Price isn't everything
Published: 29 Aug 2019
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Author: Tim Cummins
In many cases, organizations continue to make purchasing decisions based on price. It has been baked into their DNA, with the mantra of 'commoditization' backed up by software that drives price-based competitive auctions and measurement systems that continue to monitor 'negotiated savings'. In the public sector, this is further reinforced by public procurement rules that blithely ignore concepts of value and have failed to adapt to the nature of today's supply requirements.
Many claim otherwise
Suggestions that procurement decisions remain focused on price are often met with howls of protest and claims that such an approach is a thing of the past. In some cases, this is true – there are Supply Management groups which have moved on and many who advocate the need for change. Yet supplier experience continues to attest that those who have actually changed are very much the exception.
Why is this a problem?
Simply put, purchasing decisions need context and it is rarely true that price is everything. The commoditization craze that came with reverse auctions and spend management discouraged the use of economic judgment – essentially, it resulted in economic illiteracy. A great example of this was cited in a recent edition of Talking Logistics, which examined the influence of networked technologies on the logistics industry. It made the point that, during the dot com era, many believed that they could convert a traditional relationship-based industry into a spot market commodity. They were wrong. The article highlights how similar efforts are now appearing as a result of digitization. In both cases, these are driven by the hunger for lower prices, but illustrate two fundamental misjudgments:
1) creating a spot market does not necessarily alter the availability of supply and is more likely to reduce competition over time than to increase it;
2) low prices frequently do not translate to low cost. For example, reliability and quality of collection, shipping and delivery frequently has far greater importance than saving a few dollars in processing costs. A failed delivery may well catch the CEO's attention; a nominal 'saving' certainly will not.
So what's the answer?
Procurement decisions need context. They must examine impacts that stretch beyond the acquisition and explore downstream effects. I recall a great story from the public sector, where a buyer thought it would be a marvellous idea to save money in the criminal justice system by supplying gaols with fruit that had failed the supermarket tests of homogeneity. It seemed entirely logical – saving money and the environment – until it caused a prison riot due to the inequitable size of portions!
With the growth in the scale and types of acquisition, in particular the shift towards services, procurement decisions need a new and economically-based approach to sourcing decisions and supplier management. 'Price' must be put in its proper place – and my next blog will expand on how that should be achieved.
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• UBS
•
2017-01-10 15:19:37
Please can you share a copy of the 2015 Contract Management Benchmarking Report as I am not able to locate this on the website?
• Seiersen Enterprises
•
2016-10-23 13:09:55
Charlotte,
I suggest you go to the Resources tab, a do a search on Benchmarking Reports. Remember to click sort by most recent. You will find a wealth of materials on any aspects of benchmarking. I have also sent you the 2015 Contract Management Benchmarking Report. Be sure to participate in the 2017 Benchmark study.
• IACCM
•
2016-11-08 16:35:57
Charlotte, building on Nick's reply, the study he has forwarded was issued early 2016 and provides a wide variety of benchmarks on process. This is supplemented by a series of reports that offer data on the issues that most often undermine the value achieved from contracts. These are part of the Ten Pitfalls series. Clearly, all benchmarks are norms or averages and if you have specific questions for a particular industry, geography, company size etc., you should ask us for the relevant break-out information.
• Info-Tech Research Group
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2016-12-22 15:42:15
Hello - could I also get direction on how to access this report?
Replies: 4
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2016-05-24 20:30:19
The phrase "everything's negotiable" comes into play with this question. Nearly every freight forwarder will take on the risks that you mention...at a price. So much of the answer depends on the myriad of factors that are in play on a given project. The best advice here is to understand the incremental costs associated with each of the risks you raise, and then determine whether the risk avoidance justifies the incremental costs. In most instances, this assessment can only be conducted in a competitive market situation.
• Deutsche Post DHL - Global Business Services
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2016-05-25 05:44:19
The industry norm is that freight forwarders operate standard conditions incorporating the conventions. However, depending upon the size and complexity of the customer and their requirements, freight forwarders may be prepared to enter into negotiations on amended contractual terms.
Freight forwarders can arrange all risks cargo insurance on behalf of the exporter/shipper, i.e. sell cargo insurance to the exporter/shipper.
