A Word from the General Manager - August 2014

August 1, 2014

Brian Isard

I have been out meeting with association members this summer, and one topic we come to quickly is customer demand for lower prices and how to respond.

For many years I managed a large procurement program and handled contract negotiations in the grocery retail sector. I can share some insights about the purchasing process in the context of the supply chain (the network of all the individuals, organizations, resources and activities involved in the creation and sale of a product).

Often the request for price decreases begins with your customer’s senior management deciding to “achieve greater value from the supply chain.” One effective way to increase value is to buy goods at a lower price. The procurement manager, whose job it is to deliver the results, can be very aggressive in driving the cost reduction process—after all, that’s one of his responsibilities to the business.

This is easily understood when you recognize that even in the best run businesses, well over half of what is brought it in as revenue goes right out the door in expenses. You can’t fault companies for focusing on costs and prices on a regular basis; there is nothing wrong with managing your business more effectively. 

What I have learned, though, is that when your client doesn’t recognize the value of your services or how to value what they are receiving from their suppliers, they fall back to what they understand best which is the “price point” because it translates well to senior management. Even a 1%-2% discount spread across all a company’s suppliers has a significant impact on the cash flow of a business. 

If you are asked for a discount on the price of your product, there are two bits of information to remember: everything done going forward affects your customer's behavior toward you in the future relationship with your customer, and it’s your job to explain the value of your goods or services to the client. 

Outlined below are four approaches that can be used when faced with demand for a discount: 

1. Don’t get defensive or frustrated; it is just part of the procurement process. Instead, start by trying to understand what the motive is behind the request. For example, you have a perfect right to ask “Is this discount you’re asking for just on wood packaging or is it part of larger cost cutting initiative?”  The reply helps you tailor your response to what you are being asked to deal with. It could be a competitor offering lower prices and if so, you want to make sure you are comparing “apples to apples”. My first step would be to make sure that the product or performance specifications haven’t changed since the time the product or service was priced. 

On the other hand, it could be the direct result of a corporate mandate such as we have read in the newspapers this year, with several large Canadian grocery retailers demanding retroactive price cut with no price increases in 2014 from their suppliers. When large buyers of goods make these demands on all of their vendors, it cannot help but have an impact on the other parts of the supply chain. 

Dealing with procurement managers who are insistent on obtaining price reductions is tricky and the best way to deal with the situation is to understand what factors are driving the decision makers.

2. The key to presenting value is knowing the full range of services you are providing for your client. Perhaps the customer cannot accurately forecast their production and requires that you hold inventory at your plant, or they demand small orders with very tight delivery lead times or they have specialized delivery requirements. These are all examples of logistics costs being pushed back down the supply chain. Forcing these costs on to the supplier lowers the customer’s overall supply chain expenditures but it also delivers value which the customer is willing to pay for , might not be able to get elsewhere and that makes it hard for them to switch suppliers on basis of price alone.

3. When you react too quickly with a price discount, you teach your customer to repeat that behavior in future transactions. Before you respond by offering a lower price, take the time to review the costs with a complete list of services you are providing. Make sure you have a good appreciation on what is happening with lumber markets and if you are not going to change your prices then be prepared to support your position with data. The monthly CWPCA Lumber Graphs are good tools to show trends in raw material costs and demonstrate there are limited opportunities to reduce manufacturing costs.

4. Giving the indication that you have flexibility without committing to something you might regret later is a real challenge. This sounds like an easy technique to use but it does require some practice. 

"We might be able to do something for you. What did you have in mind?"  might sound like being flexible but it teaches the clients that you can be counted on to drop your prices when pushed. By agreeing to lower your price, it can imply that perhaps you were “over changing” to begin with.

I have found that a simple way to respond is “My job as a supplier is to help you manage your costs the best way I can. Let’s get together to review the process and perhaps we can find some areas where we can be more efficient”. If the response from your customer is any version of “we are taking the discount whether you agree to it or not,” or “meet your competitors price or else,” then my advice is to seriously consider whether you can afford to continue with the relationship with this client. 

On the other hand, if the response is “We want to make sure that we are buying the best that we can,” then you have a customer that you can work with. It is essential to listen carefully to what your contact is saying as there may be an opportunity to lower a price by removing something from the service provision. This process is referred to as a collaborative procurement process and one that offers benefits to both parties.  You may want consider a change in product design, material quality or service provision to achieve a lower price. 

Modifying product specifications is an often-used pathway to lowering costs and is employed extensively in all manufacturing processes. The PDS system is a good tool to optimize design while at the same time lowering product costs. Another good tool is the application of LEAN methodologies that reduce non-valued added activities that create waste in the supply chain.  

In the end, standing firm on a demand for a price discount comes down to weighing the worth of the relationship to your business and protecting your margins. One of our members shared a story with me last week of how he held firm on price with his largest customer this spring and it resulted in him losing the business, but the other supplier couldn’t meet the same service levels he was providing.  He had the business back in a month and it resulted in a much stronger relationship with his customer.

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