The worst thing to do is base everything on price.—Lance Kaye, Buyer/Planner, Waste Management, Inc. To better understand the B2B selling environment today and the impact of professional purchasing and supply chain management, we interviewed nearly fifty senior executives, including CEOs, business unit presidents, purchasing directors, and consultants in purchasing and supply management, all of whom had central roles in buying goods and services for major corporations in the United States. They represented diverse industries: electronics, aerospace, defense, energy, consumer products, engineering and construction, pharmaceuticals, foods and beverages, manufacturing, and waste management. Among the first questions we asked them were: “What do you look for in suppliers today?” “What characteristics are most important to you?” and “How has what you look for in suppliers changed in the past ten years?” Their responses were illuminating.
As we indicated above, one of the overriding themes emerging from our study is the changing importance of price in supplier selection criteria. According to Art Schick of Pepsico, “Years ago, it was much more of a bid-out business. We’d take the lowest-cost supplier and get on with life. Today, the top-quality suppliers are truly looking at customers as partners. They allow us to participate in the creation of the product, what we want it to look like, smell like, and so on. In B2B, the smarter suppliers are beginning to treat their top customers this way. They are really trying to understand what their customer’s business is all about and be proactive in working with us.”¹² We heard a similar message from Greg Schwartz, who is director, Smart Sourcing and senior vice president, OmniBrands, for Safeway’s supply operations: “More and more today, if you want to be a world-class procurement group, you need better, stronger supplier partnerships—and that means long-term partnerships and commitments from suppliers to provide you resources, bring you ideas first, and find ways to take costs out of the system. You can no longer gain a huge competitive advantage by negotiating a price. That’s what you did five years ago. Today, you focus on taking costs out of the system.”¹³
The worst thing to do is base everything on price.—Lance Kaye, Buyer/Planner, Waste Management, Inc.
Nearly all of the senior executives in our purchasing study agreed that today lowest price is not the primary criterion for selecting suppliers—more important is lowest total cost or total cost of ownership. “Lowest price is not the right measurement,” said Bonnie Keith, now a college teacher and president of Performance Purchasing Group but formerly a vice president of supply management for Pepsico, General Electric, and ABB. “You want to find lowest total cost. You want to work with suppliers who understand the costs of your business as well as their own cost drivers, suppliers who are able to tell you where you have cost-reduction opportunities in your own business.”¹⁴ As important to many purchasing executives was a supplier’s willingness to be open and transparent about costs. One purchasing director told us: “We primarily look for honesty. We want people who share their assumptions and rates. An open-book approach.”¹⁵
“Suppliers should be very open with you about what constitutes their pricing,” Paul Seibold said. “If they are up front with you about how they work out their pricing, this is beneficial. If they are tight on the pricing information, then you become suspicious and trust drops. A lot of it comes down to behaviors: honesty, openness. These are the key elements. Buyers also want to be respected. They don’t want to be sold to. They want to work with salespeople who respect their knowledge.”¹⁶ Joan Selleck, associate director of materials for Nikon Precision, said that she is disappointed by suppliers “if they are not able or willing to tell us why we are spending more money than we should. If they say, ‘The market is bad and we’re going to have to increase your prices by X,’ they should explain why. If they are not willing to share the information with us, or work with us, or help us understand what’s driving the cost, then that’s disappointing, and we find out what’s happening by talking to their competitors.”¹⁷
As we said earlier, every business today needs to drive down costs, so if you are going to satisfy your customers’ current needs, you must adopt a lowest-total-cost perspective and partner with them to drive costs down throughout the supply chain. The more proactive you are about cost reduction, the more attractive you will be to existing and potential customers. Beyond these price and total-cost considerations, we learned in our study of buyers that they look for three aggregate characteristics as they search for supplier partners: total needs satisfaction, added value through partner-like relationships, and differentiating behavior.