Is cost the first or the last factor that Procurement should consider? Will negotiating price lead to disasters?
Serge Milman
I help enterprise CFOs, Chief Procurement Officers (CPOs), and Business Leaders increase EBITDA by 20%+ using my 20+ years of Strategic Sourcing experience
Is cost the first or the last factor that Procurement should consider? Will negotiating price lead to disasters?
Let’s start with an analogy. You want to buy a car, and you start looking around. You find a $4 million Bugatti Chiron and a $40,000 Toyota Corolla. Which should you buy? Both cars have four wheels, taking you from place to place. But there is a clear difference between the two options; and your choice will depend on your needs (aka requirements, SLAs, etc.). If you just need to get around town and are not a zillionaire, the $40,000 Toyota Corolla is probably the answer. On the other hand, the $4 million Chiron is likely to be a desirable choice if you have the financial resources and a certain lifestyle.
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I hope that we can agree that the cost/price we are willing to pay for the car in the car-buying description above reflects our needs, requirements, and capabilities.
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Applying the above principle to corporate Procurement, Vendor cost/pricing is directly tied to quality requirements, service level agreements (SLAs), terms and conditions (T&Cs), order quantity, perception of the buyer as a key “logo” for the vendor, among several other factors. To be clear, cost/price is a wrapper around your requirements and expectations.
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The price we see from Vendors reflects explicit requirements or in the case of immature Procurement teams, implicit or unstated requirements that force Vendors to guess your performance expectations. Vendors will price the product/service to reflect your unstated expectations to include a “risk premium.” As a result, a poor definition of expectations not only introduces risk and uncertainty about the quality of deliverables (and your ability to do anything about it from a contractual point of view), but also necessarily inflates your cost/price above an already elevated level.
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For these reasons, Strategic Sourcing best practices include defining business requirements, SLAs, and T&Cs. These requirements should accompany pricing templates to enable an apples-to-apples comparison of various pricing options across multiple bidders. The T&Cs, SLAs, and Pricing should be aggressively negotiated to deliver the best possible deal (you should be confident that your vendors will be doing the same, except they will work to relax your SLAs and T&Cs and increase your cost as much as possible).
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To summarize, cost/pricing is a component of the requirements of a product/service, and negotiating pricing is an essential part of a leading Sourcing team. My work shows that Sourcing teams can reduce costs by 20%-40% (depending on the category) while contracting for stronger SLAs and T&Cs.
President, Serratus Mgmt. Consulting | We help companies achieve results with Risk Management, Expense Management and Process Improvement
8 个月It's also important to understand what procurement folks are being motivated to do / rewarded for doing...
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8 个月Thanks for sharing Serge. My view is that especially T&Cs are kept a mute point between sellers and buyers far too often leading to frustration and bad surprises on both sides since, as you rightly say, all elements affect the price.