You Get What You Pay For

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Spend Matters UK/Europe Real World Sourcing

‘You Get What You Pay For’

‘You Get What You Pay For’ Guy Allen February 27h 2013




Part 1 – Introduction

The Real World Sourcing Series is a series of 6 sessions covering hot topics for procurement professionals.

The Real World Sourcing Series is promoted and supported by

BravoSolution, and developed by Peter Smith (Spend Matters) and Guy Allen (Real World Sourcing Limited).

Guy Allen started his procurement career with Ford Motor Company,

moving through IBM, SmithKline Beecham and GSK before becoming CPO for Abbey National and VP Global Sourcing at Fujitsu before joining 4C as a Managing Partner. Guy has since left 4C and started his own consultancy, Real World Sourcing Limited.




Agenda 1. How Prices are Set 2. Adapting Your Approach to the Economic

Reality 3. Negotiation Styles 4. PPCA




It's unwise to pay too much, but it's worse to pay too little. When you pay too much, you lose a little money — that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot — it can't be done.

John Ruskin 1819- 1900




How Prices are Set

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DemandSupplySeries 3

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Factors that ‘Corrupt’ a Free Market Tied supply Dominant buyer or supplier Niche products or specifications Government regulations or protectionism

In the medium to long term the market will

probably adjust




5p on a litre of petrol

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Demand Supply Supply 2

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Economic Recession

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Cost of Production Above Market Price

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When Supplier Costs are Above Market Price Supplier margins are likely to be under severe pressure May encourage innovation ….or..... Cutting corners – Horsemeat

Actions to take Risk management eAuctions Address consequential costs (eg delivery)




Cost of Production Below Market Price

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When Supplier Costs are Below Market Price Supplier margins are likely to be good Supply may be restricted Possibly caused by barriers to entry into the market place

Actions to take Build relationships Seek open book pricing Revise specifications Encourage new entrants to market



‘You Get What You Pay For’ Different Situations Require Different Negotiation

Approaches *

* after Steele, Murphy, Russell

Rational argument to deliver planned outcome Logic

Implied threat to use position of power Power

Give and take bargaining Trading

‘Split the difference’ Conciliatory

Appealing to reason or looking for help Emotive




Using the Logical Approach Real margins are high in the supply market Your price is above the market price If you get it right, your opponent will do the majority of the conceding If the power between you is balanced, be sure your opposite number will respond to logic

Don’t Use Logic When Purchase price is below the cost of production

Good circumstances in which to use PPCA




Task What is the manufacturing cost of this bottle?

Identify the key cost parameters that you would need to find out to establish the cost of the bottle Assume cost of machinery and running the factory day to day is covered by a machine hourly rate




Using the Power Approach Used when one party has the perceived position of power Typically a large company buying from a smaller one Used wisely it can change and improve the supply base Possible short term gain, long term pain

Don't Use Power Unthinkingly Without being aware of the risks




Quantity

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Using the Trading Approach A range of factors to consider Searching for things easy to give up, to gain something of value to your organisation Start high, move little Best chance of a win-win outcome

Don't Use Trading When You are unclear about the value of non price factors




Using the Conciliatory Approach Often the quickest route to an outcome You have already achieved your target outcomes You wish to maintain relationships Usually on a single point (e.g. price) Useful for breaking a deadlock

Don't Use Conciliation Early in the negotiation If you are unsure of the market position




Using the Emotive Approach Useful when relationships are strong Emotions can run from anger to pleading – all potentially valid Body language can convey emotions as much as speech

Don't Use Emotion If you have the power in the relationship?




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Your Position of Power

Supp

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Logic Pow

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Be Aware of Your Opponent Using logic with some people may prove impossible Pursuing a trading approach may seem to be a sign of weakness to some cultures Emotive approaches can be easily countered by some personality types



‘You Get What You Pay For’ Final Thoughts

You get what you pay for implies that there is an unbreakable link between price and quality – this is not true Paying a premium does NOT guarantee anything ‘You Pay What You Deserve to Pay’ Manufacturing costs are not immediately linked to purchase price Vary your negotiation approach according to your situation and your opponent




Real World Sourcing Scholarship

£2500 towards any procurement based training Log on to the BravoSolution Education Network with the details you’ll receive tomorrow Complete the certification programme Check your ranking! The winner will be announced at the Sourcing Experts Dinner in December




THANK YOU!

Please feel free to contact me on [email protected]