What is Procurement? 🛍️ Podcast Ep. 13
In this episode of Pricing College – we discuss the role of procurement and why any pricing professional in a B2B environment needs to be prepared.
TIME-STAMPED SHOW NOTES:
[00:45] Procurement is to buy products and services to make their own business work better.
[01:20] Large companies will have dedicated specialists for procurement.
[01:50] Management cannot know everything. So, you need expertise in what you are buying.
[02:30] The profession has become more of an expertise field and focuses on needs analysis, identification of suppliers, and measurement of outcomes.
[03:40] Mirror the image of a pricing team with sales trying to increase prices and buyers seeking lower prices.
[04:30] Pricing can learn from procurement such as seeking to increase value from suppliers.
[05:00] We can also learn from the negotiation techniques used.
[05:30] Joanna says that often, procurement does not focus on value enough.
[06:20] Does your company send competent people in to negotiate with procurement?
In today’s episode, we want to cover a topic that will probably strike fear into the hearts of many experienced prices. And that is the dreaded word procurement. So Joanna, what is procurement?
To summarise, procurement is a fairly new function. The main purpose is to buy products and services for their own business to operate or function. Now, these could be materials to produce their own products and services for their customers. So, it is a very important function.
That’s right. I think from a pricing perspective or a selling perspective, you come into contact with procurement professionals in a B2B environment. When you’re selling to a business, obviously, private citizens make their own purchase decisions.
But procurement in a company will have at least a company of a certain size. They will have a dedicated professional trained in this area of expertise with the objective of getting better products and services at better prices.
A little bit of history about procurement is it started off as people say in World War I. When countries had to buy military goods and services, they needed to ship and get things to where they needed to go.
That makes a lot of sense when you look at it from that perspective. If you’re running a company, the management can’t know everything about what they’re purchasing.
So, you do need expertise in the same way you need expertise in what you’re selling. You need expertise in what you’re buying and it’s to know the product and to know the service to compare offers. You need to compare the different values of these products and services deliver.
I’ll just give a footnote. We’ll give them the positive side of procurement here. But there’s also the negative side, from a selling perspective. But that makes perfect sense.
Over those years since World War I and World War II when you’re buying huge amounts of armaments, etc. – making the wrong decision could threaten your company’s survival. Now, that profession has become more and more professionalised, an expertise.
I suppose nowadays there are several steps into the procurement process and cycle. But just to summarise, I suppose their expertise would need analysis for their own business. They need to be determining what the business needs at a certain point in time. Then, identify the right suppliers to get those goods and services for the business, and lastly, monitoring.
Do these goods that we’ve just bought make a difference? Can we cut costs? or Do we get the value that the supplier said we would? From then, the cycle continues and they would renegotiate the terms with suppliers. Now, this is where the tricky thing comes in terms of pricing. Difficult discussions around price occur from this point when procurement gets more educated on the goods that they’re buying.
I’ll be honest. I have previously worked in a role where I was helping selling teams in a B2B environment sell to procurement professionals. One thing I’d say is, it’s almost a mirror image of each other. You’re both trying to maximise the value provided to the customer. I think the procurement team and the seller team are trying to do that. The polar opposite is the seller is trying to increase the price and the purchaser is trying to decrease the price for that increased value.
This is often a perception that procurement has about the sellers that they’re, in a way, inflating the price. And this is often why they come into negotiations with a very cost-focused mindset. They talk about unit pricing, but it’s not necessarily the case that the sellers are always trying to inflate their prices. Often, they’re underselling the value and I think procurement realises this.
I think they do often as well. And I think in that profession, there can be quite a bit of frustration that they want to deliver more value to their own company, to their employer, and to add value. That’s what most good employees want to do.
But I think from a pricing perspective and in our own profession, we can learn a lot from the procurement profession. What they do well and recognising what offer they bring to their company can be increased in value by understanding the value of an offer.
And there’s also another aspect that we need to focus on in future episodes. It is the negotiation expertise, the reducing of prices, and the framing of conversations. They’re two separate skill sets, but both are vital of interest to our listeners.
I disagree with Aidan and I don’t think that either sellers or procurements are very good at understanding value. I think sellers are very volume-focused. And I think procurement can be very cost-focused. Their main objectives for their company are to lower costs. That in itself eliminates a lot of value discussion. There should be an opportunity for both sellers and procurement to think very closely about what value means.
Joanna, I take your point. And I am always open to criticism. I take your point openly. Now, I think in any profession, for selling, pricing, and procurement – there are good and bad practices. I suppose I was maybe referring to a perfect world environment where what people do want to deliver additional value to the company that employs them and any other stakeholders in the business.
I suppose the last point I’d like to make on this podcast is as a profession, you know, if you’re in a B2B environment and you’re going in to sell to a major customer, you must ask who are you sending in to sell to them? Are you sending in somebody able, trained, competent, and confident with the skill set required to go up against a skilled professional procurement person? I don’t know.
I’d like you to think about this as well as like, what is value? Is it just in terms of cost reductions? Sure, that is an important element in procurement discussions.
But also think about increasing revenue:
1. How does that product that you’re about to buy increase revenue for your business?
2. How does that product that you’re about to buy decrease the cost for your business?
3. How does that product that you’re about to buy decrease the risk of the purchase of that transaction over a longer period?
4. Do you want to establish a long-term partnership that is going to generate a sustainable and safe option for you, your ecosystem, your business, and your end consumer?
I’m sure you’re completely over. So it’s just broadening that discussion and thinking beyond costs and cost reductions.
I think so. I think most sellers, surely when they go into that negotiation, they’re focusing on understanding the contract. Are they focused on and often a big criticism of sellers, or that they’re focused on talking about themselves. Are they trying to align what they’re selling with what will increase value to the customer?
The other thing is, are they competent, trained, and knowledgeable in that area? Most big companies know that procurement people do a lot of courses. They’re members of institutes and they’re dedicated professionals. In a large company, if you want to recruit someone from procurement, you get a procurement specialist. That’s not always the case in the pricing environment.
I think education is required on both sides. As I mentioned before, I think the value discussion on value-based pricing and what that means is something that both sides of the equation could be better at. Then we can move the discussion away from line item pricing into real value total Economic Value discussions. And we’ll go on to describe what that means.
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