Understanding The Buyer's Strategy


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Many sellers have an exaggerated view of their importance to the buyer. That is because they are not aware of how buyers measure supplier importance, or set strategy for a particular product category. This whitepaper will examine the fundamental basis upon which suppliers are segmented and procurement strategies are decided.

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Understanding The Buyer's Strategy

  1. 1. Retail Price: $4.99Understanding How You FitInto The Buyers StrategyMany sellers have an exaggerated view of their importanceto the buyer. That is because they are not aware of howbuyers measure supplier importance, or set strategy for a “Buyers areparticular product category. increasingly encouraged to tailor theirThis whitepaper will examine the fundamental basis uponwhich suppliers are segmented and procurement strategies strategies...”are decided. It will guide you to assessing your importance andprovide you with tips on how to act accordingly.
  2. 2. Understanding How Buyers Segment Their SuppliersBuyers are increasingly encouraged to tailor their strategies to reflectthe importance of the different categories of goods and services beingpurchased. This results in a segmentation of suppliers that has realimplications for how you sell.Put simply all suppliers are not equal. Some need to be partneredwith, while others can be thrown to the wolves in the quest forlowest price. But just how do buyers arrive at these decisions?Buyer logic when it comes to procurement strategy and suppliersegmentation can be understood by reference to one of mostwidely used procurement tools – The Kraljic Portfolio PurchasingModel. As sellers we can use this model to understand, perhapseven predict, how the buyer is going to buy our goods and servicesinto the longer term.Introducing The Number 1 Model In BuyingThe most widely known buying tool is The Kraljic Portfolio PurchasingModel, created by Peter Kraljic. It is the equivalent of the 4 Ps inmarketing, or the periodic table of elements in chemistry and hasbeen around for approximately three decades.The power of the Kraljic model rests in its simplicity. The modelfocuses buyers on the reality that buying is product, or servicespecific. It highlights 4 purchasing strategies that can be chosen bybuyers depending on the level of:  Supplier risk  Financial/profit impact.The model focuses the buyer on the strategy as opposed to thetransaction, or more specifically on the twin goals of supply securityand cost reduction. But what does it mean for sellers?P a g e |2© The ASG Group 2012
  3. 3. How Sellers Can Use The Kraljic ModelSellers who want to use the model must first find out where they fiton the matrix. That is where the goods or services they provide arepositioned in the mind of the buyer in terms of the two criteria: “The model  Is there supply risk? For the buyer the issue of supply risk includes consideration of such factors as; level of scarcity, focuses the availability of substitutes, concentration of suppliers, delivery buyer on the logistics, risk of supply disruption, etc. This is in effect how the strategy as buyer views the balance of power between buyer and supplier. opposed to the  What is the financial impact? For the buyer this includes transaction.” consideration of the impact of the product/service on cost, quality or value. If you are not sure where your category fits on the financial impact axis you will be interested to know the rule of thumb - only products that account for 3% or more of spend above the line.Once you have found your position on the matrix predicting thebuyers likely strategy becomes clear.P a g e |3© The ASG Group 2012
  4. 4. Are You Strategic?This strategic quadrant is the area where buyers can achieve thegreatest impact and it is what matters most. Getting it right is key tothe performance of the business. It deserves the buyers closeattention and that means procurement is going to be involved.Most sellers want to be in this category, on the other hand buyerswant to move suppliers out of this category and reserve it for theselect few that really matter. So it is that buyers may be developingstrategic long term relationships with some suppliers in thisquadrant, while at the same time lessening the dependence onothers (e.g. doing it in-house, or genericizing requirements).If as a seller you want to be in the top right quadrant you mustseek to:  Increase your importance to the performance of the customers business.  Deepen collaboration through innovation and joint planning.  Help the buyer to cut cost and maximize value.  Connect with the buyers strategic agenda.  Help the buyer to manage risk.Leverage: Are You Facing The Onset Of Buyer Power?Buyers in this leverage quadrant are opening their eyes to untappedsavings and are set to throw their weight around. They recognize thatthey have more bargaining power than they are using and that it can(given the volume of spend) be leveraged to deliver significantsavings.Because of the potential savings procurement will seek to exercisegreater control, with buying decisions being wrestled away frommanagers and end users.P a g e |4© The ASG Group 2012
