“The common law of business balance prohibits paying a little and getting a lot.”
– John Ruskin
Price is what you pay, value is what you get. It’s unwise to pay too high or too little. Lack of knowledge and indolence on a few instances, buyers tend to enter the bargaining approach rather than well-planned negotiations. As bargaining doesn’t require any preparation but negotiation, YES! Therefore, it’s buyer’s and category manager’s sole responsibility to acquire knowledge towards those goods and services market, moreover, gather talents together while preparing for the negotiation.
From the recent supply chain transformation journey, it’s significant that high-level professionalism in procurement and strategic negotiation has become critical to business success. Throughout the end to end process, defining safe price targets and supporting sellers working at the correct price level, the aim becomes to bring a “win-win” ambiance for both buyer and seller.
“It’s unwise to pay too much, but it’s also unwise to pay too little. When you pay too much you lose a little money, that’s 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. If you deal with the lowest bidder, it is well to add something for the risk you run. And if you do that, you will have enough to pay for something better.”
– John Ruskin
The above-said statement even suits to present and future frameworks. In a commercially driven market, either for services or goods trading, constant challenges coming from competition and end customers’ realistic or non-realistic business targets. This is forcing buyers to transfer the commercial conditions to our own sellers.
Furthermore, volatile business situations are constantly pushing buyers and sellers to accept the business at its demanding conditions. Not having efforts to fix the right price for our purchasing items, no doubt at one point of time we will pay more than actual. Therefore, any business will be impacted in two ways if we miss these preparation steps:
- Non-competitiveness makes your company lose the business.
- Make you undergo a claim, and spend over cost during execution/production.
Buyers’ mistake of defining undervalue for their purchase, sellers’ decision to accept the price as it is without analyzing the cost definitely jeopardize the business, to mitigate this risk, understanding your “Should-cost” or “Idle-cost” is essential. It’s very important for either technical or non-technical buyers to acquire the knowledge of product they intend to buy. If they can’t, this knowledge can be sourced from experts.
Cost model, price benchmarking, price estimation, should cost, co-design to optimize the cost, strict on just enough buy, etc. are commonly used terminologies in the purchasing world. Detail study using internal or external experts is highly required before defining target to sellers. Knowing your Should-Cost (Idle cost) also helps buyers to know the so-called rock-bottom price level.
How unrealistic/undervalued price impact the business
- If not NOW you will pay LATER, this can’t be avoided.
- Extra cost reveal within the project cycle, lead buyers will have claim from sellers.
- Impact project margin and cause project delay.
- Spoils supplier relationship, which leads to re-sourcing again reinvestment.
- Failure to fulfill end customers’ requirements leads to customer dissatisfaction.