Top 10 Procurement Mistakes

Read about the 10 Supplier Pricing Procurement Mistakes Organizations Face

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This article was printed in CONTROL's December 2009 edition.

By Jerold Bernstein, President, and Donald Stock, Supply Chain Executive

In the June issue (www.controlglobal.com/articles/2009/SuppliersMistakes0906.html), we discussed 10 supplier pricing mistakes, and noted that the customers who involve procurement in their purchases are in a stronger position to gain price concessions from their supplier. Procurement organizations see supplier pricing mistakes every day.  Here are the top 10.

Mistake 1: Not understanding the culture, needs and incentives of the procurement organization. Price is important, but other factors count too. For example, in this tough economy, procurement may be pushed hard to implement and obtain immediate cost reductions or cash-flow improvement. This may give you an opportunity to lock in business with better payment terms immediately, while a competitor may require lengthy qualifications.

Mistake 2: Discussing only price, not value. Contrary to popular opinion, many procurement organizations are open to a "value" sell.

Mistake 3: Assuming the procurement department knows your value proposition. If the department is considering two machine tools, and one is $400 and the other is $800, then the $400 tool wins, right? If the tools are measured on cycles before replacement, the $800 tool is the clear winner. If the procurement staff doesn't understand this, the $400 tool wins.

Mistake 4: Not recognizing the customer cost of changing to a new supplier. It can easily exceed 10% of the purchase price. Suppliers often don't recognize this as an opportunity to justify a price premium of 5% to 10% or more.

Mistake 5: Thinking reverse-auction award decisions are based only on price. In most reverse auctions, price is not the only factor customers consider. If the customer doesn't publish that the "lowest bidder wins," then, in most cases, factors other than price are used in the award decision. Suppliers that only sell on price are bound to lose.

Mistake 6: Not acting quickly to pass on commodity-driven cost increases. If you are selling a product that has a cost structure that is significantly impacted by the cost of commodities, then you need to act quickly on pursuing price in the rising market. Procurement professionals will be more receptive to your passing on the commodity increase while the markets are still high—especially if they can pass it onto their customers. Once the markets fall, price increases will be resisted.  

Mistake 7: Not capturing price by using your ability to help manage your customer's risk through material hedging, managing inventory, exchange currency, etc. For example, say the supplier sells copper fittings. The customer is concerned about future price increases due to volatile copper prices. You can get a premium price if you can help mitigate the risk by providing a fixed price that relies on your ability to hedge your copper purchases.

Mistake 8: Taking a misguided view of strategic partnerships. Your partnership is not an entitlement to higher prices. The greatest benefit to the supplier is a stronger position to keep the business by locking in customers over time. You have worked hard to be named as a strategic partner, but now is not the time to rest. That partnership provides you an opening to create strong relationships with procurement, operations, engineering and quality. Creating those relationships will pay big benefits when your competition tries to unseat you.

Mistake 9: Expressing a weak financial (supplier) position to gain price. Procurement department will view this as a desperate move.

Mistake 10: Not getting involved in the customer's new product development. By helping him design, using standard products or with characteristics that align with your manufacturing capabilities, you can create a win-win relationship. Aligning your manufacturing capability with customer needs gives you the ability to be more responsive to the customer while creating a strong environment to retain price. 

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