Show me the money

More and more, the "price above all else" approach is being applied to the purchase of logistics and supply chain services.

By Clifford F. Lynch

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, valueadded 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 principal of C.F. Lynch & Associates, a provider of logistics management advisory services, and author of Logistics Outsourcing – A Management Guide and co-author of The Role of Transportation in the Supply Chain. He can be reached at cliff@cflynch.com.
More articles by Clifford F. Lynch

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