If you were good last year, you may have been lucky enough to find a treat in your stocking on Christmas morning. I must have been very VERY good last year. Not only did I get some of my favorite treats in my stocking, but one of those treats came with it the basis for a procurement blog post.
The first detail you’ll need is about the treat itself. There is a candy shop in my town that has been handcrafting chocolates since 1917. They make a dark chocolate sea salt caramel that is out of this world. If you’ve never had a chocolate covered caramel with sea salt on it, please stop reading right now and go find yourself one. My point will wait…
Since it is the holiday season, my husband found that he had two options for getting me the chocolates. He could either have a box packed for him with exactly what he wanted in it or buy a pre-packed holiday box that had a mix of dark chocolate and milk chocolate caramels in it. Milk chocolate is no disaster to be sure, but I happen to prefer the dark, so for the sake of our story, let’s think of those milk chocolates as an ‘alternate spec’.
The individually hand selected chocolates that were exactly what I wanted cost $0.85 each. Buying a box with nine chocolates, some of which didn’t quite meet spec, worked out to cost $1.33 each. Assuming the chocolates were of similar size and quality (which they were) the pre-packed chocolates came with a 56% higher price tag. My husband does not work in procurement, but he knew to expect savings with a volume purchase (the pre-packed holiday box) and to pay a premium for the custom high-service handpicked chocolates. Apparently he has been listening to me all these years after all.
Assuming he had missed some difference between the chocolates, he approached an employee and asked why the pre-packed, alternate spec candies were more expensive. The answer: “Well, the ones in the pre-packed box are round, you see.”
There are many reasons to pay more for a product or service. As procurement professionals looking to optimize benefits for our organizations we face the high value versus low cost decision on a regular basis. But if we are going to advocate paying more for something, there had better be a good reason. And, in this particular case, one shape over another does not justify the added cost.
Acceptable responses might have been that the pre-packed chocolates were in a pretty box, or were made using premium ingredients. Maybe there was a creepy high school kid that was going to be picking up the lose chocolates to pack them in a box. All of those things would have been reasons to pay more for the pre-packed chocolates.
Often times the raw material costs of two solutions will be very close, in other cases they will vary widely. One supplier might have better materials pricing because they are bigger or watch the markets more closely. Other times we may chose to pay more because a solution offers intellectual property that is only accessible by working with that supplier. Both examples represent a competitive advantage for that supplier, and as long as we have done our homework, we can make a compelling argument to our stakeholders that it is worth spending the additional money.
In other cases, it is hard to identify the reason for higher costs or to quantify the benefit that is being put forward in justification. The first step here is to separate the message from the messenger – is the sales rep just poorly prepared to present an argument? – and see if you can get a clearer understanding. The possibility always exists that a company is inefficient or simply thinks they can get you to pay a higher margin price.
As procurement professionals, we are often asked to be the givers of the ‘smell test’ even when we are not making the award decision. Does a pricing structure pass the test or not? If it doesn’t make sense to you, especially after you make the effort to understand, there is little chance that it is worth the time of your internal stakeholders – even if dark chocolate sea salt caramels are involved.