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A bit of Explanation:
Malcolm Mills is a well-known Canadian business advisor and consultant to the Purchasing and Procurement World.  He is the author of "It's a Tough World Out There-25 Ways to Lose a Customer 25 Ways to Fix It."

Malcolm and Frank Hurtte wrote a series of articles where in the spirit of “Point-Counter Point” they debated important issues facing distributor sales people. 

Malcolm’s book can be purchased by contacting Malcolm at toughworld@eastlink.ca.

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 RIDING FOR THE BRAND – Shoot out at the Value Corral

They rode into town from the east as a crimson sun poured blood on the mountains west of Crossroads City.  Ten thousand foreign head plugged the stock yards and pens.

“Hell-on-Wheels-Frank” rolled the slender cigar between tobacco stained teeth before drawing it slowly from his mouth and spitting on the parched dust at his feet.  He was fed up and so were the other distributors.  It wasn’t fair.  They’d worked for years building up their supply from nothing, scratching a living from a bald industrial prairie, fighting recessions and procurement drought for years only to have it stripped from their grasp by outsiders undercutting their price and flooding the market with inferior stock.

He loosened the six-gun on his hip and pushed his way through the batwing doors into the Reality Saloon.  He’d had just about enough of these do-nothing, box pushing, distributors breezing into town and plugging the market with cheap inventory from the east.

It was time to take a stand.  But how?  How many others would stand with him and fight?  If it was a fight they wanted he, Frank Hurtte was ready for them.  He’d already spread the news.  There was going to be a showdown tonight at the Value Corral and even the law was planning on being out of town.  The distributors of Crossroads City were going to show the Buyers from the east exactly what value they were made of.  They had value … and they’d prove it!

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Measuring and Selling Value 

A shoot out at the Value Corral by Frank Hurtte & Malcolm Mills

Malcolm Mills and Frank Hurtte are at it again – this time it’s all about measuring value. 
Are you listening?  North America is losing out.  Companies in the Asian Rim, the Indian Sub-Continent and other diverse locations are joining together in tight clusters of partnership and winning customers and markets.  Toyota, famous for seamlessly moving value from vendor partners to their own production lines continues to throw a wide loop over all competition and, based on a number of comments from readers, many companies in North America just haven’t figured out how to imitate this successfully yet.  We may have invented the rodeo but measuring the value between vender and customer, salesperson and procurement still falls in the “needs work” category. 

For instance, here’s a situation:

Frank
I just had a conversation with a Midwestern Purchasing Manager who told me it was his formal objective to reduce his product cost by 7% during 2007.  He went on to state, “every single, bonus and perk in my department will be based on my staff’s ability to meet this goal.”  I asked if this was an objective he felt was reasonable and fair.  He said, “Yeah, I believe my people will have their hands full because we will need to swap out some well established long time suppliers.”  When pressed about value, services, and quality of product, it became clear that was talking price cuts – not cost reduction.  Malcolm, do you purchasing people ever think of anything besides price?

Malcolm
Frank, “product cost” can mean different things to different people.  But traditionally, Purchasing folk think in terms of “price” because that’s what they’ve all been taught and have used as a measurement for value for eons.  The boy’s upstairs typically look at the bottom line and so must the Buyer or PA.  Either that or be replaced.  Only fairly recently have the gutsy and intuitive among purchasing managers and Buyers begun to break out “value” as a part of the item price.  Unfortunately, for the most part, no one else in the company really gives a damn or cares to measure what Buyers instinctively know.  Sorry, that’s life.  But what are you calling “value” anyway?  If it’s not tangible and reportable Frank, you’re wasting your precious breath.  If it can’t be measured and broken out of the price, it’s all just smoke to Buyers.

At the moment Purchasing eyes see “price” as including the value you promote.  Whatever the PO states, be it: shipping, certification or documentation, test reports, MSDS’, warrantees, packaging, shelf life certification, MTR’s, labeling, etc. these are al expected to be part of the quoted price.  It’s not an extra unless these “value” items are stated as separate PO line items.  You can’t put a line item for “quality of product” or “talking on the phone time.”  You may or may not charge for Certs and MTR’s.

Frank
But, don’t some of these get sacrificed to the “god of price” the first time anybody says corporate re-engineering?  The Big 3 automakers perfected the old, “I like you.  We are partners.  And let’s work closer together.  Just as soon as you give me a 5% across the board price chop” back in the 1990’s.  I pushed back with offers to increase service, outsource work they did with expensive union maintenance workers, and a lot of other great ideas.  We didn’t measure it in dollars and cents back then, but we were pretty specific.  Just how well does it need to be spelled out for you to take it for real numbers?

Malcolm
Generally speaking, Purchasing managers want to show via an accurate report where last year they spent X number of dollars purchasing “widgets” from ABC supplier.  THIS year they are only spending X minus 7% dollars for the same amount of product. 

Quality doesn’t show up on the report, Frank.  Neither does technical information or expertise.  To Purchasing people, Bean Counters and Owners/Stock holders, the total price on the report includes all of the “value added” features you talk about.

Frank, when you and I were young, when we reached an agreement, we’d look each other in the eye, shake hands and we’d have a solid deal which wouldn’t be broken for love nor money.  We went the extra mile for our friends and business partners providing dedicated service and reliable performance. 

Well we don’t live in that world anymore Frank.  We’re very much “international” now.  Our corporations are often owned and directed by hard nosed and tight fisted business people from across the pond.  Even North American companies cannot operate on trust or personal relationships today.  Instead we operate via spreadsheets and way too much backroom politics.  Again, that’s just reality.  Today we can’t just “throw that in” because somewhere it has a cost.  With the price of fuel and everything else, that “extra mile” costs you.  You just can’t absorb or provide for free what you have a cost to obtain.  It’s not reasonable.  You guys have to learn that.

