The following article was prepared by Mike Taylor, C.P.M., for distribution to ISM affiliate newsletters. January 2007
A few years ago I read an article about a purchasing agent at Costco. It highlighted an important cost-related negotiation strategy that I had seen every time I walked through Costco, but failed to recognize.
As well as many other products, Costco sells really big, 8 lb boxes of breakfast cereal. In addition to being enough cereal to last a few weeks, the unit price [price per corn flake] to customers is significantly lower than the small boxes in the local grocery store. The big boxes are on the shelf not just because Costco has extra room – but because the Costco purchasing agent negotiated for big boxes, lowering the overall cost [then shared the savings with customers].
Consider packaging for example. Each box of breakfast cereal includes a printed box. The colorful boxes aren’t cheap and the cost of each box gets added to the selling price of the product. By obtaining cereal in 8-lb boxes, the buyer gets more product and many fewer boxes. No only are there fewer boxes, there is less handling of the product in the factory and fewer secret decoder rings [I wish I still had my decoder ring]. In fact, the cost savings go much further.
Consider the other costs which are reduced by the change in packaging. The producer only folds, glues and fills one big box instead of many little boxes. Costco ends up storing a large quantity of cereal on the shelf in those big boxes which moves the inventory out of the producer‘s warehouse. The product is shipped once a month on a large pallet instead of once a week in cartons. The shelf is stocked only once a month, not once a week. Costco only has to scan and sell the product to customers once a month instead of once a week. Costco only processes one purchase order, invoice and payment instead of many. You get the idea.
In this negotiating strategy the buyer and seller have identified and either eliminated or reduced significant cost elements. Then they split the cost savings so that the producer may even make more profit on the product and the buyer gets a much lower unit-priced product to sell to his customers. Instead of costing 10 cents an ounce, the corn flakes now might only cost 7 cents - so the producer, Costco and the consumer each save a penny an ounce [and in an 8-lb box those pennies add up].
By negotiating a change to something as simple as the packaging size, Costco and the producer have effectively reduced many associated costs of handling, storage and freight. And so it is the same in every item we purchase. There are many little costs which get added in to the final selling price. If we can negotiate a change to reduce one or many of those costs, the overall unit price can be significantly reduced.
Next time you negotiate a long term purchase, instead of arguing about a few cents discount off the asking price, negotiate a lower the overall cost.
How? An easy way to explore this negotiation strategy is by looking at the products you purchase on a regular basis and thinking about packaging.
Experienced buyers understand that the overall cost of a product or service is where the big money savings hide. Happy hunting.
Read more articles in the Purchasing Toolbox at http://www.mltweb.com/prof/tools.htm and in the BuyTrain news article archive at http://www.mltweb.com/tools/buytrain/index.htm Return to MLTweb
|MLTWEB is owned by Michael L. Taylor, C.P.M. Mail:|
|Materials prepared by Mike may be shared for supply chain education, provided that this source is credited and no fee is charged. The rights for any other use are withheld.|
|Copyright; Michael L. Taylor, C.P.M.|