4. Fighting for your Price

4. Fighting for your Price - STONE Fighting for your price...

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Unformatted text preview: STONE Fighting for your price here is a killer on the loose near the start of the value chain. Suppliers of basic materials 1 have seen tough times as their own sup- pliers consolidated and customers squeezed their margins. Now some of those customers are using a kind of sophisticated professional purchaser, known as a “sourcer,” who threatens to rub out the meager margins that remain. Armed with a detailed knowledge of the suppliers’ economics, the sourcer spurns the traditional approach of building close relationships in favor of extracting the most value at the lowest possible cost. Some suppliers may not survive the assault. Indeed, this mismatch can destroy value quickly. One global producer of specialty lubricants recently acquired several service businesses in an effort to distinguish itself from competitors. The initial strategy was sound. But 117 John M. Abele, Brian R. Elliott, Ann A. O’Hara, and Eric V. Roegner A new kind of professional purchaser bent on getting rock-bottom costs threatens suppliers of basic materials. But these companies can save themselves by taking up the purchasers’ weapons. T 1 Companies that produce refined raw materials such as chemicals, paper, and metals or components such as ball bearings and gaskets. then sourcers demanded that the supplier bundle its new services with the lubricants at no extra charge. To preserve sales volumes, the supplier acqui- esced. In the end, what had started as a sensible effort to combine a chemical business that had a 5 percent return on sales with service businesses that had a 15 percent ROS gave the company an overall ROS of less than 5 percent. Some suppliers have suffered so much from the sourcers’ attacks that coun- tering them, rather than passively watching margins erode further, must now be a strategic priority. A first step is for suppliers to understand how sourcers have shifted the odds against them. The second is to use that understanding by fighting back through internal improvements and by taking advantage of the mentality of the sourcers to create value for both them and the suppliers. And suppliers must take a much tougher negotiating stand—if necessary, reducing their services to customers or even abandoning customers, however long-standing, that have become too expensive to serve. Smart stuff Professional sourcers first appeared about ten years ago. Initially, they tar- geted retailers and distributors; later they moved up the value chain to include suppliers of basic materials. Instead of looking for suppliers that offer the lowest unit price for products, sourcers concentrate on reducing their companies’ total cost of owning the products in question. The total cost of ownership (TCO) includes all expenses incurred in getting and using products—not only invoice prices, but also costs such as delivery, storage, and the disposal of packaging materials and by-products....
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4. Fighting for your Price - STONE Fighting for your price...

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