that was our focus in determining how to create value for our customers. In some cases, it was how we packaged, stocked and shipped product, which reduced their handling costs. Sometimes, it was developing products that were better than our competition. In other markets, we created ways for the customer to measure service life, which worked to our advantage as a premier producer of high performance products. The bottom line is you have to understand your customer/end user and tailor your offering to provide that value.
Can you give other examples of why you might want to pay more for a certain product or item?
Marvin: There are actually many situations where that makes sense.
Quality & Efficiency – If lower price raw materials increase the failure rate or slow the process of production in your plant, it may be better to spend more to avoid these costs. An example would be cheap bolts that fail and cause a disproportionate adverse impact due to higher operational costs for repairs and maintenance. It’s better to spend an extra 5 cents on a bolt that won’t fail to avoid a $5000 repair.
Service and Support Impacts – If the lower priced product comes with little or no support, this can be a huge downside. It can also be an issue if the price for maintenance and support of the product is extremely high. The value of the lower purchase price can be quickly and completely negated by the lack or high cost of repair and support.
Product Differentiation – If your customers expect and are willing to pay for a higher quality product, the use of lower priced parts or ingredients may negatively impact your brand and reputation. You might save in the short run, but you will erode the trust of your customer and, with it, any brand loyalty and goodwill.
What about the reverse auctions a lot of people are using today? Are they the best tool for selecting suppliers?
Marvin: Suppliers are not usually fans of reverse auctions, but they are a business reality and can be an effective tool in the appropriate situation. Some companies try to utilize reverse auctions for everything without regard to the nature of product they are procuring. Reverse auctions are most useful when there is not much difference in the quality of the product being purchased and the performance of the suppliers providing the product. However, for this tool to work, there must be enough participants to assure a competitive environment.
Dave: That’s right. Suppliers hate reverse auctions. We had several customers try to use reverse auctions, but we seldom were active participants. I specifically recall having a big contract customer of ours attempt a reverse auction, but we just told them what our new contract price would be. We signed into the auction but didn’t bid below our original offer. During the reverse auction, the customer contacted us and asked why we stopped bidding. We told them that we had given them our best price considering the value we felt we provided. The customer selected another supplier based on their price. We told the customer that if they gave the contract to our competitor, they would pay 20% more to us for spot purchases. Unfortunately for our customer, the low bidder was unable to deliver the product for more than 6 months of the one year contract. We sold that customer more dollar volume that year than we did the previous year when we had the contract. Needless to say, they didn’t use a reverse auction the following year and we were awarded the contract because we could deliver!
Both Marvin and Dave currently work in the Executive on Demand program with Core Catalysts, using their expertise and experience to help businesses drive more value.