You Get What You Pay For
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The document summarizes a presentation on negotiation strategies for procurement professionals. It discusses different negotiation styles including logical, power-based, trading, conciliatory, and emotive approaches. It provides examples of when each style would be suitable to use and cautions when they should be avoided. The presentation also covers how market prices are determined based on supply and demand and how economic factors can impact pricing.
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You Get What You Pay For
- 1. ‘You Get What You Pay For’ ‘You Get What You Pay For’ Guy Allen February 27h 2013 Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
- 2. ‘You Get What You Pay For’ Part 1 – Introduction The Real World Sourcing Series is a series of 6 sessions covering hot topics for procurement professionals. The Real World Sourcing Series is promoted and supported by BravoSolution, and developed by Peter Smith (Spend Matters) and Guy Allen (Real World Sourcing Limited). Guy Allen started his procurement career with Ford Motor Company, moving through IBM, SmithKline Beecham and GSK before becoming CPO for Abbey National and VP Global Sourcing at Fujitsu before joining 4C as a Managing Partner. Guy has since left 4C and started his own consultancy, Real World Sourcing Limited. Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
- 3. ‘You Get What You Pay For’ Agenda 1. How Prices are Set 2. Adapting Your Approach to the Economic Reality 3. Negotiation Styles 4. PPCA Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
- 4. ‘You Get What You Pay For’ It's unwise to pay too much, but it's worse to pay too little. When you pay too much, you lose a little money — that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot — it can't be done. Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential John Ruskin 1819- 1900 Real World Sourcing
- 5. ‘You Get What You Pay For’ How Prices are Set Price 20 18 16 14 12 10 Demand 8 Supply 6 Se Series 3 4 2 0 C1 C2 C3 C4 C5 C6 C7 Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Quantity C8 C9 Real World Sourcing
- 6. ‘You Get What You Pay For’ Factors that ‘Corrupt’ a Free Market Tied supply Dominant buyer or supplier Niche products or specifications Government regulations or protectionism In the medium to long term the market will probably adjust Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
- 7. ‘You Get What You Pay For’ 5p on a litre of petrol Price 20 18 16 14 12 10 Demand 8 Supply 6 Supply 2 4 2 0 C1 C2 C3 C4 C5 C6 C7 Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Quantity C8 C9 Real World Sourcing
- 8. ‘You Get What You Pay For’ Economic Recession Price 20 18 16 14 12 10 Demand 8 Supply 6 Demand 2 4 2 0 C1 C2 C3 C4 C5 C6 Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential C7 Quantity C9 C8 Real World Sourcing
- 9. ‘You Get What You Pay For’ Cost of Production Above Market Price Price 20 18 16 Market Price 14 12 10 Demand 8 Supply 6 Column1 Cost of Production 4 2 0 C1 C2 C3 C4 C5 C6 C7 Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Quantity C8 C9 Real World Sourcing
- 10. ‘You Get What You Pay For’ When Supplier Costs are Above Market Price Supplier margins are likely to be under severe pressure May encourage innovation ….or..... Cutting corners – Horsemeat Actions to take Risk management eAuctions Address consequential costs (eg delivery) Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
- 11. ‘You Get What You Pay For’ Cost of Production Below Market Price Price 20 18 16 Market Price 14 12 10 Demand 8 Supply 6 Column1 Cost of Production 4 2 0 C1 C2 C3 C4 C5 C6 C7 Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Quantity C8 C9 Real World Sourcing
- 12. ‘You Get What You Pay For’ When Supplier Costs are Below Market Price Supplier margins are likely to be good Supply may be restricted Possibly caused by barriers to entry into the market place Actions to take Build relationships Seek open book pricing Revise specifications Encourage new entrants to market Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
- 13. ‘You Get What You Pay For’ Different Situations Require Different Negotiation Approaches * Logic Rational argument to deliver planned outcome Power Implied threat to use position of power Trading Give and take bargaining Conciliatory ‘Split the difference’ Emotive Appealing to reason or looking for help * after Steele, Murphy, Russell Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
- 14. ‘You Get What You Pay For’ Using the Logical Approach Real margins are high in the supply market Your price is above the market price If you get it right, your opponent will do the majority of the conceding If the power between you is balanced, be sure your opposite number will respond to logic Don’t Use Logic When Purchase price is below the cost of production Good circumstances in which to use PPCA Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
- 15. ‘You Get What You Pay For’ Task What is the manufacturing cost of this bottle? Identify the key cost parameters that you would need to find out to establish the cost of the bottle Assume cost of machinery and running the factory day to day is covered by a machine hourly rate Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
- 16. ‘You Get What You Pay For’ Using the Power Approach Used when one party has the perceived position of power Typically a large company buying from a smaller one Used wisely it can change and improve the supply base Possible short term gain, long term pain Don't Use Power Unthinkingly Without being aware of the risks Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
- 17. ‘You Get What You Pay For’ High Price $ Low High Quantity Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
- 18. ‘You Get What You Pay For’ Using the Trading Approach A range of factors to consider Searching for things easy to give up, to gain something of value to your organisation Start high, move little Best chance of a win-win outcome Don't Use Trading When You are unclear about the value of non price factors Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
- 19. ‘You Get What You Pay For’ Using the Conciliatory Approach Often the quickest route to an outcome You have already achieved your target outcomes You wish to maintain relationships Usually on a single point (e.g. price) Useful for breaking a deadlock Don't Use Conciliation Early in the negotiation If you are unsure of the market position Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
- 20. ‘You Get What You Pay For’ Using the Emotive Approach Useful when relationships are strong Emotions can run from anger to pleading – all potentially valid Body language can convey emotions as much as speech Don't Use Emotion If you have the power in the relationship? Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
- 21. ‘You Get What You Pay For’ High Low Trading Conciliatory Your Position of Power Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Power Supplier Margins Logic High Real World Sourcing
- 22. ‘You Get What You Pay For’ Be Aware of Your Opponent Using logic with some people may prove impossible Pursuing a trading approach may seem to be a sign of weakness to some cultures Emotive approaches can be easily countered by some personality types Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
- 23. ‘You Get What You Pay For’ Final Thoughts You get what you pay for implies that there is an unbreakable link between price and quality – this is not true Paying a premium does NOT guarantee anything ‘You Pay What You Deserve to Pay’ Manufacturing costs are not immediately linked to purchase price Vary your negotiation approach according to your situation and your opponent Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
- 24. ‘You Get What You Pay For’ Real World Sourcing Scholarship £2500 towards any procurement based training Log on to the BravoSolution Education Network with the details you’ll receive tomorrow Complete the certification programme Check your ranking! The winner will be announced at the Sourcing Experts Dinner in December Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
- 25. ‘You Get What You Pay For’ THANK YOU! Please feel free to contact me on guyallen@realworldsourcing.com Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing