Friday, January 29, 2010

How to Get Away with Almost Anything, and While People are Looking Too - the Power of Brand Capital

This is a momentous occasion - my first blog post from the air. Taking advantage of VirginAmerica's inflight wi-fi I am penning this missive from seat 23C on Flight 411 from JFK to LAX. Why you might ask? Well for a start to take my mind off the non-stop turbulence we've been suffering since we left New York. (Ooops - upchuck). Secondly because this flight and this airline bring to mind a seldom discussed aspect of procurement, that of brand capital.

When I walk off this plane tonight at LAX (oh speed ye to me thy blessed moment! Ooops - upchuck) I will be one green and weary traveller but my love of flying VirginAmerica will be undiminished. Why? Because for me VirginAmerica possesses significant brand capital. Brand capital, that "feel good" factor for a company's products that allows buyers to forgive the occasional bad experience, causes me to ignore this isolated nightmare because of all of the other delightful experiences I've had flying this airline.

Brand capital is a powerful value lever both to suppliers and to the Procurement organizations that select them. If you are a supplier that consistently exceeds all your service level metrics then your resulting brand capital will prove invaluable when life's occasional slippery spot causes you, your coke and your large popcorn to careen headfirst into your customer's lap. They'll laugh, pick you up and dust you off because they know it's a very rare incident in a Titanic-length success story.

Similarly if you are a Procurement Department that proactively sets out to select and develop suppliers that consistently exceed internal customer expectations then you will develop brand capital with these same internal customers yourself. An example of this is a client of mine that places over 80% of its commercial print spend with one supplier. This supplier has consistently exceeded all minimum required performance metrics for quality, delivery and service since it was selected through strategic sourcing by my client's Procurement Department four years ago.

The one potential blight on this supplier's copybook during this run of excellence occurred during 2008 when prices of some paper grades rose by more than 30%. As you can imagine this printer had to pass on some fairly significant cost increases to my client during this period, even though my client's Procurement Department had negotiated best practice caps and collars on allowable percentage price increases. Despite the stinging blow to my client's print budget the print supplier was not tarred, feathered and duct taped to the front railings. No, the supplier enjoyed brand capital and thus was held blameless for market prices increases over which it had no control (and there lies another lesson - without brand capital you often will be blamed for events outside of your control).

Further, in addition to the print supplier enjoying brand capital directly from its performance my client's Procurement Department built its own brand capital (in this case with the Marketing Department, the main consumer of commercial print) by selecting the supplier in the first place and doing it in a way that clearly placed appropriately high weight on non-cost factors. This would make it considerably easier for Procurement to broach the subject of cost reductions with Marketing in the future because Marketing would know from experience that its quality and service needs would not be ignored in the quest for improved bottom line performance.

So whether you are a supplier or a buyer, I recommend that you proactively work on building the highest possible levels of brand capital with your respective customers. Come on - at least put as much effort into it as you do to maximize your frequent flyer miles or your Starwood points! Be warned - when your brand capital balance gets low and the sky falls you risk the buck not only stopping with you but it being super-glued to your desk.

And VirginAmerica Flight 411? No turbulence for an hour...but here come the Rockies. (Ooops - upchuck). No worries, Mr. Branson - you got brand!

Monday, January 4, 2010

A Penny Avoided Is A Penny.....Nah

There's been some good discussion over in the LinkedIn groups recently about the definitions of "Cost Savings" and "Cost Avoidance". Never one to shy from controversy I thought I'd throw my own ten pence in on this since this is an area where it seems very few parties see things exactly the same way.

In my wanderings through the procurement landscape over the years I've seen many tens of different definitions of cost savings and cost avoidance but if I had to choose the most USEFUL definitions (note, not necessarily the most popular) in my opinion they would be:

COST SAVINGS are achieved when the cost of purchasing the same quantity of a good or service falls, e.g. achieving a reduction in the dollar cost of procuring the same market basket of commercial print by leveraging spend with fewer suppliers (note: some definitions would allow specification optimization in addition to simple price reduction such as substituting a different substrate for a printed sign; the total quantity of items purchased however would however remain the same).

COST AVOIDANCE is achieved when an unavoidable increase in the cost of purchasing the same quantity of a good or service is not completely eliminated but is partially offset, e.g. in the period 2007-2008 when paper prices rose by more than 20-30% or more depending on the grade it was impossible to avoid an increase in the cost of most commercial print items but by employing the same procurement best practices as above the cost increase percentage could at least be kept in the low single digits.

My opinion is that these definitions are most useful because they allow the positive outcomes of best practice procurement strategies to be unambiguously and fairly evaluated in both deflationary and inflationary environments. They also allow the CFO and his team to quantify the budget impact in both cases.

But what about goods and services with no previous purchasing history (i.e. no baseline) that are often thrown automatically into the cost avoidance category? I would argue that for these situations it is COST SAVINGS that is most appropriate. Why? Well, in fact you actually CAN establish a baseline for a new purchase by issuing an RFI/test bid to a group of suppliers (making it clear to the suppliers that you are conducting an exploratory evaluation for the purchase in question). The preliminary pricing thus obtained from the RFI effectively forms a baseline (think of it as a "RFI Baseline" for products without a purchasing history) against which to measure the cost savings from the ensuing RFP process. Using the "RFI Baseline" approach for new products allows measurement of RFP-created savings and also (from the CFO point of view) allows aggressive budget targets to be set for products that would previously have been given more "fat" due to their lack of purchasing history.

Oh, and one more using the RFI Baseline approach for new purchases some end user departments that have historically been responsible for high volumes of "non-baselineable" spend (e.g. travel and meetings, some marketing areas) would be held to tighter criteria of effective buying. By having to conduct RFIs and/or test bids they would alert their vendor base to a forthcoming competitive process and the expectation that likely double digit cost reductions would be expected when the actual RFP hits the streets.

There, that feels better...nothing like starting off the New Year by upsetting multiple constituencies of purchasing terminology idealists, sacred cow internal departments and hitherto unchallenged suppliers of previously unsourced spend!