Sourcing and Procurement: Truly Understanding Cost vs. Price

- November 30, 2012 7:11 AM
Categories: Friday Rant |

After my recent stories about the acrimonious relations between marketing and procurement (here on Spend Matters, here on PRO – Part 1, and PRO – Part 2) it struck me how similarly negotiation-focused buyers behave versus salesmen that sell mainly on price. Giving the product away for free is the point of convergence – a pipe dream since quality and availability will then resemble Soviet bread lines. Sure, the shelves are empty, but the bread’s free! This is not a sustainable model from either side of the table. But it’s certainly an easy trap to fall into.

Almost invariably, technology-based firms sell based on having a better mousetrap. Look, we have more features than X, Y, and Z do, so there, we’re best! Never mind how well we address an actual use case, we have the most features! Similarly, buyers often go through their own routine; stating various platitudes around the bigger picture need and the total cost of ownership involved but at the end of the exercise, the pied piper and his PPR tune is oh-so-alluring. If Pete Seeger had been active in procurement, he would still wonder when they will ever learn…

Better sales organizations train their staff in understanding the prospect, identifying organizational as well as individual pain points, motivators, even grasping ulterior motives of an organizational or political nature. Procurement, on the other hand, doesn’t seem to do as good of a job when it comes to training employees in developing a TCO mindset.

For starters, few buyers do a good job of using the terms “cost” and “price” correctly. Price is what you pay and cost is what you incur, easy to say, hard to live by. The former is easier to understand – it’s the dollar amount on the bill. The latter can be harder. An example I like to use is that of a container load of Chinese toys that I’ll sell to you for $20,000 dollars – that’s the price. The cost of the toys can be a lot higher – in the millions even – if it turns out that the toys contain lead paint and you’re now at the losing end of a lawsuit.

Yes, you say, I know that, that’s Econ 101, sheesh. My counter to this is that unless you (as an organization) constantly and consistently strive to use terms correctly, the concepts will be forgotten or ignored and you will revert to the old PPR behavior.

It reminds me of the Japanese organization I worked for out of college who had a saying: “the customer is god” (o-kyaku-sama ha kami-sama). This is something that permeated our daily activities. For example, finished products were handled with white gloves, and large cardboard boxes in the loading area were always moved by hand, never-ever pushed around with your foot – they were seen as extensions of the customer. We always had to think about the customer first – even when it seemed trivial. That’s how you get an organization working toward a common goal.

Procurement needs to adopt this mentality as well. Let’s treat suppliers on the same sacred level. Words matter, especially when you deal with change management. And developing TCO thinking in a company is serious change management. Best to start with terminology. As you saw in the marketing stories, the all-too-prevalent “they say cost but mean price” perception is getting procurement into trouble with business units, marketing, suppliers…in fact, just about everyone outside procurement is annoyed by this behavior.

Isn’t it about time that we say what we mean? Assuming we mean it…!

- Thomas Kase

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Comments

  • Andy Woodwark:

    Perhaps the average buyer is too much of a cynic… "a man who knows the price of everything and the value of nothing" – Lord Darlington responding to the question "What is a cynic?" (Lady Windermere’s Fan – Oscar Wilde)

  • bitter and twisted:

    Is ‘cost’ enough of an improvement on ‘price’?

    ‘Investment’ may be a better term yet.

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