Purchasing and Negotiation Training

Harry Hough, PhD, founder of the American Purchasing Society

Editors note: Dr. Hough is a frequent contributor to this blog.

Comparing and evaluating prices are among the most important parts of a buyer’s job. The American Purchasing Society asked buyers from coast to coast and in all types of industries how they accomplish these tasks. The question was limited to the following options.

A. Routinely ask for a lower price
B. Compare prices with those received from other suppliers.
C. Compare prices with other bids or offers.
D. Analyze the cost of labor and material of each component.

The questionnaire indicated that the respondent was to check all that applied. No doubt there is much more to evaluating prices than is indicated by these brief descriptions. Properly done, a comparison of prices must check the risk of doing business with a certain supplier and needs to evaluate the value received for the product. However, the results of the survey give some indication how buyers behave.

The largest number of respondents, 23%, indicated choices “B” and “C.” They compare prices with those received from other suppliers and compare prices with other bids or offers. The intent of including these two choices was not the same. The latter can refer to prices received for other products. For example, slight differences in products should usually mean slight differences in price. If the difference is great, it should be explained.

The next largest group, accounting for 18%, indicated that in addition to choices “B” and “C,” they also routinely ask for a lower price. We are not sure this is a good policy. While a lower price should often be requested, it should not be assumed that the supplier is always making a profit on the price quoted. If no profit, and the supplier is awarded the business, the buyer may soon discover that the supplier can’t or won’t deliver. Also, a supplier may begin to deliberately bid high realizing that the buyer will ask for a price reduction. He is then prepared to cut the price in return for the business. Even with the cut, the price may be higher than necessary. It is far better to determine the component cost to establish a proper price.

The third highest number respondents, at 15%, checked all the options. Perhaps surprisingly, this was the highest number that actually indicated that they analyzed the cost of labor and material of each component.

There were 13% that checked option “B” only. They only compare prices with those received from other suppliers. In probably the majority of cases, this course may be adequate, but where competition is limited or the knowledge of available suppliers is insufficient, this method may result in higher costs than necessary for the buyer.

A significant number of buyers, 10%, selected “B,” “C,” and “D.” With the limited number of options available, this combination of responses seems the best course of action. A slightly smaller number, 9.7% checked “C” only. Since the differences between “B” and “C” may have been difficult to see, it is possible that these two could be grouped together. If so, the resulting 23% would tie with the highest reported group selecting “B” and “C.” Listed below is a recapitulation of the results of the survey except for combinations with answers amounting to less than 1%.