Supplier: “Thank you, now goodbye!”
I have been at this industrial distribution thing for a long time, which in turn provides a historical perspective. Through that lens, I recall the days of geographically captive markets. The three elements of a customer’s purchase decision were price, availability and relationship. The relationship with the customer was the most dominant factor. It was paramount to the success of any industrial distributor.
As time evolved and competition went from local, to regional, to national, to now global, with the exponential increase in competition, there has been a corresponding compression on profit. As a result, there was a “reset” of the weighting of the aforementioned purchasing variables. The reset was the mitigation of the relationship component. While relationship was still important, it played less of a role. It was no longer a differentiation but, rather, expected. Expected but not necessarily valued. With the abundant channels of inventory in the world, availability was a given, and price began to dominant everything. Note, price not total cost, the latter of which I contend is a more important, but often overlooked measure. For those industrial distributors whose entire culture was institutionalized around relationships only, the end was near.
Historically, the incumbent supplier found security in the purchasing decision being made by the operational folks. They wanted someone they could trust, specifically trusting that the supplier would not shut down their manufacturing line or their jobsite. As those purchasing decisions moved away from the plants and into the purchasing departments, those purchasing departments were incented to keep the material cost competitive, and equally important, the operational personnel off their backs. Remember, this was before the days of the protection of caller ID.
Today, there is a trend for the purchasing decision often being within the domain of the accounting department. Please understand, I have nothing against accounting departments or, in particular, accountants. After all, without them, I don’t get paid. However, I do not want purchasing people doing the accounting, or accounting people doing the purchasing. Purchasing is complex. It is both an art and science, with sometimes neurotic individuals and idiosyncratic personalities. Understandably, they tend to be defensive, as they are a convenient target. We lost the order! Why?The purchasing department doesn’t buy right! We missed earnings expectations! Why? Purchasing does not have the right sourcing … And so on, and so on. In many organizations, purchasing represents an all too convenient punching bag. After all, show me the commercial guy who lost an order because he was outsold?
To the point — once upon a time, if the incumbent’s supplier was doing their job, it was nearly impossible to unseat them. However, when contracts are put out to bid with the over-simplified process of collecting pricing on an Excel spreadsheet, a danger is invited. The danger to the incumbent is that the competitor sees it as an opportunity to “buy their way in.” Further, they ignore the cost involved in servicing the account as they are unaware of the real service requirement. I have been in situations where I have been the long-term perennial incumbent who is given the last look, only to find that the number to meet is below my cost. In those situations, I invite my customers to see if that “low bidder” will guarantee those prices for two years. If so, I encourage them to switch. Of course, that outside alternative is reluctant to lock in a price they know is not sustainable. It is a great way for vetting legitimacy. Also, important for customer consideration are the not so insignificant switching costs.
My organization had a 90-year relationship with a big bank, and due to a significant construction and relocation of a plant, it was necessary for us to secure a loan commitment should such be needed. This project was to be funded with internal cash, yet it necessitated the sale of the 90-year-old campus on the city’s Southside. The potential mortgage was a safety net in the event the old property was not sold prior to closing on the new plant. Long, emotional story short, the 90-year-old incumbent bank was not competitive. When confronted with such, they indicated that they did not know I was taking it out for bid. (As if that should matter!) In the subsequent debate/argument, they confronted me by asking: “If steel prices go down and your customer doesn’t call you, do you, on your own, lower those prices?” My answer was an unequivocal “yes”! Our organization will never be caught red-faced due to the pricing exploitation of a naïve customer, or any customer for that matter. It is just not our culture.
Ironically, in the end, we sold the old campus in time, and the bank lost a 90-year-old customer by not being competitive on a loan that was never needed.
True partnerships are those that are centered around mutual trust and a quid pro quo. These true partnerships exist, but unfortunately, are few and far between. The problem with accounting, or perhaps more accurately Excel spreadsheet purchasing, is that it does not factor in the numerous peripheral issues involved in a purchase, many of which are more important than the price per unit. Is not a 1/2 percent higher price worth a 4 percent reduction in rejects? Where does a spreadsheet capture these types of variables?
I am aware of a major distributor who had a 10-year MRO contract with a mill. That decade-old track record reflected flawless delivery and almost nonexistent rejects. Yet, when the spreadsheet was complete, they were on the outside looking in, having lost the $3 million contract, notwithstanding the fact that the parent company purchased $350 million per year in steel from that company. Where does the spreadsheet factor in those variables? I contend these factors should influence, or at least be considered in the decision-making process.
Anyway, as those with experience know, there are a few of axiomatic truisms in business:
- If your customer doesn’t have competitively priced products, they will not be profitable.
- If your customer is not profitable, they will not be around to sell.
- If your supplier is not profitable, they will not be around to supply. Customers have a responsibility to be loyal, and suppliers have an obligation to accept the responsibility to keep customer sourcing competitive throughout the economic cycle. After all, is that not the foundation of a true partnership?
Perhaps George Elliot said it best: “What do we live for, if not to make life less difficult for each other?”
Dr. Donald McNeeley is president and CEO of Chicago Tube and Iron Co., headquartered in Romeoville, Illinois, as well as a professor of engineering at Northwestern University. Founded in 1914, CT&I is one of the largest steel service centers in the U.S., with 10 subsidiaries throughout the Midwest. Contact Dr. McNeeley at (800) 972-0217, or visit www.chicagotube.com.