Aggressive Supply-Chain Management and the Complex Sale

by Charles R. Smith and Lenoard L. Given

Sales persons handling big-ticket, technology-based products are challenged as never before. Always fast-paced, the current environment has moved into overdrive due to the rapid onset of globalization (Asia-focused), sharply increased competition, growing technology complexity (layers of approval through OEMs to end users) and cost, cost, cost.

Increasing demands are influenced by global economics and an often uncertain legal environment. The most immediate challenge, and the focus of this article, is the growing practice of aggressive supply chain management, previously referred to as PICOS (Program for the Implementation and Cost Optimization of Suppliers) and some strategies to combat it. Knute Rockne, the legendary Notre Dame football coach always said "stick with the fundamentals" when the going gets tough. That advice holds true in selling today, especially in high value, high priced, high-tech products.

Product or service VALUE (actual or perceived) has always been the fundamental of the successful sale. And despite aggressive procurement strategies, it is even more so today as account sales teams increasingly assume a significant chunk of the responsibility for the success of a large portion of their employers' AND their customers' business success. When real understanding of how a customer's need is met by a unique product solution and is combined with experienced, creative and courageous negotiating skills, the table is set for a successful VALUE transaction. Getting the customer to fully comprehend the supplier's Value Proposition (VP) is the foundation for dealing with the PICOS-driven procurement group. But it ain't easy!

A Brief PICOS History

Current supply chain management programs, evolved from PICOS, manifest themselves in customer pressure to squeeze significant amounts of profit margin out of supplier product offerings. This movement, in various forms, has been around for decades, but it was codified in 1988 by Jose Ignacio Lopez de Arriotua, then head of procurement at General Motors, who defected to Volkswagen in 1992 amidst charges he stole GM secrets. The US government indicted him for industrial espionage, and he is still fighting extradition from Spain.

The Wall Street Journal, 2/1/08— "Like other auto suppliers who have filed for Chapter 11, Plastech was caught between rising costs and falling demand for the products in which its parts are used. The cost of plastic, dependent on oil-based resin, increases along with oil prices. Detroit's auto markets typically have resisted paying more for a part and have instead insisted on lower prices over the life of a a supply contract."

Supply Chain Digest Editorial, 3/22/07— "After years of having ever-lower prices dictated to them by automotive OEMs, auto parts suppliers are saying they have had enough . . . Many operating losses, and no ability to raise prices based on increased production costs."

Manufacturing Net, 1/29/08— "The industry (automotive) has gone through a wave of bankruptcies over the last few years amid pressure from big car makers to sell parts at lower prices."

CBS News.com— "Delphi Corp., the nation's leading parts supplier filed for Chapter 11 bankruptcy protection in October. Visteon Corp., the nation's second biggest auto parts supplier is closing three plants and putting another six up for sale under its restructuring plan. Suppliers say the restructuring moves also are being forced by automaker's increasing pressure to sell them parts at lower prices."

While at GM, Lopez designed PICOS which was conceived to defeat weak supplier negotiators and their managements. The program was heralded as holding down supplier "costs" (supplier prices) in order to hold down GM's cost. Other auto companies adopted the practice. The problem is that this radical suppression of supplier prices had unintended consequences. It successfully and severely eroded supplier margins thereby reducing supplier product innovation and upgrades, quality support -- and predictably, the number of suppliers. The practice has evolved and spread to the semiconductor and many other industries during the past decade.

Simply put, the first objective of such programs is to turn every supplier product—including $20+ million/unit high-technology equipment—into a commodity so that the only thing negotiable is price. The second objective is to ensure that the customer, not the supplier, determines what that price will be. Intuitively and performance-wise, neither objective is sustainable long term.

The procurement strategies employed vary from customer to customer. Some examples of the elements of such programs in action are:

  • gathering and using extensive personal data about members of supplier account teams;
  • attempted access (demands) to supplier costs early in the sales cycle;
  • customer-driven continuous supplier cost-reduction "programs" beginning with customer/supplier committees where all of supplier data is supposed to be "on the table," including proprietary supplier information;
  • and many other equally insidious practices.

In combination, these customer strategies and related tactics often demoralize the supplier account team, put them on the defensive, and open them up for major exploitation . . . if they're not prepared!

The Complex Sale

Such sales are generally contextual rather than transactional; that is, they are conducted in an environment that considers the impact on the customer's business over some extended period of time.

The "Complex Sale"

  • Characteristics
    • Long sales cycles
    • Multiple
      • Technologies
      • Performance proofs (process, apps, facilities, etc.)
      • DMs/DIs and committees
      • Approvals and management events
  • Big ticket products
  • Often/usually within a current business relationship
  • Account strategies required
  • Negotiation is constant process
  • Procurement often ancillary to DMs
Working within a successful supplier-customer relationship generally reduces the PICOS-driven impact. Typically the product or service is very expensive ("big ticket"), often in the range of multiple millions of dollars per unit or batch. As such, these products or services generally consume significant selling time during which extensive qualification processes and performance proofs are required under near-actual conditions, and often at appreciable cost to the supplier. Multiple levels of customer management approval are required as is long-term, after-sale support. This generally is a significant cost, even for the most reliable products, and often includes co-teams developing new applications or processes or next-generation systems or materials.

Such a sales process requires a highly refined, experience- and training-enhanced skill set, as well as a great deal of information, both objective and subjective, which is time- and cost-consuming to obtain. It is in this area that the PICOS-practicing procurement group sets out to limit access by sales professionals, though it is frequently to the customer's own disadvantage. For example:

  • there can be less than required value realization.
  • there is often failure to achieve mutually profitable synergism with a supplier resulting in sub-optimal business impact for both.

