Purchasing: My Price Is Not Your Cost

By Toby Reed

I want to share a frustration I have. A mistake that those who procure products and services sometimes make. That mistake? Believing that a price for a product or service is their cost. Many procurement professionals often view their role as finding the lowest price for a product from a field of qualified vendors. But is that really the goal? To find the lowest price?

Just like the “product pusher” is the old-school sales person, the RFP or “3 bid” concept of procurement is now also, archaic. The extensive RFPs that are intended to establish a ‘technical specification’ for what the company is looking to buy is outdated. The process of intentionally creating a one-way dialogue to eliminate any potential for vendor favoritism, while indeed noble, is antiquated and extremely limiting. The effort to painstakingly generate questions in numerous categories to ‘qualify’ a would-be vendor is often wasted effort as the process is ultimately squarely focused on price alone.

In my post “We Do Not Sell Envelopes: 3 Reasons Why We Avoid Selling Product and Your Sales Team Should Too”, I speak about the fact that we at Tension come up with our best solutions for our customers through extensive collaboration with them. During that process, elements are often incorporated into the final solution that were not considered beforehand but ultimately help deliver a more complete and valuable solution to the customer organization. Might the price of that better solution be more money? Quite possibly. Does that mean the total cost to the customer is higher? Absolutely not.

Seek the Value

Actually, more often than not, we find that lower-priced products that result from the aforementioned ‘old procurement methods’ often cost the customer more money. Since the solution collaboration between the customer and vendor never occurs in the traditional RFP or “3-bid” style procurement process, the result is often a product purchase and not the implementation of a business solution that addresses the underlying customer need. That is what bothers me the most. All that time, money and effort spent by the procuring company seeking the most qualified and lowest priced product, resulting in a purchase that brings no real organizational value.

The issue is that the old process often ignores the operational and marketing needs of the company’s internal customers in favor of a low price. In all businesses there are internal customers involved in the use of the product or service being procured who know there are performance and quality differences between suppliers and solutions. More times than not, those differences result in real operational and opportunity costs for the company that dwarf the total expense of the right, and possibly more expensive, solution in the first place.

Consider This

As an example in my industry, the price of an envelope to a customer is often measured in terms of a price per 1,000 envelopes. Let us say that after a healthy consultation with my customer we were able to craft an envelope solution that is $.25/M (or literally 2.5 hundredths of a penny per piece) more expensive than the initial technical envelope specification but in return we will lift response by ½% or 5,000 more sales of my customer’s product. This would mean that the customer’s $250 incremental solution investment on a million name mailing would have generated an additional $99,750 in new revenue, if they were selling a product worth $19.95. The RFP and “3-bid” procurement process, by their very nature, would never have identified this new revenue stream opportunity because the solution collaboration between the customer and vendor never would have occurred. Instead, the old procurement process MAY have yielded a 10% envelope ‘savings’. The procurement team would likely celebrate their $1,500 ‘cost reduction’ (assuming a $1.50/M savings on a million piece mailing) never realizing that same procurement decision just cost their business almost $100,000 of new revenue.

Clearly the above example is hypothetical (wink, wink) but the premise is all too real. I often come across really good procurement professionals who fall victim to this price/cost conundrum because of the purchasing practices adopted by their employer. Even worse? I know many procurement professionals who have their performance review and incentive compensation based on their “cost elimination efforts”. Which translated means how much spend reduction did they generate.  This is most unfortunate because the company is providing an incentive that drives the wrong behavior and by default prevents their talented procurement professionals from working with supply chain partners to find and drive real meaningful value to the company like in the example above.

So back to my lead question. Is the goal of a purchasing professional to find the lowest price? Clearly no. It is to find the solution that delivers the most value to the customer organization. We just should not let ourselves be fooled into believing that those two end results are one and the same. Because as I mentioned in the title, my price is not your cost.

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