Smoke at the
Reality Saloon
or
The shootout at the
Value Corral

Starring:
"The Destroyer" Mills and
"Hell-On-Wheels-Frank" Hurtte

Malcom Mills and Frank Hurtte are at it again - this time it's all about measuring value.

Measuring value

by Malcolm Mills and
Frank Hurtte

Are you listening? North America is losing out. Companies in the Asian Rim, the Indian sub-continent and other diverse locations are joining together in tight clusters of partnership and winning customers and markets. Toyota, famous for seamlessly moving value from vendor partners to their own production lines, continues to throw a wide loop over all competition and, based on a number of comments from readers, many companies in North America just haven’t figured out how to imitate this successfully yet. We may have invented the rodeo but measuring the value between vendor and customer, salesperson and procurement still falls in the “needs work” category.

For instance, here’s a situation:

Frank:
I just had a conversation with a Midwestern purchasing manager who told me it was his formal objective to reduce his product cost by 7 percent during 2007. He went on to state, “Every single bonus and perk in my department will be based on my staff’s ability to meet this goal.” I asked if this was an objective he felt was reasonable and fair. He said, “Yeah, I believe my people will have their hands full because we will need to swap out some well-established long-time suppliers.” When pressed about value, services, and quality of product, it became clear that he was talking price cuts – not cost reduction. Malcolm, do you purchasing people ever think of anything besides price?

Malcolm:
Frank, product cost can mean different things to different people. But traditionally, purchasing folk think in terms of price because that’s what they’ve been taught and have used as a measurement for value for eons. The boys upstairs typically look at the bottom line and so must the buyer or PA. Either that or be replaced. Only fairly recently have the gutsy and intuitive among purchasing managers and buyers begun to break out “value” as a part of the item price. Unfortunately, for the most part, no one else in the company really gives a damn or cares to measure what buyers instinctively know. Sorry, that’s life. But what are you calling “value” anyway? If it’s not tangible and reportable, Frank, you’re wasting your precious breath. If it can’t be measured and broken out of the price, it’s all just smoke to buyers.

At the moment, purchasing eyes see “price” as including the value you promote. Whatever the P.O. states, be it shipping, certification or documentation, test reports, MSDSs, warrantees, packaging, shelf life certification, MTRs, labeling, etc., these are all expected to be part of the quoted price. It’s not an extra unless these “value” items are stated as separate P.O. line items. You can’t put a line item for “quality of product” or “talking on the phone time.” You may or may not charge for certs and MTRs.

Frank:
Don’t some of these get sacrificed to the “god of price” the first time anybody says corporate reengineering? The Big Three automakers perfected the old, “I like you. We are partners. And let’s work closer together. Just as soon as you give me a 5 percent across-the-board price chop” back in the 1990s. I pushed back with offers to increase service, outsource work they did with expensive union maintenance workers, and a lot of other great ideas. We didn’t measure it in dollars and cents back then, but we were pretty specific. Just how well does it need to be spelled out for you to take it for real numbers?

Malcolm:
Generally speaking, purchasing managers want to show via an accurate report where last year they spent X number of dollars purchasing “widgets” from ABC supplier, this year they are only spending X minus 7 percent dollars for the same amount of product.

Quality doesn’t show up on the report, Frank. Neither does technical information or expertise. To purchasing people, bean counters and owners/stockholders, the total price on the report includes all of the “value-added” features you talk about.

Frank, when you and I were young, after reaching an agreement, we’d look each other in the eye, shake hands and have a solid deal that wouldn’t be broken for love or money. We went the extra mile for friends and business partners, providing dedicated service and reliable performance.

Well, we don’t live in that world anymore, Frank. We’re very much international now. Our corporations are often owned and directed by hard-nosed, tight-fisted business people from across the pond.

Even North American companies cannot operate on trust or personal relationships today. Instead, we operate via spreadsheets and way too much backroom politics. Again, that’s just reality. Today we can’t just “throw that in” because somewhere it has a cost. With the price of fuel and everything else, that extra mile costs you. You just can’t absorb or provide for free what you have a cost to obtain. It’s not reasonable. You guys have to learn that.

And that is the mess your team is in. Unfortunately, your international competitors have already learned to quote the item alone, in many cases without that added value which drives North American prices up.

Frank:
An area that often is talked about is soft savings – those which affect the use of internal people. I believe that freeing people up from one task to be used in another task is indeed a value to most organizations with more than 50 employees. The companies that recommend and provide automation equipment are really in the business of selling soft savings. Aren’t they?

