We have lost count of the number of times friends and business leaders have complained about how much harder business is today ‘because of Procurement’ – profits from cozy and long-established relationships have diminished. Procurement get involved earlier in the deal, are better trained, have more authority in their organizations, and see ‘the price of everything and value of nothing’.
Modern procurement practices are indeed a world away from those at the start of this decade. And there is a simple reason for it. Since the financial crisis, smart CEOs have recognized something astoundingly simple. Profit growth cannot be guaranteed by ever-increasing sales. With tepid growth in many economies, and increasing price-driven competition in many sectors, the best way to focus on profit is to focus on costs. For many businesses, direct and indirect costs account for as much as 80% of revenue. Improving gross margin even by 1% will typically have more impact on profit for these companies than a 5% increase in sales.
We spoke to Jonas Olsson of global engineering group Trelleborg. He has been a procurement leader in the multinational industrial business for over 15 years, and has been at the forefront of modernizing their procurement practices. Jonas provided us with some great ideas and insights for helping salespeople and businesses deal more successfully with procurement departments.
In this, the first of three blogs, we will introduce you to a key purchasing tool and discuss why the ability to create value for, and communicate value to, clients is more important than ever.
In the second blog we will be looking at what really happens in a formal RFQ/Tender process.
In the third blog we will be providing ten insights and ideas that will help you better navigate your next engagement with a modern procurement team.
The first major step in improving your performance with procurement teams is to understand what they are trying to do on a strategic level. Peter Kraljic created a matrix, the Kraljic Portfolio Purchasing Model, that is used to analyze the purchasing portfolio of a company by many procurement departments. On the right side of the matrix the customer has the pricing power, and on the left side the pricing power is with the supplier. The Kraljic Matrix looks into the importance of the product and/or service and the difficulty of substitution, with the following classification:
- Shop: Not strategically important and easy to find an alternative, so the customer shops around for the lowest price (e.g. for major-brand vehicle tires, manufacturers use multiple suppliers or use one supplier for a short fixed term). If you are this kind of a supplier, your customer’s relative power is usually very strong, and your power weak. Procurement do not have a lot of time to spend here and influencing their decisions will be difficult.
- Leverage: Strategically important but easy to find an alternative, so customers leverage the position to gain an improved deal from the existing suppliers – or even dual source the product/service, due to its importance to the business. Customers offer higher volumes in return for reduced prices (e.g. the hospitality industry needs laundry services but there are plenty of alternatives). The customer’s power may be poor in the short term, but good if you take a longer-term view. This is the place where Procurement loves to operate.
- Manage Risk: Not important, but difficult to substitute – so the customer can manage the risk and reduce reliance on the solution or the supplier by finding alternative options. These products are not necessarily mission critical or a major part of the cost structure (e.g. specialty chemicals, or specialized equipment not at the heart of the production process, such as floor cleaning equipment). Customer power is relatively weak.
- Partner: Very important and also difficult to substitute, so customers seek to partner, in order to align the interests of buyer and seller, (e.g. high-end computer chips from Intel and AMD and their alliances with HP and Dell). Customer power is weak, supplier power is strong.
This tool determines the type of negotiation and relationship the procurement department will have with you, the supplier. There are various versions of the matrix – with Cost, Profit, or Financial Risk typically marking the Y axis, and Supplier Risk or Level of Competition on the X axis. However they are all addressing the same point. Procurement professionals want to push suppliers to the left of the matrix. Here there is extensive competition (which procurement teams love) and little differentiation or risk in not choosing the supplier. It is easy for them to make price an overriding buying criteria, and run a dispassionate process free from risk and internal pressures.
The goal of the supplier (from the product and marketing teams through to the sales organization) has to be to move to, or stay on, the right of this matrix. This can only be done through delivering and proving differentiation. This means supplying value over and above that being offered by the competition that is important to the client, and creating a risk of lower performance if they ignore it.
To create this differentiation you must understand your customer’s business, their market realities, their needs, and the role you as a supplier play within their business. And then your marketing teams and sales teams need to know how to communicate use the information. They need to provide evidence of the value of this differentiation and how it helps the client’s goals and metrics to build internal support that the procurement team will find hard to resist. More so, as customers react more to pain or risk than hopes of gain, you need to raise the risks and costs of not using you.
If you cannot create this differentiation, then you are better off reducing your own costs and joining the other commoditized, transactional sellers in a price race to the bottom.
How can we help? Our Creating Client Value consultative sales programme provides sales teams with the skills to communicate value and identify, and sell to client needs. Our Negotiations programme helps salespeople create and capture value throughout the customer’s buying process.