And that is the mess your team is in.  Unfortunately your international competitors have already learned to quote the item alone, in many cases without that added value which drives North American prices up.

Frank
An area that often is talked about is “soft” savings – those which affect the use of internal people.  I believe that freeing people up from one task to be used in another task is indeed a value to most organizations with over 50 employees.  The companies who recommend and provide automation equipment are really in the business of selling “soft” savings.  Aren’t they?


Malcolm
Frank, you were talking earlier about turning “soft” savings into “hard” savings when you made recommendations to your customer to outsource some of their internal work to lower costs.  Today “hard savings” are the rule.  It’s up to you to turn the soft savings you offer into “hard” savings Buyers can recognize and quantify.  Promoting automation is only a part of that.  Promoting “quality,” “technical expertise” and other things suppliers consider to be “added value” must also become measurable and hard. 

But to most Buyers and Purchasing Managers this added “value” is no more than your own “costs of doing business” and they don’t believe you can’t do better because the competition tells them that they can do better … and they often do.  The fact that your product is North American made, better quality and good for the local economy doesn’t make it under the “hard savings” ledger column. 

Frank
Salespeople are only now beginning to think about measuring their service using that five thousand year old standard for doing so – money.  Increasingly my clients are asking questions about how to transform their actions into cold hard cash for customers, but this is a very new concept for the sales community.

Malcolm
Frank, Buyers and other Purchasing types listen to sales pitches from competing suppliers all day long.  The stories are similar but their interpretations and cost of “value” are sometimes quite different.  And when the interpretation of “added value” is different, often, so is the price.  I’ve seen brand new ISO 9000 factories in China smack in the middle of rice fields producing acceptable quality goods for the hungry American market.  What kind of value do you suppose they are offering, Frank? 

There’s one thing that will change the way things are being done today and that is to actually prove in black and white to every customer the significance of soft savings as related to price.  What it will probably take is for every manufacturer or distributor to do their homework and price the product they are in jeopardy of losing, without freight in, without technical advice, without documentation, without packaging, without QA extras and whatever else makes up the cost and then offer that to the Buyer as an option.  If you sincerely want to change the way customers/Buyers view price quotes in America, that’s pretty much what it will take. 

Frank
Malcolm, typical purchasing mentality is as archaic and as one sided as it’s always been but at least we agree on one thing; identification and documentation are the key.  Further, these values need to be clearly visible and understood by the CUSTOMER.  It’s time you and I took this bull by the horns….

To make this real, I want to suggest a mini-case study.

I am a sales professional calling on your company.  I know the Engineering Department is concerned about the high cost of energy.  Gasoline has pushed past the two dollar point and has on occasion surpassed the three dollar point.  The cost to operate the vehicles used by your company has grown dramatically and everyone is concerned.

After hearing about your troubles, I bring in a new technology flying carpet to replace your vehicles.  I know the average vehicle cost your organization $3000 to maintain and $1000 for gasoline during 2006.

The magic carpet runs on genie dust which will cost you $500 dollars per year. Additionally, magic carpets require only $100 a year to maintain (rug shampoo).  All other costs of operation are the same.

And finally, the magic carpet costs about $750 more than the vehicles you are currently buying.  The expected life is 5 years for both the vehicle and the magic carpet

Financial Analysis Model

 Magic Carpet 

 Traditional Vehicle 

 Fuel Costs  $500  Fuel Costs  $1000
 Maintenance Cost  $100  Maintenance Cost  $3000
 Annual Cost  $600  Annual Cost  $4000
    
 Purchase Price  $20,750  Purchase Price  $20,000
    

 Total Cost of Ownership over 5 year Life (TCO)   

 Operation Cost = Annual Cost x Years of Life   

 Magic Carpet  $3,000  Traditional Vehicle  $20,000
 Purchase Price  $20,750  Purchase Price  $20,000
TCO $23,750 TCO $40,00

Malcolm, based on a compelling story like this, it would seem that every purchasing guy on the planet would say, “Wow this company brought us some value!  Their suggestion just put $16 Grand and some change in our pocket.  We’ve got to get them more involved with our company.”  Instead, the message often delivered is, “Thanks for the suggestion, now as long as nobody beats your price on Magic Carpets by a dime, I’ll let you keep the business.”  Give me your thoughts…

Malcolm
Looks like you plugged me Frank.  You’re a straight shooter and I took one for the old Purchasing Association.  In today’s world you’re probably right.  Depending on the industry they may not even have the will (or inclination) to listen.  And worse yet there’s many the purchasing guru who would listen but has neither the time, training nor procedure to record the savings.  You see, Maintenance and overhead are coded differently from “purchase price.”  Sorry Frank.  You winged me but there was a ricochet and procedures don’t account for ricochets, Frank. 

But Frank, because I am a Progressive Purchasing Manager, I actually DO see the value in what you’re proposing and I’ll go to the matt for you.  You see, I’m a customer who listens.  We aren’t really extinct, you know. 

In summary, what you’re saying is possible but it will take work on BOTH sides.

By the way can I get that Magic Carpet in blue, with white pinstripes and aluminum tassels?  Give me the sporty model with the leather interior, DVD player and cup holders okay?  I presume they all come with air?  Can you throw in a genie named Barbara?

Oh, and I need it by next week Frank, FOB our plant, a full tank of magic dust, a 5 year tassel to tassel warrantee and …..

 

 

The End

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