252. “Buy-Low” Better (Rethinking Assumptions #3)

Points From First, Two Blogs of Series:

#1 Why companies must – rethink, unlearn and relearn – for new business models.

# 2 Financial-management mantras both blind and bind your firm.

Expand the “Buy-Low” Mantra

  1. No mental model can match the complexity of a (changing) business ecosystems. Buy-Low for “price-savings” will prevent lazy over-paying. But, don’t go for a “best” price when the costs – of the attending, lousy service or excess-inventory – exceed the price savings.
  2. Two, more-holistic, buying models (often under applied by distributors) are: “Economic Order Quantity” (EOQ); and the “11 elements of Total Procurement Cost” (TPC).
  3. EOQ works only for a narrow set of inventory replenishment conditions. Wikipedia has the details.
  4. TPC models vary by context. For five (4-minute video) clips on TPC for distributors go to my YouTube-playlist #1 (of 9): Bruce Merrifield – YouTube Watch specifically clips 12- 16. Buyers should buy TPC, and reps should sell the TPC benefits of your service metrics and replenishment-solutions.
  1. Turbo TPC buying results from win-win, supply-chain partnerships. These solutions reduce both the service-costs of the seller and the TPC of the buyer. The best exemplar? How McDonalds has continually innovated down the cost-curves of both the same distributors for 65+ years and the restaurants. For more on win-win partnering see webinar 9 at merrifieldact2.com under the “eCommerce 2023” tab.

Buying Groups’ Effectiveness?

In most commodity channels, every distributor belongs to a buying/marketing group. The founding concept: band together to demand an extra discount. Groups have then fizzled, fractured, merged and (rarely) innovated.

The final state of groups is a stand-off. All distributors get their “extra” discount as a year-end “rebate”. But, all participating suppliers raise their list prices by the rebate amount. Results?

  1. Factories make the same profits.
  2. No distributor has a sustainable buying advantage over any other distributor.
  3. Rebates aren’t the extra profits they appear to be. They are instead a delayed remittance from overpaying during the year.
  4. Both suppliers and distributors are locked into this stand-off state.
  5. Pushing supplier programs to win more rebates has a distracting opportunity cost. If distributors instead innovated service-value for target customers to improve customer TPC benefits, then sales, profits and rebates would all soar as by-products of happier end-customers.

Conclusions:

Avoid buy-low hidden costs. Buy (and sell) TPC. Belong to the most innovative buying group. Don’t just flog commodity promotions. Innovate service-value to lower target customers’ TPC and boost their uptime-productivity. Both real-time and delayed, rebate profits will grow faster.

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