Malcolm:
Frank, you were talking earlier about turning soft savings into hard savings when you made recommendations to your customer to outsource some of their internal work to lower costs. Today, hard savings are the rule. It’s up to you to turn the soft savings you offer into hard savings buyers can recognize and quantify. Promoting automation is only a part of that. Promoting quality, technical expertise and other things suppliers consider to be added value must also become measurable and hard.

But to most buyers and purchasing managers, this added value is no more than your own costs of doing business and they don’t believe you can’t do better because the competition tells them they can do better, and they often do. The fact that your product is North American-made, better quality and good for the local economy doesn’t make it under the hard savings ledger column.

Frank:
Salespeople are only now beginning to think about measuring their service using that five-thousand-year-old standard for doing so: money. Increasingly, my clients are asking questions about how to transform their actions into cold hard cash for customers, but this is a very new concept for the sales community.

Malcolm:
Frank, buyers and other purchasing types listen to sales pitches from competing suppliers all day long. The stories are similar but their interpretations and cost of value are sometimes quite different. When the interpretation of added value is different, often, so is the price.

I’ve seen brand new ISO 9000 factories in China smack in the middle of rice fields producing acceptable quality goods for the hungry American market. What kind of value do you suppose they are offering, Frank?

There’s one thing that will change the way things are being done today, and that is to actually prove in black and white to every customer the significance of soft savings as related to price. What it will probably take is for every manufacturer or distributor to do their homework and price the product they are in jeopardy of losing, without freight, without technical advice, without documentation, without packaging, without QA extras and whatever else makes up the cost, and then offer that to the buyer as an option. If you sincerely want to change the way customers/ buyers view price quotes in America, that’s pretty much what it will take.

Frank:
Malcolm, typical purchasing mentality is as archaic and as one-sided as it’s always been but at least we agree on one thing: identification and documentation is the key. Further, these values need to be clearly visible and understood by the customer.

It’s time you and I took this bull by the horns. To make this real, I want to suggest a mini-case study.

I am a sales professional calling on your company. I know the engineering department is concerned about the high cost of energy. Gasoline has pushed past the $2 point and has on occasion surpassed the $3 point. The cost to operate the vehicles used by your company has grown dramatically and everyone is concerned.

After hearing about your troubles, I bring in a new technology flying carpet to replace your vehicles. I know the average vehicle costs your organization $3,000 to maintain and $1,000 for gasoline during 2006.

The magic carpet runs on genie dust which will cost you $500 per year. Additionally, magic carpets require only $100 a year to maintain (rug shampoo). All other costs of operation are the same.

Finally, the magic carpet costs about $750 more than the vehicles you are currently buying. The expected life is five years for both the vehicle and the magic carpet.

I suggest a financial analysis that looks like the chart below:

Malcolm, based on a compelling story like this, it would seem that every purchasing guy on the planet would say, “Wow this company brought us some value! Their suggestion just put sixteen grand and some change in our pocket. We’ve got to get them more involved with our company.”

Instead, the message often delivered is, “Thanks for the suggestion. Now as long as nobody beats your price on Magic Carpets by a dime, I’ll let you keep the business.”

Give me your thoughts.

Malcolm:
Looks like you plugged me, Frank. You’re a straight shooter and I took one for the old purchasing association. In today’s world, you’re probably right. Depending on the industry, they may not even have the will (or inclination) to listen. And worse yet, there’s many the purchasing guru who would listen but has neither the time, training nor procedure to record the savings. You see, maintenance and overhead are coded differently from purchase price. Sorry, Frank. You winged me but there was a ricochet and procedures don’t account for ricochets, Frank.

But Frank, because I am a progressive purchasing manager, I actually DO see the value in what you’re proposing and I’ll go to the mat for you. You see, I’m a customer who listens. We aren’t really extinct, you know.

In summary, what you’re saying is possible but it will take work on both sides.

By the way, can I get that Magic Carpet in blue, with white pinstripes and aluminum tassels? Give me the sporty model with the leather interior, DVD player and cup holders, OK? I presume they all come with air? Can you throw in a genie named Barbara?

Oh, and I need it by next week Frank, FOB our plant, a full tank of magic dust, and a five-year tassel-to-tassel warrantee.

This article originally appeared in the July/August 2007 issue of Progressive Distributor. Copyright 2007.

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