How To Make The Cost-Cutting Buyer Your Ally?


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Today’s buyers are hell-bent on cutting cost. However for sellers that need not be all bad news. In this whitepaper you will find out how cost reduction is something that can now unite, rather than divide buyer and seller.

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How To Make The Cost-Cutting Buyer Your Ally?

  1. 1. Retail Price: $9.99SELLERS - If You Play Your Cards Right:The Cost-Cutting Buyer Is Your AllyTurning the 6 buyer strategies for cost reduction to your advantage. Todays buyers are hell-bent on cutting cost. However for sellers that need not be all bad news. Indeed, the latest wave of buyer cost cutting, with its broader and more strategic “Shaving supplier focus, has the potential to take buyer-seller relationships to a margins is not the new level. only way, or even Buyers are slowly realizing that shaving supplier margins is not the best way…” the only way, or even the best way, to achieve sustainable cost reductions. This presents opportunities for sellers. This whitepapers shows how sellers can use the buyers changing focus on cost reduction to unite, rather than divide.
  2. 2. The Traditional Buyer Cost Reduction StrategiesTraditionally, buyers have turned to two strategies in the pursuit ofimmediate cost savings:Strategy 1: The RFx - we are all too familiar with the rise of thecompetitive tender and the increased volumes of RFPs (request forproposal), RFQs (request for quotation), etc.Strategy 2: Price Negotiation - the traditional jaw-boning wherebuyer and seller go head to head on price reduction.The bottom line is that the progressive shaving of the suppliersmargin is not the only strategy for cost reduction. For buyers whohave already gone to the well on a number of occasions in pursuit ofsupplier margin cuts, that is good news.In many cases much of the scope for shaving supplier margins mayhave already been exploited. Buyers know that there is a point whereit is counter-productive, even risky, to look for another cost reduction: Suppliers often cut the quality of service in response to a cut in margins. Their attention turns to more profitable customers. Competitive tenders and reverse auctions can scare off quality suppliers, or at least quality tenders. The obsessive focus on lowest price, can result in higher costs in the long-run (total lifecycle costs). Price is only one dimension of cost and cost itself is only one half of the economic cost-benefit analysis. The link between cost and quality goes under-appreciated.So, it is that buyers are exploring other ways of cutting costs too.P a g e |2© The ASG Group 2011
  3. 3. New Buyer Strategies For Cost ReductionBuyers are adopting an increasingly sophisticated approach to thechallenge of cost reduction. This is reflected in the range of strategiesbeing adopted.Buyers have moved beyond the more obvious strategies of thecompetitive tender (the RFx) and supplier re-negotiation, to adopt amore integrated, holistic and ultimately more strategic approach. Sobuyers are being advised to adopt a number of strategies for cuttingcosts: “Cost reductionStrategy 3:Partner With Suppliers To Identify More Creative becomes a jointCost Savings responsibility ofAsk and you may receive is the new motto for the progressive buyer, both buyer andwho has come to see that two heads are better than one when it supplier.”comes to finding new ways to cut costs. In this way cost reductionbecomes the joint responsibility of both buyer and supplier.Increasingly, buyers are cautioned to take a holistic view of costreduction in working with their suppliers. That means finding newways to remove cost, rather than simply hitting suppliers margins.The focus then shifts to greater innovation, process efficiency and soon.This has implications for sellers, as it means that they can co-operatewith buyers in the pursuit of cost savings, without the defensivenessthat the direct assault on supplier margins entails.Sellers who recognize the inescapable fact that buyers are targetedwith delivering additional savings, year on year, partner with buyers infinding more innovative win-win ways of cutting costs.P a g e |3© The ASG Group 2011
  4. 4. Suppliers who come to their customers with new ideas as to how costs can be reduced can really distinguish themselves. For example; if we did it this way, added more of this, or less of that, if you followed this process, etc. With every dollar, or euro they help the buyer to save the seller protects, or perhaps even grows, their revenue and margin.Tick  If ‘Yes’ Can you identify ways you can partner with the buying organization to delivery cost savings through innovation? Strategy 4: Managing Demand Buyers are increasingly focusing their attention on the origin of cost, addressing the issue of managing demand, or spend for the various products and services used throughout the organization. This rather obvious strategy makes total sense. For example, if the buyer can curtail demand for new software licenses in the organization by 10%, that is going to deliver up to 10 times more than a 10% reduction in software license costs from the supplier (which incidentally will be sought anyhow). The seller who helps the buyer to manage demand has an advantage in winning the deal. Although it may result in cannibalizing some sales in the short term, helping the buyer to buy less can help the seller to sell more in the long term. Take for example a bio waste solutions company that provides onsite equipment to cut the cost of handling canteen waste by up to 190 euro per tonne. Such a major saving is obviously appealing to the buyer, but that is not all the company offers. P a g e |4 © The ASG Group 2011
