There has been an improved understanding of supply base/market issues, and supply management is more integrated into organizations’ operational processes and decisions. Wal-Mart gets much of the credit for inventing supply chain management. According to Ellram, in Wal-Mart’s relentless drive to lower costs, it discovered that its own process for ordering goods from manufacturers like Procter & Gamble created costs and inefficiencies for P&G, which the manufacturer then had to pass on to Wal-Mart. By working as buyer-supplier partners, the two companies were able to remove a number of systemic inefficiencies and achieve cost savings that helped both companies.⁴ The essence of supply chain management is to forge closer relationships up and down the supply chain—from the raw materials providers to the ultimate consumers of the goods and services created—and to discover ways to improve quality and reduce the costs of manufacturing, distribution, logistics, service, and so on. Ellram, who conducted a comprehensive study of strategic cost management, concluded that “cost management is not a passing fad; it is a way of life that will continue, and perhaps grow even more important.”⁵ Among her other findings were these:
There has been an improved understanding of supply base/market issues, and supply management is more integrated into organizations’ operational processes and decisions.
Cost-consciousness is a way of life in today’s organizations. “This philosophy is felt and lived from the chairman of the board to the administrative staff to the workers on the manufacturing floor.”
“Cost management specialists, either from within the purchasing and supply management organization or from the finance organization are the focal point for supporting supplier cost analysis, building cost models and should-cost models, and validating results.”
“Effective cost management is not a one-off approach that the company takes when it really needs to reduce its costs, but an ongoing expectation that is built into supplier relationships and the organization’s reward and measurement system.”⁶
Woven throughout her study is the notion that buying decisions are migrating from users to purchasing professionals. By “users” we mean the local department heads, superintendents, functional managers, and business unit leaders who have traditionally made or approved important buying decisions. Increasingly, says Ellram, purchasing is being centralized so companies can develop a comprehensive understanding of the purchases they are making and can leverage and properly manage supplier relationships and cost issues.⁷This is unwelcome news to the sellers who view purchasing managers as gatekeepers or blockers and do what they can to avoid them. Paul Seibold, president of Purchasing Support Services, explained that purchasing agents act impartially on behalf of their company and consequently have no wants and needs.* Furthermore, their performance measures are based on their ability to reduce procurement costs and directly impact the bottom line. Users, on the other hand, have wants and needs, and those can preempt all other considerations, including price. Naturally enough, suppliers want to sell directly to users because suppliers can sell to their needs and gain a psychological advantage. They would prefer to avoid purchasing agents, whose decisions are more objective and therefore more rational.⁸
The good news, for suppliers who understand supply chain management and today’s purchasing environment, is that it presents a wealth of opportunity for suppliers willing to do what it takes to become a good supplier partner. “Suppliers and supplier relationship management will grow in importance as sources of cost savings and improvement,” says Ellram. “There is a limit to the amount of year-over-year cost savings attainable from on-line reverse auctions. The long-term opportunities lie in working more closely with suppliers.”⁹ So what are the implications for sellers today? Among them are these:
The psychological advantages sellers have enjoyed by understanding buyers’ motives, giving compelling sales presentations, skillfully handling objections, and using the right closing techniques will still work with consumers, but in B2B selling, the approach must increasingly be fact based and rational. Tony Millikin, vice president of purchasing and supply management for Sealy, reinforced this point: “Buying is not about emotion. It’s about data and doing what’s best for your company. Many buyers and executives allow the emotions of a situation to drive their decision. Decisions need to be based on the data, price, delivery, and quality, not emotion. Salespeople will always try to create an emotional attachment, and I tell my people to watch out for that.”¹⁰ Avoiding purchasing professionals and trying to sell directly to users is a strategy that may occasionally still be effective, but it is not a healthy long-term option and is unlikely to remain an option in the most sophisticated customer organizations.
One might conclude from the above that behavior does not matter. On the contrary, as we will see throughout the rest of this chapter, the correct conclusion is that the right behavior matters, and what’s right has changed since purchasing became more professional. As sellers, you can still gain a psychological advantage, even with purchasing directors, but you have to do it by understanding their world, adopting a supply chain management perspective, and working with them in ways that make working with you easier and more valuable for them.
While relationships remain important, the nature of those relationships is changing. To develop a strong relationship with a purchasing director, you must demonstrate your willingness to be a good supply chain partner and must participate in customers’ efforts to improve quality and reduce costs throughout the supply chain.
Understanding the buying influences in an organization remains important, but more important is understanding and aligning yourself with customers’ efforts to make purchasing a critical component of its business model. This implies that your executives, sales managers, and salespeople must be versed in supply chain management. In the coming years, it won’t be enough to know your own products, know your customers, know your competitors, and have good selling skills; it will be essential to be fluent and skilled in strategic sourcing throughout the supply chain in which you operate. Moreover, the admonitions you hear about “selling to the top” or “selling high” will need to focus less on the CEO, COO, and CFO and more on the CPO (chief purchasing officer).
Charging premium prices is likely to be more difficult than it has been in the past, particularly if you cannot prove higher value. Consequently, brand value in many industries will decline. You will need to improve your bottom line by taking costs out of your business and passing on at least some savings to your customers. In fact, most large buying organizations today expect you to reduce the annual cost of the goods and services you sell to them and enable yourself to do that by finding greater efficiencies in your own operations and reducing your own supplier costs.
Tony Millikin told us that he has suppliers who in ten years have never taken a price increase. “To account for cost of living and inflation, suppliers have to increase their efficiencies and reduce the cost of doing business. They have to become better businesses in their own right and can’t focus on raising prices. Sealy is probably the nation’s largest buyer of foam, and we haven’t paid more than the commodity line for foam since the mid-1990s.”¹¹ Millikin’s experience may appear to contradict the story one purchasing director told about low rates driving suppliers to cut corners to earn a profit, but there is a crucial difference. The lesson learned in purchasing organizations today is that you can’t beat up suppliers to the point where they have to cut corners to stay in business. Instead, you have to work with them collaboratively to find ways to jointly take costs out of the supply chain, and that’s what Sealy has been able to do.