Purchasing professionals are focused on adding value to their companies, and so are sales and marketing professionals selling to them.
Both of these professionals, however, focus on price or cost as the major source of value creation for their companies. Sales professionals want to discuss their value proposition, but the discussion often deteriorates into a price one.
Assuming both purchasing and selling companies recognise that mutual value and partnership has to be created, could they not discuss and negotiate this? Could they not discuss how to co-create value? Could they not agree that value creation is what additional the supplier should give at what price?
Let’s start with generally what the thinking is:
I am adding value to the supplier by buying from it (help him fill out capacity, help him make money); how much can we get by outsourcing to the supplier versus making on our own (and we do not fully price our self-manufacture).
My role is to increase total profit (not just reducing total cost of acquisition). Shouldn’t I look at the total value added? Shouldn’t the supplier do this? Does the supplier understand what creates value for the buyer?
Both these negotiating parties must understand that there has to be a sharing of value, and a co-creation of value.
How do you go about doing this? A Value Co-Creation Model is shown below
The Financial and non-Financial benefits are shown below:
The Financial benefit chart shows higher profits due to better collaboration and fewer delays and mistakes, sharing of profits (reduced price to start with profit incentives), lower costs for changes, spares, inventories etc.
The Non-Financial benefits include happier employees/bosses, reduced time to market, happier customers, better acceptance and so forth.
Isn’t this a better model than just beating down the supplier on price, and trying to commoditise his offering? Build your Value chain!
Go from a supplier evaluation to a partnership collaboration.
Its just traditional thinking that prevents this shift in organizational behaviour.
If you cannot do this, then maybe an artificial intelligence system to buy and sell based on value (benefits –price) should replace the human purchasing person, as co-created value and collaborations are not required and price is king!
Customer Value Foundation are experts at co-creation of value: [email protected]
Would love your comments and help. We are happy to help others in education and executive education on courses in Value Creation.
Gautam, interesting thoughts, but I think it is ‘traditional’ thinking on both ends. Not only does the purchase department want to maximise but the sales department wants to maximise . These metrics may be incompatible. Your model works fine – with or without AI – if both parties can find some common ground in terms of
1. What value is
2. What their relative constraints are
This is mutual. Not only evaluate buyers their suppliers, but also vendors their prospects. So it is not from supplier evaluation to partnership collaboration but from (supplier + vendor evaluation) to partnership collaboration. As long as either party concentrates on their own benefit as opposed to getting their benefit out of the other party’s benefit – things will not really move ahead.
And the ones with the longer lever are the sellers!
2 ct from Down Under
Thomas
@twieberneit
Very astute comment. You are right. Both sides have to change and not just think price but value. Thanks