  5. 5. Equally important for the environmentally conscious buyer, the supplier also helps the customer to reduce the total tonnage of canteen waste by up to 25%. It does this through a range of related activities, including educating canteen customers and staff, backed up with full system reporting of volumes of waste handled.Tick  If ‘Yes’ Can you help the buying organization to curtail unnecessary spending, or waste in your area? Although the company charges per tonne of waste handled, it has determined that helping to cut waste volumes is the best strategy for long term profitability. The bio waste companys solution has a dual economic advantage – cutting cost directly through superior technology, as well as indirectly through helping the buyer to manage demand. As this example shows, the seller who helps the customer to spend less can sell more. Helping the buyer to manage demand can be a win- win for buyer and seller. It is a means of helping the buyer to cut costs “…the seller who without the seller necessarily suffering any margin, or revenue helps the buyer reduction. spend less can For the buyer the starting point for demand management is spend sell more.” analytics - the process of exposing what the organization spends, how and where (and more importantly how this can be reduced). This can present challenges however, with many buyers complaining of limited visibility of what is spent. Sellers who help provide such visibility, or illumination of spend can have an advantage.Tick  If ‘Yes’ Can you provide the buyer with greater visibility or understanding of what is spent and what should be spent? P a g e |5 © The ASG Group 2011
  6. 6. In the bio-waste example, the seller provided the buyer withincreased spend visibility in the following ways: Information on bio-waste waste volumes based on data from other customer sites (including key metrics, averages and rules of thumb). This information enabled the buyer to benchmark against others. “...tried & tested An audit of bio-waste volumes at proposal stage, presenting ways to cut the buyer with a detailed analysis of volumes and the savings procurement that could be derived in the form of a business case. cost and Weekly and monthly volume reports, detailing the throughput complexity.” and comparing it with volume reduction goals set and savings targeted in the business case. The customer is provided with alerts when volumes processed and spend reaches 60%, 80% of monthly spend allocation.The seller can play a role in helping thebuyer in respect of profiling,understanding and managing demand,often without suffering any margin, orrevenue reduction.Strategy 5:Consolidation Or Aggregation OfPurchasesThe first port of call after the analysis ofspend is typically the consolidation, oraggregation of purchases.P a g e |6© The ASG Group 2011
  7. 7. There are 6 key ways in which buyers approach this challenge: 1. Getting managers, departments and business units to pool their orders to generate bulk discounts. 2. Framework agreements with selected vendors (covering more items for a longer period). 3. Reducing supplier numbers, with preferred and approved vendor lists. 4. SKU (Stock Keeping Unit) consolidation- reducing the number of individual / unique items purchased (e.g. we purchase 18 different types of ball bearings, lets reduce that to 6). 5. Specification reduction - where specifications are simplified or reduced so as to open up new / cheaper sourcing options. 6. Category management - that is the focus on particular spend pools , or categories of purchases. These 6 strategies are tried and tested ways for buyers to manage and ultimately cut the procurement complexity and cost. They represent aspects of procurement best practice and can present either an opportunity or challenge to the seller, depending on the degree to which he/she is prepared for them.Tick  If ‘Yes’ Do you know what procurement best practice for your area is and do you help your customer & prospects to apply it? As consolidation/aggregation strategies are an almost inevitable step for the buyer, suppliers must be ready. P a g e |7 © The ASG Group 2011
  8. 8. Some examples of how suppliers can help their customers to aggregate, or consolidate their buying, are as follows: We received 30 individual orders in the past 6 weeks from various departments in the buying organization… If we combined orders into weekly delivery schedules that could reduce transport costs by 30%, while also preventing impulse orders. Based on the sample invoices you provided to us, we see that there are a total of 15 product substitutions (like for like non- premium brand alternatives) that could deliver savings of 25%. We will provide your end customers with direct access to our ordering system through an online catalogue which will show availability based on budgeted allocations and will require valid order numbers, or other internal ordering processes that you may want to follow… We receive orders from 4 different parts of your organization, each with its own account, rates and terms. If we combined them all together we could offer better rates to everybody and one centralized ordering process. Those suppliers who proactively help buyers to more effectively aggregate and consolidate demand begin the transition from supplier to partner. Tick  If ‘Yes’ Can you help the buying organization to consolidate, categorize, or aggregate what they spend in your area? P a g e |8 © The ASG Group 2011
