Retention discounts, or the dangers of loss leading bids

I went to a very interesting evening at the University of Bradford School of Management Knowledge Transfer Network, which featured featured Nigel Greenwood of Simply Customer talking about the Customer Journey, and Martin Haley talking about segmentation.

Martin mentioned the old Marketing rule of thumb that it costs 6 times as much to win a customer as to retain one.  And that triggered a few thoughts about procurement.

The costs of bidding for business are considerable, whether it is a formal tender process or a more traditional business to business relationship of meetings and negotiation.  Having won a contract, obviously the business has to perform well in order to retain it, but assuming it does then there is and advantage to both sides if the relationship continues.

My question is whether Procurement think about this sufficiently, and whether we put enough emphasis on squeezing prices in return for extending contracts.  Obviously it saves procurement time and money in avoiding a new bidding process, but there are a few processes going on that we might not think about in sufficient detail.

The cost of sales is obviously shared across all potential customers that suppliers target, but if we are already contracted then the cost of sales to us should be lower.  Perhaps not by a factor of 6, but certainly by 2 or 3.  Do the pries charged during the extension reflect that?

In addition we can think about the well known experience learning curve (or Boston Learning curve) which has been demonstrated back to the days of the Model T Ford.  The more units made, or the more times we carry out a service the more efficient we get.  The relationship is a log-log one, so is commonly portrayed as a curve where every time we double cumulative production the cost per unit goes down by a certain amount.  This obviously does not happen without some effort on the part of the Supplier, but is an indication that longer contracts become particularly attractive to suppliers as set up costs are written off and experience learning reduces the cost of delivery.

Taking this into account, some suppliers will initially submit a loss leading price assuming that profits will come later in the contract.  If we start targeting those savings then the supplier risks making less money than anticipated - hence the phrase that loss leading leads to a loss!

When considering the end of a contract, it is common to more or less roll over the existing price - maybe taking into account variables such as inflation and raw material costs.  Should we be looking instead to have price reductions taking into account the reduced price of sales AND experiential learning. 

There is no such thing as a free lunch, and we might see that initial prices rise if we want to share in the future efficiency savings - but it is something we probably should think about a bit harder.

The price of oil - a case for investing in training

This week I am due to be in Dubai presenting courses on Procurement and Supply Chain Management.  Instead I am at home writing material for the Chartered Institute of Procurement & Supply, which in some ways suits as it is nice to have a few days in a row to write rather than clutching hours here and there.

So far this year we have cancelled 5 weeks worth of courses in or for the Middle east, which is not surprisingly dominated by the oil and gas industry.  The dramatic fall in the price of oil (currently about $41/barrel down from over $100) has meant a massive cut in spending on training across the ME and in particular the oil and gas sector.

Now I have a vested interest in this because I work as a trainer, but I think we should make the case that training in procurement and supply (above other things) should be protected because it should pay for itself.

The usual argument is that when there is a financial shock it is sensible to cut back on discretionary spend - don't spend money unless you have to.  And I don't argue with that. 

However Procurement in the oil and gas industries in recent years has been focussed on Quality, delivery, availability, effectiveness and other non-price issues.  The high price of oil, and the relatively high margins it gave, meant that Price was not the dominant issue.  Now we are in a different environment.

Now Safety and Quality are things that cannot be comprised in process industries, but we can pivot to put far greater emphasis on price and cost rather than issues such as flexibility or efficiency.  That does require a change within the organisation, and a change in emphasis for the Procurement team and Suppliers.

In some situations that may mean a focus on partnership and joint cost reduction.  In others it may moving to a much more adversarial relationship than before.  The trick is in deciding where and when.

Which is where training comes in.  Training is not just about learning new things.  It is also where we can go back to basics and build up again in a new pattern.  It is where we can challenge established ideas and established ways of thinking.  It is where we can learn from others and test new concepts in a risk free (or low risk) environment.  In good training it is where we can plan how we are going to deliver in this new world.

In short a Procurement and Supply Chain training course could, and perhaps should, allow delegates to come away to save ten or more times the cost of the training.  At the least delegates should come away with some plans to save the cost of the event within a tight timescale (perhaps 3 months).  Those savings will then repeat over coming months adding multiples to the overall cost reduction.

The Return on Investment on Procurement training is high anyway, but when you need to save a lot of money in a hurry it is even better.  Particularly if it allows you to avoid making "savings" that will in the end cost more through lost production.

OK, you can say that I am self-serving in making this argument, but I think it makes sense.  In a losing football team you need to stop conceding goals.  You don't do that by getting rid of the Goalkeeper.

Procurex South - 20th April 2016

Wednesday this week is Procurex South at London Olympia.  Sadly I am not going to be there, instead I shall be at the computer working on training materials.  But I am sure that it is going to be a useful and interesting day.  And my colleague Eddie Regan will be in the Efficiency and Savings Zone, and he is always good value.  Well actually it is free, but trust me Eddie is worth paying money for. 

Procurex North - promo video

The event was great as usual - but I've been very busy since then developing and delivering a range of courses for CIPS. 

Procurex is of course BIPS - confusing I know.
I can be glimpsed in the video of the Procurex North event at about 2 minutes and 55 secs - see here.

Hope to see you there next time.