Consider moving away from “prices” and opt for developing “pricing models” that reward suppliers when value is received. • Learn about and test alternative commercial agreements such as Performance- Based or Vested Outsourcing that shift accountability for delivering value to the supplier, yet seek to reward them fairly for their risk. The bottom line is that those who find themselves using last centuries approaches will find themselves in a race to the bottom, bickering over low price rather that seeking ways to establish sustainable supplier relationships that more fairly create value for both buyers and suppliers. Still not convinced? Consider the following two studies. The first, a 2010 study by the Monitor Pricing Group found that companies that take a value pricing approach (creating, calculating, communicating and pricing based on value created) had a 36% higher net operating margin than companies in the same industry that took a share or cost driven strategy. The second, a report by the Manufacturers Alliance (MAPI), found that companies that had a defined methodology to buy on Total Cost of Ownership (a measurement of best value) had a 35% higher net operating margin than ones that did not, and companies with a TCO methodology are twice as likely to enter into pay-for-performance agreements with suppliers, nearly twice as likely to realize 90% or more of savings promised by a supplier, and more than seven times as likely to receive supplier offers with a TCO component.
Unpacking Best Value Understanding and Embracing Value Based Approaches for Procurement | 26 | Page About the Authors Kate Vitasek. Kate is an internationally recognized innovator in the practice of supply chain management and outsourcing. She is the author of over 200 articles and four books, including Vested Outsourcing: Five Rules that will Transform Outsourcing and Vested: How P&G, McDonald’s and Microsoft are Redefining Winning in Business Relationships . She is a faculty member at the University of Tennessee’s Center for Executive Education and has been recognized by World Trade Magazine on their Fab 50+1 list of people and concepts influencing global commerce. She can be reached at [email protected] Todd Snelgrove. Todd is the Global Manager of Value with SKF, the world's market leader for bearing and related industrial products. Todd’s work and expertise in TCO and Best Value has been featured in articles in Purchasing Magazine as well as in scholarly reviews published by Kellogg, Harvard, MIT Sloan, Wake Forest, and London Business Press and others. Todd has also led sessions on value at Executive MBA courses from IMD Switzerland, Chalmers Sweden, and London Business School. He can be reached at [email protected] Dawn Tiura Evans. Dawn is the President and Chief Executive Officer of the Sourcing Interests Group. Prior to joining SIG, Dawn held leadership positions as CEO of Denali Group and before that as a partner in a CPA firm. Dawn is actively involved on a number of boards promoting civic, health and children’s issues in the Jacksonville, Florida area.