Pricing Past the Pandemic to Rebalance Buyer-Supplier Relationships

By Navdeep Sodhi

Supply chain disruptions and erratic demand situations caused by the pandemic are transforming buyer-supplier relationships. Buyers are rushing to stock high-demand items and raw materials, seeking local suppliers despite higher costs, but delaying purchase and production of “non-essential” goods. While many companies have informed suppliers to expect payment delays others are helping smaller suppliers with accelerated payments. Traditionally, buyers are empowered to do whatever it takes not only to reduce expenditure but also to reduce supply risk. Sellers, always under pressure to close deals, lack similar organizational support and are therefore prone to yielding on price and terms. With supply risk at stake, how should the suppliers match the buyers’ sophistication for mutual benefit?

Supplier-side front line teams, especially Pricing and Sales, should learn from Supply Chain Management to become equally strategic and organized. Supplier side teams can improve their negotiating positions by offering higher-value products and services without sacrificing price or terms. Peter Kraljic’s well-regarded product portfolio approach for Supply Chain Management classified purchased goods in four categories (Figure 1) based on supply risk and expenditure. Below, I will discuss how suppliers can improve their negotiating positions in each product category:

I. Routine Products (Low Supply Risk and Low Spend)

Routine goods, such as low-grade metal-cutting tools or office supplies are especially vulnerable to price pressure, especially during a downturn such as the one currently in clear sight. These products represent a relatively small portion of the buyer’s overall spend and are considered low supply risk because several local suppliers compete aggressively on slim pickings. However, buyers want to reduce transaction costs and administrative complexity. Purchase decisions are made at lower levels of the purchasing organization, typically, by buyers or material managers. 

While it may seem counter-intuitive, suppliers should certainly refrain from price gouging during temporary shortages or think of deep discounts as the only remedy for slow demand. Instead, they should focus resources on improving their inventory turns and cash flows by making products or services easily searchable and by reducing transaction processing costs for buyers. Suppliers should partner with other sellers of complementary SKUs to form aggregator or drop-ship consortiums offering online ordering and convenient monthly billing. Forming alliances with other suppliers may be easy but data management to ensure real-time updates of price and inventory are vitally important.

II. Leverage Products (Low Supply Risk and High Spend)

Buyers exploit purchasing power for goods such as computer hardware, hospital supplies, business process outsourcing (BPO), EDP, payroll processing, and phone services that they purchase in high volumes, and therefore expect both reduced costs and high service levels. They also seek a reduction in inventory management, handling, and storage costs. Purchase decisions are typically in the hands of mid-senior level purchasers.

How can suppliers add value without losing out on price? Suppliers should help customers with inventory optimization efforts with appropriate economic order quantities and payment terms. They should also monitor compliance on contractual obligations as well as customer-side commitments related to purchasing volume and product mix during regular reviews with customer management. Where applicable, concessions should be in the form of bundling: fast- with slow-moving products, newer technology with legacy products, products with value-adding services, or standard with custom products. 

III. Bottle-neck Products (High Supply Risk and Low Spend)

Bottleneck goods are highly specialized products or services, such as electrical parts, catalyst materials, and outsourced services. Product specifications are highly detailed which limits the supply base and, therefore, only a few trusted suppliers operate in the marketplace. Buyers continually seek alternative sources of supply and/or substitute goods in local markets to reduce overall procurement cost as well as supply risks. Customers maintain safety stocks to mitigate possible supply risks and have long-term agreements, preferably, with more than one supplier. Procurement is typically directed by technical experts and, therefore, coordinated centrally.

Suppliers should assure customers of the timely availability of products and services possibly before the markets open. As needed, they can levy temporary surcharges or permanent price increases in anticipation of raw material shortages while assuring buyers that supply will remain uninterrupted. They should carefully watch for any changes in demand patterns and prepare to offer versions of their products befitting the price-value positions of a wider customer base. Supplier-side front-line teams should be adept at technical selling to emphasize customer surplus rather than rely on disclosing internal costs to justify price points.

IV. Strategic Products (High Supply Risk and High Spend)

Strategic goods and services, such as scarce metals and high-value medical components, are critical to organizations. Often available as innovative solutions or as complex "packages" of goods and associated services, delivering these products requires high-level expertise from a select few global suppliers. This category of products represents relatively few transactions. Procurement teams remain interested in a reliable long-term availability of supply. Contract negotiations are often lengthy and detailed involving senior leaders of the buying and selling organizations. Purchase decisions are considered strategic and therefore managed centrally.

Suppliers in this quadrant should underscore assurances to customers of timely supply, rather than, field requests for reducing prices or relaxing terms. They should appraise regularly various buying centers in the customer organization about innovation and service level improvements. Prices and terms offered in multi-year agreements should factor in the product lifecycle, life-time value of the customer as well as the possibility of buyer’s “make or buy” considerations. 

Conclusion

As restrictions ease and the world reopens for business, suppliers should aim to rebalance buyer relationships by offering mutually beneficial terms. And they need not be content with a given customer-product classification. Suppliers should consider adding or subtracting features to existing products to develop higher-value offerings to advance into a quadrant that is a better strategic fit, say, from Routine to Leverage or from Leverage and Bottleneck to Strategic. Suppliers will also find unintended benefits, such as a decrease in costs of serving existing customers or much greater ease in acquiring new ones.