How often have purchasers heard this refrain? There is a huge misconception among non-procurement professionals that the greater the volume (quantity or dollar) the better the discounts. And to a certain extent this will work -- for a while.
But how much volume is too much? Do those in the upper echelons of your organization constantly talk consolidation? What happens if you try to explain to them that any additional volume at this juncture is like adding a snowball to an avalanche...it's not going to make any difference!
If you are a successful procurement professional then you know the marketplace, understand the current conditions that enable you to negotiate a beneficial deal for your organization. If you go into a negotiation with a supplier unprepared and just expect to barter them down -- then be assured they are aware of this tactic and will have come in at much too high a price and will pretend to bleed at every step you take them down. When a supplier walks out of a negotiation and praises your negotiation skills and how they are feeling the pain -- BEWARE -- the false flattery probably means that they were more prepared than you and are just pandering to your ego, while they walk away with an inflated profit margin.
Another misconception is volume commitments will result in better deals. As before, it depends and the down-sides of this scenario far outweigh any benefit.
The very thought of committing agreed upon volumes is enough to make the hair stand up on the back of my neck! Not that in theory it isn't a bad idea, but we live in a real world where the practice is what counts. There is no spell or incantation that can't effectively make a volume commitment into good business sense.
Why? Well firstly, volume commitment is based on an accurate sales forecast. When was the last time you saw one of these? Now, I'm not necessarily blaming the sales team (oh maybe a little bit), but the volatility of the marketplace and the whims of the consumer (whether business or individual) are often times hard to predict. If you over commit, the result can be enough product in your warehouse to supply you until the new millennium. Significantly under commit and 1) you may have trouble with supply; but more importantly 2) you probably didn't get the best possible deal. Also don't forget that in the new Sarbanes Oxley world, a volume commitment is to be disclosed as a liability on the balance sheet, and must be tracked closely. This adds another layer of complexity onto an already complicated situation.
So is consolidation of volume bad? Of course not, consolidation of spend and increased volume do make a difference.The benefits, however, are not infinite -- there is a saturation point wherein if you got more -- it would be the supplier paying you to take the product or service! At this juncture you may begin discussions in another direction, more alliance and partnership oriented where each of you can bring some intellectual capital to the table to enable mutual growth in revenues.
Consolidation and limiting the number of suppliers can also have its limitations when considering flexibility. If there is a product constraint or your current provider happens to be acquired or goes bankrupt, what would you do? The answer -- you would pay a higher premium with another supplier because of the rapidity with which you would need to get supply.
In conclusion -- size matters, but only to a point!
But how much volume is too much? Do those in the upper echelons of your organization constantly talk consolidation? What happens if you try to explain to them that any additional volume at this juncture is like adding a snowball to an avalanche...it's not going to make any difference!
If you are a successful procurement professional then you know the marketplace, understand the current conditions that enable you to negotiate a beneficial deal for your organization. If you go into a negotiation with a supplier unprepared and just expect to barter them down -- then be assured they are aware of this tactic and will have come in at much too high a price and will pretend to bleed at every step you take them down. When a supplier walks out of a negotiation and praises your negotiation skills and how they are feeling the pain -- BEWARE -- the false flattery probably means that they were more prepared than you and are just pandering to your ego, while they walk away with an inflated profit margin.
Another misconception is volume commitments will result in better deals. As before, it depends and the down-sides of this scenario far outweigh any benefit.
The very thought of committing agreed upon volumes is enough to make the hair stand up on the back of my neck! Not that in theory it isn't a bad idea, but we live in a real world where the practice is what counts. There is no spell or incantation that can't effectively make a volume commitment into good business sense.
Why? Well firstly, volume commitment is based on an accurate sales forecast. When was the last time you saw one of these? Now, I'm not necessarily blaming the sales team (oh maybe a little bit), but the volatility of the marketplace and the whims of the consumer (whether business or individual) are often times hard to predict. If you over commit, the result can be enough product in your warehouse to supply you until the new millennium. Significantly under commit and 1) you may have trouble with supply; but more importantly 2) you probably didn't get the best possible deal. Also don't forget that in the new Sarbanes Oxley world, a volume commitment is to be disclosed as a liability on the balance sheet, and must be tracked closely. This adds another layer of complexity onto an already complicated situation.
So is consolidation of volume bad? Of course not, consolidation of spend and increased volume do make a difference.The benefits, however, are not infinite -- there is a saturation point wherein if you got more -- it would be the supplier paying you to take the product or service! At this juncture you may begin discussions in another direction, more alliance and partnership oriented where each of you can bring some intellectual capital to the table to enable mutual growth in revenues.
Consolidation and limiting the number of suppliers can also have its limitations when considering flexibility. If there is a product constraint or your current provider happens to be acquired or goes bankrupt, what would you do? The answer -- you would pay a higher premium with another supplier because of the rapidity with which you would need to get supply.
In conclusion -- size matters, but only to a point!
1 comment:
As a supplier it seems that there is an expectation at EVERY contract renewal that I will be able to reduce my price. This despite market conditions, availabilty of resources or any other factors. You are absolutely right that volume can bring SOME discounts but there are definite limits and lots of revenue with little or no profit is bad news for anyone! Godd article!
Post a Comment