… but they should focus on TCO or TVM.
Unfortunately, as per a recent Procurement and Sales Survey by Greybeard Advisors, discussed in this recent article over on Supply and Demand Chain Executive on When Procurement and Sales Collide, price is still the dominant factor in negotiations. This is problematic. Even though some savings can be found in a price reduction, price can only be reduced so much. A supplier cannot reduce price below cost and stay in business. And price reductions, even if they materialize, are not sustainable in the long run.
As Jim Baehr said, procurement executives need to recognize that as we move into a healthier economy, they need to start doing things differently, and they need to start thinking much more strategically. It’s not just price, it’s quality, it’s sustainability, it’s value-add, it’s inventory, it’s delivery, and a host of other factors that contribute to overall cost and limit organizational profit. So while it’s probably healthy that Procurement and Sales don’t trust each other, since this will keep both sides alert and on their toes, it’s unhealthy that they choose to just focus on price when that energy should go into understanding total cost.
A recent article in Supply & Demand Chain Executive on 5 secrets to allocation success hit the nail on the head when they focussed in on a demand driven strategy built on product life-cycles. The key to success in the consumer market is to fill real demand at the source, not fictional demand in cluster-based model. It’s not what you think will sell, but what customers actually want to buy. Honing in on that makes all the difference.
The tips detailed in the article were:
- Use Demand to Drive Allocations
Last year’s numbers don’t matter, especially if the current instantiation of the product is different, if the economy has soared or tanked, or the market has moved to a new platform. For example, if you’re selling software that runs on discontinued computers or smart-phones, you’re out of luck.
- Think Locally
Many retailers allocate product to store clusters in small geographic areas. While this sounds great in theory, since it’s easier to forecast demand based on regional averages, it’s lousy in practice since there can be micro-pockets of customers with similar desires that can result in significantly different demand levels at each individual store due to local economics and cultural factors.
- Adopt a Push-to-Pull Strategy
New products should be pushed based upon attribute-based demand profiles and then pulled based upon revised demand forecasts.
- Hold Some Inventory Back
Even though most product should be pushed and pulled using just-in-time deliveries, some inventory should be held in reserve, especially for new products, until the demand levels are understood.
- Make Allocation Management a Priority
Otherwise, it will go by the wayside.