An alternative would be for the exporter to arrange their own cargo insurance programme.
The respective conventions are as follows:
For air freight:
Montreal Convention i.e. the Convention for the Unification of Certain Rules for International Carriage by Air signed at Montreal, Canada, on 28 May 1999.
or the Warsaw Convention the Convention for the International Carriage by Air signed at Warsaw, Poland, on October 12, 1929, as amended and supplemented by applicable protocols and supplements.
For road transportation:
Within Europe:
Convention for the International Carriage of Goods by Road (CMR) which provides a limit of 8.33 Special Drawing Rights per kilogram
Domestic transportation:
Usually the national road transportation regulations e.g. in UK: RHA
For ocean freight:
Hague - Visby Rules i.e. the 'International Convention for the Unification of Certain Rules of Law relating to the Bills of Lading', amended by the Brussels Amendments (officially the 'Protocol to Amend the International Convention for the Unification of Certain Rules of Law relating to Bills of Lading')
Replies: 2
•
2019-08-30 18:01:18
In the US, Texas or New York are largely considered "neutral territory" whereas in Europe, until very recently UK law was considered neutral. I think that may change with the recent political upheaval.
• Ministry of Defence
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2019-10-04 08:50:59
Or try international trade law?
www.jus.uio.no/lm/index.html
• Legal and Commercial Training Limited
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2019-11-05 09:40:02
In the case of one party proposing Indian law and the other proposing Singapore law, the parties may well choose the law of England and Wales as both Indian law and Singapore law are based upon English and Welsh common law. (Note that there is no such concept as "UK law" as one commentator has suggested below).
However, a party should consider a wide range of factors before proposing a particular governing law and should weigh up the legal and commercial advantages and disadvantages of all the options.
One factor may be the degree of certainty that a contract will be interpreted in a particular way. English law adheres to the doctrine of binding precedence. Some legal systems do not. This could lead to significant uncertainty as to how the law will be applied.
In English law, it may be perceived that the courts allow a greater degree of freedom of contract. Subject to certain exceptions, freedom of contract in English law means that commercial parties are completely free to make disastrous bargains. This illustrates the comparative reluctance of the English courts to interfere on policy or other grounds to rewrite the parties' contracts for them.
For example, in English law it is possible, provided very clear wording is used, to include an exclusion clause that excludes any and all liability whatsoever, even for a deliberate breach of contract. And there is still no recognition of a duty of good faith being applied generally to commercial agreements (but watch this space!). This may or may not be an advantage to you but it remains the case that the courts are likely to give effect to the wording of the contract without imposing their opinions as to what does or does not amount to good faith.
And you may wish to consider the approach of a particular legal system to particular clauses.
For example, in English law, a liquidated damages clause will be subject to the clarification set out recently by the Supreme Court with a subsequent judgment, applying that test, indicating that a freely-negotiated LD clause is likely to be upheld subject to the requirements set out by the Supreme Court. Under UAE law, such a provision would be subject to Article 390(2) of the Civil Code and either party may apply to the court to adjust the agreed amount of compensation so it is equal to the loss. If Indian law were to apply, we would have to consider the effect of section 74 of the Indian Contracts Act 1872.
English law will also recognise an asymmetric jurisdiction clause.
And it may be that the choice of law clause will be reflected in the choice of jurisdiction. So, English law and the English courts. If the choice of courts is to reflect the choice of law, it may well be the consideration should be given to the efficacy of the court system and the technical expertise and other qualities of the judges.
Lots to consider.
Replies: 3
• Australian Red Cross Blood Service
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2019-06-21 01:28:00
Here are a couple that I just quickly came up with:
1. Can you recall the last time that you engaged with our team. Was it;
a) In the past 7 days
b) In the past 4 weeks
c) In the past 3-6 months
d) More than 12 months ago
c) Who is this?
2. When you engaged with our team, did you know the name of the person you were contacting?
a) No, I had to look someone up using either the contract, website, intranet, LinkedIn
b) Vaguely, I have spoken to a few different people in the course of business
c) Yes, I have regular communications with a consistent point of contact
Replies: 1
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