The Principle(s) of Negative Value – A Procurement Article

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Some years ago while researching and writing a book on the subject of industrial Buyer & Sales relationships, I also wrote a follow up chapter for future endeavors which has rolled around in the back of my mind ever since. The piece was entitled “The Value of Value”.

Alright, I admit it was and could still be, construed as something of a Procurement diatribe but the purpose both then and now is to assist venders recognize and comprehend how Buyers perceive and respond, to the levels of service we receive from distributors and manufacturers when there are problems. (Notice I didn’t say, “reps”)

After 20 years of battling repetitive and inane situations and shortfalls, I thought it was time for someone to get it out into the open and talk about it plainly. Forget the graphs and the charts and Power Points, statistics and pep talks, just plain talk seemed like a reasonable solution.

After all, how many Buyers and PA’s aren’t exhausted to the point of pending insanity, by suppliers not delivering on promises or being late, or shipping incomplete orders or failing to include documentation or … on and on and on?

When I say “It’s a Tough World Out There…” (That’s the book title) I’m not just whistling “Dixie”. It’s a tough row to hoe on any given day in the land of industrial procurement no matter the industry, or the branch. Suppliers just don’t seem to get it sometimes.

There comes a time when people just have to get nose to nose and hash things out.

Was I justified in my disparagement? Are countless hours and countless dollars not spent needlessly across America re-doing what suppliers should automatically perform according to their quotations and PO deliverables?

Daily … even hourly across this land industrial clients must repeatedly request and re-request Certificates of Compliance, MTR’s, Calibration Certificates, Proof of Shelf Life, Shipping Bills and on and on. It’s a fact. It’s no secret. It’s reality. It’s expensive. It’s aggravating.

Anyway, in my old notes I think I labeled the problem as providing “negative value”. While suppliers regularly provide very good, in fact exceptional value in a myriad of ways on many other levels, (technical support, trouble shooting, rush deliveries and other hoop jumping exercises) the “negative values” tend to overshadow many of the positive values, simply due to their repetitiveness nature and needlessness. Enter human nature. Can it be overcome? Darned sure it can.

So what is value and how is it measured?

Hold on to that thought because first of all you have to understand what “price” is before you can appreciate what “value” is.

In their book, The Portable MBA in Marketing , Alexander Hiam and Charles D. Schew provide us with an equation which builds upon Professor Dick Berry’s study on the marketers role in the marketplace. Quite simply it is this: …”the price paid by the Buyer must be equal to or less than the total satisfaction obtainable from the bundle of benefits received.

In other words Buyers don’t want to pay more for any item than the satisfaction value they are going to achieve from purchasing it.

And very simply put, “value” in marketing should consist of product, place, promotion, customer sensitivity, satisfaction and service which is all included in the price. You can then say that “value” is incorporated as a component of the price.

Even from a procurement standard, if we are talking about measurable value(s) we cannot look at a sale as simply a “sale” or a purchase. We also have to look at the transaction as a “bundle”. Real value is rarely measured and less frequently examined and recorded.

Most Buyers and P/A’s don’t have the time for examining “bundles”. They need a product, they request a quote and they purchase whatever the requisition calls for at the lowest price. As Purchasers we crunch (and report on) the obvious which is the sticker price. Few of us have time for anything else.

Remember Oscar Wilde? In his short life span he learned a lot or at least observed what many do not. He was the one who opined, “What is a cynic? A man who knows the price of everything and the value of nothing.”

Are we all cynics then?

I can think of at least two quick reasons why Buyers may have become cynical in today’s purchasing environment.

(1) Buyers are overworked and undervalued

(2) Buyers are becoming increasingly bound to software programs and routines where the single benefactor in the company is the Accounting Department. They rarely have time either to examine nor calculate the real costs of acquisition. Neither can they take steps to counteract the problem.

How can Buyers talk about value when procedurally, professionally and psychologically they have been conditioned to and driven to focus almost entirely on price? Even though they have heard and even learned that the bundle, or the total transaction cost is the real story, both lateral and pressures from outside and managerial sources foster and encourage the “sticker price” mentality because “price” is what is most often measured.

I’ll say it again. In most organizations, the PO price is what is measured. Should Buyers be cynical? How can they not be?

Here is a common example.

Customer A purchases one million dollars of product from Supplier B annually.

Supplier B has performance problems which the Buyer at Customer A calculates at 30% “negative value”. In other words, of the one thousand business transactions conducted between Customer A and Supplier B in one year, over three hundred problems occur within that “bundle” of deliverables per year. That’s about one per day. Either the Certs are missing or the order is short shipped or the order is late or the order arrives damaged or the material is in non conformance or the material has an expired shelf life or the material doesn’t meet spec or the product isn’t according to the drawing …. On and on but you get the point.

The cost per Purchase order as calculated by the industry or the company is we’ll say $200.00 per order.

The administrative cost alone to re-contact the supplier, source and identify the problem and then rectify the issue, be it returning the goods, accepting the material with a deviation, revising the price, quarantining the material, or expediting the order, whatever the case may be, has just driven up the actual transaction cost by at least $100.00 possibly to $300.00.

The Buyer has actually brought added value into the transaction by his/her due diligence by resolving the issue. The supplier has contributed an equal amount of “negative value.”

So my question is, “who is tracking this “negative value” and who is tracking this “positive value'” By the Buyer identifying, confirming and then resolving the problem, the actual composite price has just skyrocketed, yet the only measurement being taken is again, the purchase sticker price written on the PO.

This is neither fair to the Buyer nor to your vender base.

“Hold on”, you say. “The vender should be sent packing….”

Well, maybe after some discussion they should, but is this the best solution? Are they a single source supplier? Is it single source equipment? Are they providing other “value” unable to be obtained elsewhere?

The bottom line is that it isn’t fair to the Buyer (and his/her employer) and it isn’t fair to our supplier base not to measure these “negative values” being imposed by poor suppliers operating without conscience.

And then there is the other side of the coin.

Today’s suppliers are cynical too. They see the Buyer as a Price Cyclops with his/her only eye, focused entirely upon unit price and little else. Suppliers are angry that the added value they often provide for free in the form of technical advice, free samples, re-routed orders when a customer is in a pinch and rush shipments when the Buyer miscalculates, is unappreciated and largely ignored when the next quotation is offered.

Many outside sales reps and sales managers aren’t even aware of the “negative values” being inflicted on their customers in the form of poor and inadequate services in shipping, documentation, product quality etc.

Suppliers don’t understand that the “negative value” they have been displaying has caused them loss of future orders. The fact is Buyers can rarely … or will rarely … tell the seller why they are being passed over. The supplier must often assume it to be the sticker price.

The bottom line is that we have problems in procurement which must be corrected internally and we have problems externally with suppliers who are screwing up regularly and royally.

We must measure all of the values going on around us within the purchasing bundle. We must learn to measure, to assess and to report the composite values which make up the actual and complete transaction price of a product or service.

In fairness to all of us, including the suppliers who do not inflict this “negative value” upon us so often, we must all begin to measure and to use the data in our workdays effectively.

If neither the Buyer nor the Seller is measuring and reporting these positive and negative values then how can either side expect a positive relationship?

And if we don’t talk about it … how can it ever change?


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