  5. 5. Sellers in this quadrant are about to come under attack. They must beprepared for:  The prospect of competitive tenders, auctions and e-tendering is looming.  The threat of substitute products or suppliers.  The consolidation of purchases and concentration of suppliers.  Increasing price pressure.The seller must be proactive, rather than reactive inresponse to these challenges.Sellers face the threat of cosy incumbent supplierrelationships being opened up to competition. They cannot count oncustomer loyalty alone and must guard against complacency. Theymust look to make themselves more important to the buyer throughinnovation, service and other means of differentiating their solutions.A key challenge for sellers is to communicate their impact on thebuyers business, focusing the buyers attention on total cost ofownership as opposed to simply price. The seller who can do thissuccessfully has the potential to move the buyer into the strategicpartnership quadrant.In addressing the price challenge sellers must be innovative. Cuttingprice is not the only way to cut costs. The challenge for the seller is tomake the cost-cutting buyer a friend and show the buyer thatincreased collaboration with suppliers can boost performance beyondthat of squeezing supplier margins.Sellers can also look to leveraging higher-volume orders and longerterm supply agreements in return for greater discounts.P a g e |5© The ASG Group 2012
  6. 6. Are You Causing A Bottleneck?Sellers in this bottleneck quadrant beware – you are being watched!This is an area where procurement is likely tofocus its attention. Quite simply it is a problemarea that needs to be fixed.Buyers are likely to seek ways to take backcontrol, such as by; creating buffer stocks,investigating substitute products, or suppliersand managing supplier performance.For incumbent suppliers in this quadrant thewriting is on the wall. From the buyers pointof view such troublesome suppliers are notimportant enough to merit all the hassle. Theseller should therefore seize the initiative andactively work to resolve the bottleneckexperienced by the buyer. If the seller waits forthe buyer to take action it may be too late –they are at risk of losing some of their businessto new suppliers, or substitutes.Are You A Non-Critical Item?If you are in this quadrant your products and services are notconsidered to be important by the buyer, and you face the increasingthreat of commoditization.The 80:20 rule applies in this quadrant. The segment is likely toaccount for less than 20% of spend, but as much as 80% of allsuppliers and related paperwork. That means it is a real administrativeburden – one that will rightly come under scrutiny.P a g e |6© The ASG Group 2012
  7. 7. Making goods in this category easier (and more cost effective) to buyrepresents an important strategy for sellers with the focus on EDI(Electronic Data Interchange) related technologies in order to reducetransaction costs. “Buyers are alsoBuyers will not be rewarded for their time spent on buying these likely to pursuerelative unimportant good and services. They should step back oncecost competitive supply agreements and approved vendor catalogues areas where theare in place. Helping the buyer to realize this is the sellers objective. seller can beBuyers are also likely to pursue; consolidation/concentration of proactive.”products and suppliers, optimizing order volumes and automatedinventory replenishment – areas where the seller can also beproactive.Sellers in this quadrant are most exposed to being beaten up on price.The challenge is to find new ways to matter, or at least a new basis forcompetitive differentiation (other than just price). In particular theymust communicate this in terms of total value and total cost ofownership.In return for better deals suppliers are likely to look for increasedvolumes, bundling of products and longer term supply contracts orframework agreements.Put It To WorkSo pull out The Kraljic Model. Start by taking each of your top 5customers and prospects and positioning them on the grid. Thenexamine what the model tells your buyer his/her strategy should be.P a g e |7© The ASG Group 2012
  8. 8. The Science Behind This PaperThese insights and tools are based on: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 Group and cannot bereproduced in any format without written permission.Want help in tackling your sales challenges? Contactenquiries@theASGgroup.comwww.theASGgroup.comP a g e |8© The ASG Group 2012