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Pricing & Value

November 16, 2011
To what extent are current Procurement practices self-defeating over time? And to what extent are suppliers missing opportunities to define new sources of differentiation?
I have posed these important questions in previous blogs and this week’s Economist highlights the dangers of today’s constrained debates in an article that focuses on airline pricing. It explores the effect of airline consolidation and global alliances, pointing out that meaningful price competition on many key routes has almost disappeared, apparently with the support (or in part due to the actions of) regulatory authorities.
A study of the airline industry shows a brief period of open competition (following deregulation) when fares dropped dramatically and competition largely revolved around price. It was a classic case of ‘commoditization’ and over the years has caused extensive ‘unbundling’ of value so that fare comparisons can now be made on the lowest common denominator (a no-frills seat). A bi-product of this has been the need for airlines to continually cut costs, in part by forming consortia and alliances that also have the effect of reducing competition.
A similar trend can be observed in other industries, for example aerospace and defense or oil and gas, where the constant drive for lower prices, yet a parallel demand for ‘integrated solutions’, has caused a reduction in overall competition and  a curious confusion in the relationships between remaining suppliers. In other words, Procurement today often faces a market where the selection of viable suppliers is steadily shrinking and where those suppliers are no longer truly ‘competitors’ since they also often operate as partners, or under teaming agreements, as sub or prime-contractors to each other etc. In these circumstances, the motivation to engage in real competition is dramatically reduced.
It is clear that these conditions undermine Procurement’s ability to continue delivering ‘savings’ in their current form. To do so will require compromises on quality, safety or other indispensable aspects of value. So what comes next?
It seems to me that Procurement must make an urgent switch to value measurements. And indeed, in order to compete more effectively, leading suppliers must start to think far less about how they cut their own costs and far more about how they can cu their customers’ costs. There are many examples of places to start – and I have highlighted several in recent weeks. For example, what is the cost of failed projects, or inaccurate billing, or inefficient ordering and fulfillment processes? Turning back to airlines for a moment, what I would give to find an airline that made my overall travel process simple! Yet even as a ‘high status frequent flier’, I find many obstacles to simple booking or management of my overall travel experience. And it is clear that many suppliers do not really take time to assess or understand their customers, or the cost impact of their interactions.
Perhaps it is time to compete on contract-related value propositions, such as the company that cuts cycle times by 30%, or the company that achieves 98% correct billing, or the company that has 50% less disputes with its customers  ….. all of these ‘value propositions’ indicate an organization that is easier to do business with, and which therefore can spend time collaborating with its customers, rather than arguing or correcting past mistakes.
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