Purchasing and Negotiation Training

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Editor’s note: this interview was conducted by Rental Management magazine (RM) in March 2003 with Robert Menard (Menard) on the subject of Partnering with customers.

RM: What is meant by the buzz word “Partnering”?

Menard: Partnering is a long-term committed business relationship between customer and supplier that reduces the costs of doing business to improve the mutual profitability of the Partners.  

RM: How does that differ from traditional sales strategies?

Menard: It differs in its collaborative rather than adversarial approach.  The traditional view of Partnering is a corral to protect territory from poachers.  It loosely defines added value and encourages an “us-versus-them” contest that is almost always argues over low price.  This ultimately disserves both customer and supplier alike. 

RM: How does low price disserve the customer?

Menard: Because low price often comes at a higher cost.  A steal on price always costs more when quality is poor, delivery is late, and service is incompetent.  It is shortsighted for Partners to fixate on price.  When the Total Cost of Ownership (TCO) is high, Partnering fails.  The customer fights to lower the cost by cutting the price.  The supplier fights back with high prices to counter the pressure from the customer.  

RM: What are some of the TCO distinctions of the Partnering strategy?

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Menard: Let’s take the customer, then the supplier.  A 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).  The cost of Quality, Service, and Delivery, can and often do outweigh the initial Price.  It makes economic sense to pay a higher price when it buys a lower TCO.

As a Partner supplier, the product or service is higher profit earned by reducing costs.  The supplier quantifies and measures the cost reduction for its customer. 

RM: Could Partnering apply to any or all customers?

Menard: Partners are a select group.  The 80/20 rule proves that a small percentage of customers generate the large majority of the sales.  Partnering should concentrate on reducing the costs and improving profits to share with these best customers.  

RM: What costs can a rental firm reduce other than price?

Menard: The transaction costs!  These are considerable for the customer and carry a high fixed cost per order.  Take the case of a construction customer.  Its rentals are made up of relatively frequent orders for low dollar amounts, compared to its subcontract, material and labor purchases.  These frequent low dollar transactions of high fixed costs present cost savings opportunities.  

RM: How do frequent low dollar transactions carry high fixed costs?

Menard: Purchasing studies peg the average cost per P.O. at about $150.  This sum accounts for the processes of requisitioning, shopping, ordering, receiving, accounts payable, handling, storage, etc.  Sales organizations report comparable transaction costs, bringing the cost of a single purchase and sales transaction to about$300.  This means that a $1,000 per month rental costs carries a combined transaction cost of $300, or 30% of one month’s rental. 

In a Partnering scenario, these repetitive transaction costs disappear as the parties negotiate one agreement that applies to all their dealings.  It eliminates the processes that add unnecessary transaction costs.  Prices, availability, service levels and the like are specified under the Partnering agreement and not by each individual purchase order.  

RM:How would a rental firm establish a Partnering program?

Menard: First, retrain staff and customer in the TCO philosophy.  Translate benefits such as convenience to quantifiable dollars and numbers.  This will reorient the Partners toward costs.

Obtain a committed volume of sales as part of the Partnering program.  Resist the urge to use blanket contracts that do little more than establish prices.  Secure customer buy-in by selling the Partnering Strategy to senior management, as staff buyers might feel threatened. 

RM: Why the committed book of business? 

Menard: A committed sales volume is crucial.  With the wasted repetitive processes eliminated, the supplier concentrates on customer service, having the proper equipment available when needed, and other cost reduction measures. 

An important customer motivation is that a larger book of business generates lower costs, therefore lower prices.   

RM: Please elaborate on that last point. 

Menard: The seller has a certain volume that it must meet to stay profitable.  Call that volume the “basket”.  If we fill that basket with 5 Partner customers instead of 95 adversarial customers, we eliminate needless duplicate administrative, sales, marketing, and advertising expenses.  These savings are quantifiable and measurable benefits of Partnering.  Moreover, once the basket is filled, we can then cherry pick the market, perhaps selling at higher margins to the non-partners.

 RM: What other benefits can Partners expect as the program proceeds? 

Menard: It benefits the supplier to search the marketplace and bring higher productivity, lower cost products to the customer.  Up sell becomes an investment in further cost reduction.  

RM: Does a rental firm need to be large or small, local or national to practice Partnering?

Menard: Any firm improves its viability by reducing costs.  The critical ingredient is the belief in a TCO philosophy by both customer and supplier.  The size and geographical coverage of the supplier and customer are tactical matters.  That is, a large rental firm’s regional operations may offer more convenience to large regional customers, but less to small local customers.  The small local customer cares only about the local market, irrespective of the size and coverage of the rental supplier.  

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

Menard: Among the most prominent are complacency and rebates.  Partners must constantly measure costs and periodically evaluate cost performance as a unit and as individuals. 

Rebate programs are a List down, not a Cost up vehicle that underscore a Price based philosophy.  Cost oriented customers will prefer Pre-bates with cost reductions cranked into the deal. 

RM: What is the potential for Partnering in the rental industry?

Menard: One of the facts of business life is that sluggish economies encourage leaders to look at alternative strategies.  Partnering certainly qualifies as a novel and promising alternative.  The moral of the story is that willing Partners can derive considerable cost savings.  And who do you know who has saved too much money?