The Price is the Price Only if You Pay the Price

Over at Next Level Purchasing, Charles recently published a good article on How Suppliers Defend Price In Negotiation. In summary, if the supplier thinks that you are not on your game, it will defend its price with a steaming pile of bull-crap.

Of the 7 examples that Charles gives for a common supplier response used when you attempt to start negotiations, my favourite has to be:

We are the only company that provides this product/service, so we don’t play pricing games – our price is our price.

First of all, unless you have it in your head that you have to have an iPad, there is no single source provider of any product or service. Pick a product. Any product. I guarantee there’s a dozen variations of it out there, somewhere. Maybe not all providers can meet your volume demands, and it’s probably the case that not all have the same quality level, but still, unless you’re insisting on a name-brand product, there are always multiple options.

Second, any supplier who wants to sell something bad enough will negotiate on price. Very few companies have the power to set a price in stone, and they are all selling branded products or services, like iPads, Wiis, or Playstations. Everything else is up for negotiation. And even if the price on the base product can’t move, maybe a value-added service can be thrown in at a deep discount.

The price is the price ONLY if you pay it. Given a choice between moving a line in the sand or being stuck with a mountain of inventory, which choice do you think a supplier is going to make?

Now, this isn’t to say that you should be requesting unreasonable price concessions, as everyone deserves a fair margin, but that you shouldn’t believe that the price is the price.

And if I was asked to choose a runner up, it would be:

“Is price the only criterion on which you are basing your decision?”

Of course not, but don’t let the supplier distract you. If you’ve done a proper cost model and determined that the supplier has built in a hefty margin of 20%, compared to the market average of 10%, unless you’re getting very valuable value-added services thrown in for free, you need to cut that margin in half to stay competitive.

Who to Blame if Your Supply Chain Complexity is Spiralling Out of Control?

Management, for demanding ever cheaper costs? No.

Consumers, for demanding ever more variety in your product offerings? No.

You blame information and communication technology, or ICT. We made it all possible. We opened the world up to you. It’s true that you didn’t have to try and conquer it, but you did, and now you have supply chains with complexity spiralling out of control.

And this view is backed up by recent research by Mr. Richard Baldwin of the Graduate Institute of Geneva, which was summarized in a great article in the Economist this summer about Chains of Gold. According to Mr. Baldwin, cheaper communications allowed firms to manage supply chains over ever greater distances. Companies discovered they could build plants in cheap locations, ship components there to be assembled and export the finished product around the world. While the first unbundling separated producing markets from consuming markets, the second broke up production entirely across long, multinational supply chains.

And, in addition to a much faster rate of industrialization of developing and emerging economies, you now have supply chains that are increasing in complexity by the quarter where a single component may be exported several times, adding to tallies of gross trade but not to measures of value added. We have a plethora of Pakled emerging markets that now merely “borrow” technology from rich-world firms, who are incented to limit technology transfer out of fear of theft and unexpected competition.

But supply chains are maturing. As per the article, evidence suggests that supply-chain trade may have declined less and recovered faster than overall trade during the financial crisis, which is promising. So maybe you’ll get that complexity under control after all!

The First 100 Days

One week from today, at 11:00 a.m. GMT, in The Salle de Fete Private Dining Rooms in Kettners, on Romily Street in London, England, Bravo Solution is hosting the sixth and final instalment of their Real World Sourcing Series Expert Briefings on The First 100 Days of your tenure as a new CPO.

In this talk, the presenter, Guy Allen, will discuss the priorities of a new CPO against two very different contexts, one where there is a burning platform, requiring immediate action and the other where there is a little more time to plan and get it right. Both situations are difficult. In the first, the CEO/CFO is likely expecting rapid results, and in the second, the CEO/CFO is likely looking for a plan of action to deliver long-term, sustainable results. In either case, credibility with key stakeholders will be key.

A specialist in cost transformation and procurement, Guy Allen, now a managing partner at 4C Associates, has considerable first-hand experience as a senior Procurement professional at Fujitsu, Abbey, and GlaxoSmithKline.

This series is put together quite well. The last presentation was by Peter Smith of Spend Matters UK on “Measuring Procurement’s Performance” and included a great segment on 12 ways that buyers can falsify Procurement Savings (and get themselves in trouble if it’s ever discovered). The talk categorized spend into Opex vs. Capex and One-offs vs. Recurring and presented methodologies to accurately measure and report savings in acceptable, defensible ways.