PICOS-using customers attempt to limit information to the supplier account team (perceived leverage reduction) along with access to customer personnel most knowledgeable in the technology at hand and those most able to explain needs and understand offered values. Arbitrary time constraints, commoditizing of obviously complex product offerings and minimizing opportunities for strong sales team performance (to the customer's own disadvantage) are included in the PICOS quiver of tactical arrows. Price to the PICOS practitioners is the only variable, and they try to focus on that alone. In this arena, sales professionals must become "special ops" information seekers. An account team simply cannot allow itself to be kept in the dark about the performance of its product offerings.

The Complex Sale is the friend of the sales team in that the sheer intricacy of the sales process will require inside-customer access by members of the team in order to obtain process, performance and support information to meet the need of the customer and to fully account for the costs of same. In fact, a proper proposal cannot be prepared without the full knowledge of the performance and support required. The trained sales professional attains or facilitates acquisition of the information required to match his product's benefits with customer needs in the context of competitive strengths and weaknesses. In the face of customer resistance to such access, the many elements of the complex sale – proofs, approvals, support – absolutely mandate it. That access to both Decision Makers (DM) and Decision Influencers (DI) helps insure the validity of the value proposition and provides a basis for successful "give-and-take" negotiation rather than just "give" negotiation.

Suppliers Should Not Become Victims

Decades of PICOS-type programs in the automotive industry have finally made high-tech suppliers realize that they cannot live with such conditions, and pushback is happening down the high-tech supply chain.

Characteristics of the SEM industry

  • Small, highly influential
  • Relatively few customers
  • Fast moving technology
  • Critical elements include
    • Process
    • Applications
    • Software
    • R&D
    • IP
  • Highly competitive
  • After-sale support is critical
  • Risk-averse
A couple of years ago Delphi Corporation, a large parts supplier to GM, decided to discontinue supplying its largest customer because it was not profitable business. A company must make acceptable margins, or change its business model so that it can. Apparently Delphi did just that! Semiconductor and other industry suppliers which find themselves in the victim's chair must respond promptly and proactively to avoid the fate of some automotive industry suppliers.

The very nature of the SEM (Semiconductor Equipment and Materials) and similar industries is an ally of the sales team during a tough negotiation. Suppliers of very high-tech, complex and expensive products know that the technology changes rapidly as do customer processes and applications. Customers absolutely require after-sale support despite some of the procurement statements on the negotiation road to "lower-the-price" demands. Recognizing and understanding the complete operations environment of our product's use vis-à-vis competition gives us opportunities to obtain and sustain our required margins.

There are answers and inoculations in the shape of policies and tools that can level the playing field. Five tools are needed to provide PICOS-defense armor and an offensive sword. They are:

  1. Solid, customer-specific Value Propositions that differentiate a supplier from its competitors in a meaningful way and matches customer needs to product benefits at all levels. (See the article on this subject by Smith The Value Proposition: Basis for Value Selling) Continuing analysis of likely competitors includes current intelligence, significant knowledge of their dynamic strengths and weaknesses, and deductive scenarios of possible competitive actions. Insufficient knowledge of competitor VPs and their strengths and weaknesses is the basis for failure.
  2. Comprehensive and continuous account planning and control at the sales level including defining objectives and strategies for the account Key Account Management Process, and development and management of the account relationship. (See the articles on this subject by Smith, Part 1, Part 2 and Part 3)
  3. Enforced supplier policies that disarm PICOS strategies. Examples include absolute cost confidentiality, price change approval chain, margin requirements, management involvement levels and timing of same, "walk-away" strategy, resistance to demands, use of "No", etc. Education and training of all account team personnel (up to and including the supplier CEO) in this defensive/offensive program is a key condition of success. Honed negotiation skills and discipline of all members of the account team are vital.
  4. A developed "Play Book" of actions for neutralizing every possible customer PICOS-type strategy and tactic. Leveraging the customer relationship (if one is in place) at all levels, and timely involvement of management at all levels are key tools and must be controlled by the Account Manager.
  5. A trained and well-led account team which develops and executes a realistic and smart account plan based on the VP can skillfully negotiate genuine win-wins and accomplish its objective.

The "walk-away" plan is likely to require top-level executive participation and should be carefully thought-out, developed and controlled. A sales team leader must know how and when to employ patience. Key to the Walk-away tactic is to understand the difference between your and your competitor's VP – and insuring that your customer understands it.

At the root of all of this is the determination to achieve proper compensation for value delivered. A well known CEO of a prominent equipment company was the linchpin of his company's walk-away strategy vis-à-vis a large Asian customer. Three trips to Asia (customer requested) by this CEO were required before the customer accepted that he knew the differentiated value of his product in the context of competitive offerings and would not permit its sale at a lesser figure. In discussions with companies in the SEM industry, one supply chain management exec bottom-lined it: "We use PICOS tactics to insure we receive the best price possible – but we BUY value". Sales professionals cannot allow their products, developed and perfected using carefully assembled and highly skilled technical talent and proprietary information, to be purchased without insuring the required return on that investment.

Conclusion

These are trainable skills; sales teams should not be left on their own to develop them in this fast moving arena. Professional coaching and sales interventions are available from The Quest Team, in public seminars/workshops and in-house, for developing sales, negotiating and key account-team management skills for use in today's Supply Chain Management environment.

Intensive, Dynamic One-Day Course:
Combatting Aggressive Supply-Chain Management

This dynamic, one-day workshop is designed to provide companies with the knowledge and tools necessary for success in resisting commoditization of their products, and maintaining profit margins.

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