3 Ways Pricing Transparency Drives Strategic Sourcing Success
In 2005, Harvard Business Review published “Strategic Sourcing: From Periphery to the Core.” The article was an overview of the changing dynamic in an increasingly global world, where companies were moving away from the traditional business model of vertical integration. The authors wrote:
“For years, ‘sourcing’ has been just another word for procurement—a financially material, but strategically peripheral, corporate function. Now, globalization, aided by rapid technology innovation, is changing the basis of competition. It’s no longer a company’s ownership of capabilities that matters but rather its ability to control and make the most of critical capabilities, whether or not they reside on the company’s balance sheet.”
Fifteen years later, that message is more compelling than ever. Strategic sourcing is critical to the success of most organizations—whether they need raw materials or a service such as shipping. A big part of strategic sourcing success lies in understanding the variables that make up pricing, and when the best total value may not necessarily be the best price.
Here are three reasons why transparency can expedite your sourcing event.
Your sourcing team can understand what variables affect price
Companies don’t arbitrarily come up with the price for a product or service they’re selling. These aren’t numbers that are pulled out of a hat. Many factors go into setting prices. The more you know about these variables—the more transparency involved—the better able you are to make winning strategic award decisions.
These factors include obvious ones like the costs for raw materials, labor, packaging, shipping, and support.
Demand is a huge influence on price. In a free market, suppliers can charge higher prices for something that is in high demand. If there is a shortage, that means the ability to charge even higher prices. We’ve seen increasing demand and rapidly driving up prices for protective face masks and hand sanitizer. If the demand for a product falls, prices often follow suit, all other things being equal. If there’s a surplice? An oversupply in the market also tends to push prices down.
Competition can have a significant impact on pricing. A company that has few competitors for its products or services has the freedom to set prices as it wishes. Those sectors where competition is fierce will often see suppliers compete based on price.
The reputation and prominence of the company in search of a product is also important. A company that’s an industry leader or one that’s in a position to place large orders is a preferred partner for most suppliers. A well-known customer can have a halo effect that brings in more business. A client that places large orders is a win—even more so if you establish a relationship with them, opening the opportunity for additional business. Companies like this can often negotiate lower prices based on their reputation and/or volume of business.
There are also macro factors that can come into play. For example, during an economic downturn, companies that make big-ticket or luxury items may have a more difficult time selling their products since the market willing/able to pay for those goods shrinks significantly. That tends to lower their prices.
Arrive more quickly to collaboration and mutual gain
Mutually beneficial partnerships between companies and strategic suppliers are based on collaboration and mutual gain.
When one party comes out dramatically ahead, that may be good news (for them) in the short term. But that partnership is unlikely to last. When everyone works together, and both parties feel they are getting something positive from the relationship, they’ll put in the extra effort to maintain it.
Without pricing transparency, getting to that point of collaboration and mutual gain takes much longer.
Your sourcing team is equipped to make accurate first offers
Nothing starts a new relationship off on the wrong foot faster than an initial offer that’s so far off it’s insulting. This is another area where pricing transparency is critical. If your strategic sourcing team doesn’t have access to the many variables involved in pricing a product or service, they are guessing. Come in too low, and the “good” suppliers—the ones you want to be working with—ignore you. If you do get a bite, it’s likely to be from a supplier who is desperate or completely new to the business. Either way, it’s not a great situation to be in.
On the other hand, your sourcing teams may estimate too high. When that happens, you end up in a scenario where your best award decision drastically underperforms on the market, eating into your savings opportunity and company profits.
Having access to a tool that offers full pricing transparency helps to avoid both of these scenarios.
The Solution to Pricing Transparency
Circling back to that Harvard Business Review article, sourcing is far from a “peripheral” corporate function for companies and organizations today. It has become a critical function. However, without pricing transparency, strategic sourcing simply isn’t possible.
So, how do companies gain access to the variables and factors that go into pricing? For a long time, this has been a time-consuming, labor-intensive, and imperfect task. It’s generated many intimidating spreadsheets.
Arkestro is a true intelligent sourcing enablement tool, advanced, sourcing enablement tool. No more manual research and updating, it leverages the power of advanced AI intelligence and machine learning to equip strategic sourcing professionals with the insights they need to award critical sourcing projects to suppliers they can count on to deliver value. Arkestro collects and tracks variables that are so critical to pricing transparency—weighing each based on current circumstances—but it also accounts for the factors that are important to the user’s organization. For example, they may put more weight on a supplier’s environmental sustainability than on their price.
All of this data is analyzed, constantly updated, and used to put out a request to suppliers. At the same time, the Arkestro platform fully supports messaging with suppliers, helping to build that important collaborative relationship. It’s the ultimate tool for pricing transparency, but rather than stop at making those variables visible, it incorporates the data, then automates the negotiation process with intelligent first offers that signal ballpark price expectations to participating suppliers.
The result is better quotes faster, but it all starts with pricing transparency.
The Arkestro Platform acts as a centralized source of truth for strategic sourcing activities. All buying organization stakeholders are able to communicate directly with each other and suppliers are able to communicate directly to the buying organization in-platform, eliminating the need for a messy shared email inbox.
Find out how Sourcing Enablement with Arkestro is a good fit for your team.