Purchasing and Negotiation Training

 This story first appeared in Rental Management magazine   in May 2003 and is relevant today as it was 10 years ago and as it will be 10 years hence.  The matter of partnering with suppliers and supplier relationship management is crucial to the success of any purchasing and supply chain operations management.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional

Editor’s note:  While this story deals with the rental industry, substitution of many other industries would yield very similar results.  Here are some of the key points in question and answer fashion. 

 Rental Management: What is meant by the term Partnering?

 Menard: Partnering is a long-term committed business relationship between customer and supplier that concentrates on reducing the costs of doing business to improve the profit performance of the Partners.  The only motivation for Partnering is the reduction of the costs of doing business.  All other motivations will fail. 

 Rental Management: What are some of the key distinctions in a Partnering strategy that help sales pros stress the TCO rather than the price?

Menard: Let’s examine both sides of the equation.  First, take the customer buyer.  Simply stated, the buyer’s definition of ‘Best Value’ is the lowest TCO.  TCO is the sum of the four elements of Cost: Quality, Service, Delivery and Price (QSDP).  Price is just the initial cost.  The cost of Quality, Service, and Delivery, can and often do outweigh the Price.  A customer can always get a lower price.  A customer will, however, pay a higher price if it buys a quantifiable and measurable lower TCO because it makes economic sense.

 Expressed in consultative sales terms, the seller’s product or service is higher profit obtained at the same revenue level achieved by reducing costs.  The barrier for the sales organization to overcome is learning to speak the customer’s language.  In the customer’s cost driven culture, sales pros must quantify and measure their cost reduction value to the customer.

 Rental Management: What will attract the customer’s interest in a Partnering relationship and what costs can a rental firm realistically reduce?

Menard: In two words, transaction costs.  Transaction costs are substantial for the rental customer and carry a high cost per purchased dollar.  For illustration, take the case of a construction customer with a $5 Million dollar project.  Compared to a single electrical subcontract of $750,000, the $250,000 (using the 5% level) of rentals is made up of relatively frequent orders for low dollar amounts.  Assuming that high frequency low dollar transactions create high transactions costs compared to the value of the order, we have identified a promising cost savings target. 

Rental Management: Suppose that this Partnering model appeals to a rental firm, it has sufficient qualified customer candidates, and it can mount the training program for staff and customer.  How would it establish a Partnering program?

 Menard: Start by retraining both staff and customer in the TCO philosophy and the Partnering Strategy.  Translate benefits such as regional offices and convenience to hard dollars and numbers costs.  This will help sales pros and customers focus on costs.

 Tighten and strengthen commitments in the Partnering contracts and insist on committed volume of sales as part of the Partnering program.  Resist the urge to use blanket contracts that do little more than establish a price.  Visit customers to kick off the campaign and obtain top down directive by selling the Partnering Strategy to senior management, as buyers might feel threatened

 Rental Management: What other benefits can Partners expect as the program takes shape for the long term? 

Menard: Certainly, the collaboration to reduce costs which yields higher profits is justification of its own.  Nevertheless, once TCO philosophy takes root, up sell evolves into investment in value to further reduce costs.  If   both partners are sharing cost savings in subsequent years, it benefits the supplier to search the marketplace and bring higher productivity, lower cost products to the customer.  

 Rental Management: What about downsides?  What can potential partners anticipate and thereby eliminate as problems. 

 Menard: Several come to mind.  Among the most dangerous are complacency and doubt.  Living fat, dumb and happy invites attack.  Partners must constantly measure costs and periodically meet to evaluate performance as a unit and individuals, with the focus always on the cost. 

Another is the rebate policy.  Rebate programs are a List down, not a Cost up vehicle that underscores a Price focus and belie any cost centered partnering philosophy.  Furthermore, they penalize customers who fall short.  Cost oriented customers will prefer Pre-bates where cost reductions are cranked into the deal.