Yes or No: Soliciting Pricing from Alternative Suppliers is the Best Way to Benchmark Your Incumbent?
This week’s Wiki-Wednesday topic is benchmarking, and we are covering it at the suggestion of BMP member Victor Halchin. A discussion has been going on in the Strategic Sourcing & Procurement group on LinkedIn in response to the following question: "If you are "locked " into a supplier , would you be prepared to try another for benchmarking even if it was just to "bash " down the supplier on price - would you change suppliers if you were offered the same service at reduced costs on your purchasing requirements?”
I read through the responses and found that the answer was most frequently, no. There were only two yes votes, and one came with the qualification that you need to check your contract to make sure that there are no exclusivity or volume requirements.
Of the no votes, the reasons varied, but came back to a few central themes:
- The question of ethics associated with soliciting a bid you know you are not going to accept
- If you think there is a better source based on price, etc., just take the time to fully re-bid the category
- Be careful that your decisions do not make suppliers hesitant to place bids with your company in the future, as they will know if you have been wasting their time
There were also a few alternative suggestions put forward to help benchmark pricing in a way that is less imposing on suppliers:
- Look at other suppliers you already do business with to see if they are able to provide benchmarking data on the product or service in question
- Develop a solid cost model for the product or service, which you should be able to do without involving additional suppliers
Victor offered his own doubts “on the relevance of the data provided by a supplier who knows that it's not getting anything out of it. Based on my experience, I can tell that there are many suppliers that would act differently if quoting for "statistics" or actually competing for a deal. The difference would be significant. And then, how much can I rely on a benchmarking results? The reply I got couldn't wash this question away. I still have my doubts on how effective the benchmarking can be when you're facing renegotiations with your current supplier. What margin should be considered? Is there a better way than benchmarking?”
We also checked in with “The Sales Guy” on this topic, and I can tell from his reaction that he has not only faced this situation before, but that he feels strongly about it:
A competent sales person will suspect their quote is nothing more than "column fodder" if a potential customer calls out of the blue and asks for a quote. He/she should only agree to provide a quote after a more in-depth discussion of the customer's needs where the sales person can get a sense of the situation. If it is evident this is just to scare the incumbent the sales person should either offer a list price quotation or politely decline the request for quote.
If you are interested in reading more on the topic, John Tracy, author of ‘Knowledge to Negotiate’, one of the independent blogs listed on our site, recently posted on this topic and you can read it by clicking here, but I’ll also give you the opening to his post:
There are a number of ways that you can be locked into a supplier. They may be the only source for the item. They may have been designed into a product or service where it would be difficult or costly to change them. You may have voluntarily locked yourself in by giving the supplier a firm purchase commitment or a commitment to provide them with all or a percentage of your requirements. Since competition is the best weapon to managing pricing you want to avoid being locked in but there will always be times when you can’t avoid it. How do you manage those situations?
Now we’d like to throw this topic out to the BMP community: where do you stand on the issue and when you felt ‘locked’ into a contract with a supplier, how did you handle it?
Kelly, what is best will always depend upon the circumstances. Soliciting competitive quotes is one way to benchmark and that works best when the business may be easily moved. There are other ways to benchmark using a variety of cost models that are available and those may be better suited for when you are locked in. The key is if you will get locked into a supplier you need to establish the methodology that will be used to allow for benchmarking to ensure the supplier remains competitive.