  9. 9. Strategy 6: Re-engineering The Supply Chain Procurement is increasingly the focus of strategic, or joined up thinking that sees buying in the context of the total supply chain with its multiplicity of inputs and outputs, customers, suppliers and partners. That means procurement is looking for economies and efficiencies in new areas. The focus has shifted to total supply chain efficiency and in particular to leveraging supplier partner innovation in getting their product/service into the hands of the customer. It has also shifted to the suppliers of your suppliers (e.g. raw materials) in terms of seeking cost reduction, or managing supply risk.Tick  If ‘Yes’ Can you map your customer’s supply chain and how it is changing? When buyers see their business as a supply chain, they quickly begin to see that certain steps in the supply chain could be done by others. That may mean out-sourcing the procurement of particular products, or categories, or it may be the out-sourcing of stages / steps within the supply chain. This presents opportunities, as well as challenges for sellers. In a world where the biggest one time manufacturers dont own “Sellers need to factories, or fleets of delivery vehicles, but instead manage supply see themselves chains, what matters is the end-to-end performance of the business as links in a (or supply chain), not who owns the various pieces in between. With companies focusing on core competence, the trend is towards out- supply chain...” sourcing everything else and that presents opportunities for suppliers to become strategic partners. This new out-sourced business model presents opportunities for sellers. Buyers are regularly reminded the issue of out-sourcing requires asking not Who is best to do it?, but Who is best at doing P a g e |9 © The ASG Group 2011
  10. 10. it? Sellers need to see themselves not as suppliers, but as links in a supply chain. They need to adopt a full customer supply chain focus.Tick  If ‘Yes’ Can you help the buyer to optimize their supply chain efficiency - from raw materials, or inputs to outputs, or finished products provided to their end customers? What happens when sellers adopt a supply chain view? Well, here are some of the opportunities it presents: Help the customer to optimize their supply chain – starting with the step that they are presently on, but looking forward to the end customer and backward to the raw material. This enables sellers to take cross selling and up selling to a new level. Adopt a total solution, or total ecosystem view to more comprehensively address the buying organizations needs. See opportunities where one product, or service ends and another begins. For example the IT solutions vendor whose system must integrate with a myriad of other supplier systems in the buying organization partners with those other suppliers with respect to integration, or the total solution. Recognize that solutions dont just have internal, but also external customers. For example the IT vendor whose system enables self-provisioning by the buying organizations end customers, as well as its channel intermediaries. Optimize, develop and re-engineer their own supply chains – that is their own suppliers and distributors to enhance competitive advantage in the marketplace.Tick  If ‘Yes’ Can you help the buyer to out-source and thereby focus more on their core competence? P a g e | 10 © The ASG Group 2011
  11. 11. Your Sales Gauge: The Cost-Cutting Buyer Is Your AllyThere are 8 checklist in the article. Use these to gauge how effectivelyyou are transforming the cost-cutting buyer into an ally.Tick the ones for which you can answer Yes – that is those that arepresently being addressed, or covered by your sales approach. Payparticular attention to those that you cannot Tick – they could belimiting your success.What Should You Do Next?Use the checklist above to decide what you want to do next. Inparticular, see how many items were you able to tick Yes.If you ticked most, or all of them then you have the cost-cutting buyerunder control. So, you might like to navigate to some other aspect ofthe Orders Stage (i.e. proposals, negotiation and closing), orelsewhere in the sales process.If not, this area could be limiting your sales success. You can startaddressing it by tackling those items in the checklist that you couldnot tick. For each make a note of specific actions you can take – youwill find space to write earlier in this paper.P a g e | 11© The ASG Group 2011
  12. 12. The Science Behind This PaperThese insights and tools are based on extensive research under 3headings:1. Buyer Research – our ground-breaking research into how modern buying decisions are made and the implications for sellers.2. Best Practice Research – Over 1 million pages of best practice sales case studies, books and research.3. Common Practice Research – Our peer comparison benchmark of 1,000s of your competitors and peers.The Sales Engine® and SellerNav are trademarks of The ASG Group.The entire contents of this document are copyright of The ASG Groupand cannot be reproduced in any format without written permission.Would you like help in tackling your sales challenges? Contact us at:enquiries@theASGgroup.comwww.theASGgroup.comP a g e | 12© The ASG Group 2011