BY CLIFFORD F. LYNCH
fastlane
show me the money
FOR SEVERAL YEARS NOW, A SMALL BUT SIGNIFicant organizational shift has been taking place inside
some U.S. corporations. Logistics and procurement
responsibilities have been combined into one department. Often, the managerial responsibilities were
assumed by existing logistics executives, and the purchases of logistics services were combined with the
procurement of supplies and raw materials.
In many cases, this has worked out well. Although
contracting for logistics services is very different from
contracting for computers, stationery, and ballpoint
pens, the more sophisticated logistics managers have
recognized this and seen to it that each type of transaction was handled in the appropriate manner.
But in other cases, it has become clear that logistics
services are now being purchased by people with only
a limited understanding of the services they’re contracting for. They’re treating these services as they
treat everything else: as commodities. Experience has
taught us this does not work out terribly well in the
supply chain industry.
Nevertheless, lately we’ve seen more companies
shifting the responsibility for negotiating supply
chain contracts to procurement departments rather
than the users of the services. More and more, the
“price above all else” approach is being applied to
supply chain services—an industry that has always
been built on relationships, not price. And with the
deteriorating economy, that’s unlikely to change anytime soon.
This change in mindset will make it much tougher
for logistics service providers (LSPs) to justify their
services—especially their value-added services. It can
be difficult enough to explain the value-added concept to fellow logisticians, never mind people outside
the profession. Soft benefits will be particularly hard
to sell to someone whose likely response will be something straight out of the movie “Jerry Maguire”:
“Show me the money.”
This is fast becoming the new challenge of the logistics service provider—how to price and explain the
value of the services being contracted for. I don’t pretend to have all the answers, but I have a few tips for
the LSP that, hopefully, might make the task a little
less difficult:
1. Price on your own costs. Don’t try to set prices
based on what the competition charges or what it will
take to close the deal. If there is no profit, simply getting the business will be of little value.
2. Make your first price your best price. Once you
have determined your projected costs and the margin
with which you are comfortable, set a price and stick
with it. Don’t leave room to come down. You may not
get the opportunity.
3. Learn the ins and outs of RFPs. Most procurement
managers work with a Request for Proposal. When
putting your proposal
together, answer the questions clearly, concisely, and
honestly. Keep in mind that
the RFP is not intended as a
vehicle for your latest marketing puff piece.
4. Know the value of the
services you provide. As
mentioned above, value-added services will sometimes be difficult to explain.
Make sure you are able to
articulate the soft benefits
and their value to the client. What are you able to provide that your competition doesn’t, and what will it be
worth to the prospective client?
5. Be prepared to live or die by your reputation in the
marketplace. Procurement managers are very conscientious about checking references—references of
their own choosing, not necessarily those you provide. Be aware that they’ll likely check with clients
that have terminated their relationships with you.
6. Develop a good contract. Procurement managers
are very focused on contracts. Be careful about what
you agree to; you will likely be held to it.
Notwithstanding all this, remember that procurement managers are not the enemy. They are simply
more focused on price; and in this economy, we’d better get used to it.
Clifford F. Lynch is executive vice president of CTSI, a supply chain solutions firm, and author
of Logistics Outsourcing – A Management Guide. He can be reached at cliffl@ctsi-global.com.