If you’re in or around the London area, and are a new CPO, or a senior Director / VP vying for a CPO job, it would be worth checking this event out as the first 100 days is critical to your success as a CPO in an organization. In today’s tight economy, even if the C-Suite is not expecting rapid results, they are expecting rapid acclamation and signs that their faith in you will deliver results in the long run.

The Real Reason We’re Losing Manufacturing Jobs (in North America)?

Because the Chinese are taking them? No.

Because we’re not subsidizing them? No.

Because, as pointed out by Mitch Free of MFG.com in a great article in Forbes this summer, we’re not exporting.

Instead of using North American know-how to build great products and sell them to other countries and optimizing the value generation chain, we’re optimizing the cost saving supply chain to instead import great products from other countries. Now, in some cases it makes sense when these products can be produced cheaper and in greater quantities than they can be produced in the US, especially when those products are going to be sold around the world, but I’m still not sure it makes sense in all cases. Especially for custom made products or high-end manufacturing or medical devices which are high value and require very high-end expertise that we possess a lot of in this country.

And while some North American companies have figured this out, and are doing a great job of selling product abroad (like Apple and Caterpillar), they are few and far between and all large companies. As Mitch says, the key to (North) American Manufacturing success is for small and mid-size manufacturers to get into the exporting game and sell their products outside of North America. There are less than 460 Million people in North America. That’s less than 6.6% of global population. And with large middle classes emerging in China and India, where 2.585 Million people live, North America is quickly becoming a (very) small portion of the global market for whatever product you are making.

So why aren’t we exporting? Because, as Mitch says, we have been spoiled by our home business market of more than 300 million people who speak the same language, largely embrace the same culture, abide by the same laws, use the same currency and have freedom of movement and disposable income. In the past, our market has been so robust that you did not need to sell abroad in order to have a great business and live a comfortable lifestyle. But this isn’t the case anymore. Now, we have a lot of work and learning to do in order to catch up with our global competitors whose small- and medium-sized businesses are already skilled exporters. They understand and appreciate different cultures, speak multiple languages and are good at adapting to the markets they are selling in. Because, for the most part, they had no choice. For example, Germany only has 81 Million people. It couldn’t build great, now globally recognized, brands if it just tried to build for it’s home market. And the UK and France only have 62 Million and 65 Million respectively.

We’re losing jobs because we aren’t exporting. But there’s no reason we shouldn’t be. We are among the most productive and technologically advanced countries in the world. We can compete with anyone; we just need to learn to export. And it shouldn’t be hard. We’re already masters at importing with some of the most advanced supply chains in the world. We just have to point them the in the other direction now and then.

The Real Problem With Most of Today’s Supply Chains?

They’re too fast and too slow.

And no, this is not an oxymoron.

As highlighted in this recent post on Supply Chain Digital, the product life cycle is in decline now that 50% of annual company revenues across a range of industries are derived from new products launched within the past three years at the same time that there are 250 supply chain disruptions to public company supply chains every month (Supply Chain Brain) that result in shareholder value dropping by 10.28% on average (SAS) and that takes the company an average of 50 trading days to recover from.

They’re too fast. There are too many products being introduced too fast. For example, how often do you need a new phone anyway? It’s a damn phone. And a dress shirt is a dress shirt. Now, it’s true that you need to constantly improve computing technology (to keep up with the bloatware), but do you need to change the form factor every year? Sure you need to increase the memory, the processing power, and the storage, but there’s no reason the form factors can’t stay the same — especially since density keeps increasing.

They’re too slow. The average company can’t respond to supply chain disruptions or market shifts fast enough to prevent significant stock-outs, significant drops in revenue, or reputational damages that take it, on average, two months to recover from.

Companies need to balance the competing agendas of innovation, renovation, and reverberation. While constant product innovation is needed, the innovation needs to enhance the product lines and not destroy them. Since research is expensive, the gains from each effort need to be maximized. That means reusing designs, components, and innovations to the extent possible for more than just a year or two.

Furthermore, some things just can’t be reinvented. A toaster is a toaster is a toaster. A new design every year isn’t going to drastically increase revenues and is, to be blunt, a waste of time.

Unnecessary efforts need to be eliminated and redirect to risk management. There’s not enough focus on risk or the mitigation thereof. For example, the benefits of an innovation efforts can be eliminated by the failure of a strategic supplier and the expected profits from a new a product launch can disappear if a supply disruption translates into stock-outs across the board in peak seasons.

In other words, your supply chain needs to slow down and speed up.