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Where Do I Have to Be?

January 24th, 2010 | Tags: , , ,
Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Every seller has posed and every buyer has considered this question. 

When the sales pro resurrects this tired old chestnut, is the answer to be found in the words of the George Strait song, “Amarillo by Morning”?  No, the seller is intentionally inciting a fool’s game of race to the low price in which both sides drive feverishly toward crash and burn.  Buyers and sellers engaging in this game violate the guiding principle of negotiation, obtaining the lowest Total Cost of Ownership (TCO).  Further, the only outcome of this negotiation must Win-Lose because there has to be a winner and a loser.

In over two decades of posing this question in purchasing and negotiation training seminars, I have found that the responses reveal ignoble behaviors.  Typically, when pressed to disclose their answers in safe discussions, buyers admit to a variety of “theoretical” evasive answers. They indicate a range, a target, and even a hard number. Probed further, they confess to exaggerating the amount a bit, in anticipation of and to offset the expected lie of the other side. To paraphrase the warden in Cool Hand Luke, “What we have here is a commercial case of liar’s poker.”

Any of these “theoretical” answers marks us as amateurs who understand little of the TCO basis of negotiation. This question is in reality a trap set to expose the price centered purchasing negotiator that with troubling corollaries attached so let’s examine the implications of Practical, Ethical, and Legal considerations.

Practical Implications

How do you know you could not have done better?  Forgetting about price for the moment, could you have obtained better quality, service or delivery?  You’ll never know because you have foreclosed your options.  If you demand 10% less and the seller was willing to go to 15%, you have been had.

Besides, what good is the low price if the quality is unacceptable, the delivery too late, and the service too inferior, all likely results of forcing the price under water?  You can always find a lower price.  The goal of purchasing and sale negotiation is to obtain the lowest TCO.    

Click here for Bob's book and CDs

Click here for Bob's book and CDs

Ethical Implications

Are we all aware that ethical behavior is the buyer and seller’s responsibility under the law (Uniform Commercial Code, UCC)?  Many of us are surprised and some are shocked to learn that honesty, good faith, and fairness in dealings is a legal requirement for those engaging in purchase and sales transactions. 

Lying cannot be considered ethical by any stretch so now we have two strikes as we step in for the Legal Implications pitch.

Legal Implications

Herein resides the greatest danger.  A landmark case was decided on this matter in 1971 involving Kroger v. FTC.  The buyer had purposefully deceived the seller about prices.  The seller sued, alleging that the buyer and his employer had knowingly induced (or received) a discriminatory price prohibited by the Robinson-Patman act.  When the buyer argued that the court would be interfering with private bargaining if it granted the seller’s claim, the court disagreed.  It cited the legal requirement for honesty as it found against the buyer and for the seller.

So what is the right answer to this question?

Given this landscape of implications, our passion for the Best Value (defined as lowest TCO) and our professional dexterity at avoiding traps, we have a ready and effective answer to the supplier’s question of “Where do I have to be?” The answer is:

“Mister or Madam Supplier, let me be certain that I understand what is being asked. Did I understand correctly that I am to decide your price? If so, I cannot tell you what your price should be for several reasons important to us. Neither of us wishes to run afoul of Robinson-Patman provisions. More importantly, to preserve our relationship and because of the importance of the issues, we need to look at the TCO, not just the price. Since I heard you mention that the price is a function of the cost, why don’t we look first at the price, then into the costs? I am most interested in the best value, which we define as the lowest TCO. Would you be willing to work this way?”

This answer reinforces the TCO and Win-Win messages. It is also completely honest. We are interested in TCO. If we can eliminate some costs and thereby reduce the price in the process, so much the better.

The words we use complement our Win-Win strategy. The constant deflection of price to cost stresses the TCO significance to which the supplier may not be fully attuned. As a professional in procurement, you will never go wrong with costs. Seize every opportunity to bring the negotiation around to cost matters. The suppliers will come to realize that your goal of lowest TCO drives the negotiation process, not ego, price, or other hidden agendas that alienate the parties.

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