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Why Do Suppliers Get Away With It?

5 April 2019

Fair DealPart 4 – understanding the conditions upon which suppliers may prey

The feedback we often receive is that buyers want the best deal with fair and transparent solutions.

In Part 3, we showed that 8 years of independent research suggested that there were two ‘deals’ available.

  • Deal 1 is based on enticing buyers with a basket of goods, the prices for which may be set far too cheaply. Suppliers are able to subsidise these tempting prices, charging far higher prices for other goods by applying disingenuous and misleading (but generous-sounding) discounts to inflated retail prices.  Deal 1 is designed to look impressive and buyers are not supposed to know how it works.
  • Deal 2 is, in our view, much fairer and more transparent. It is designed to give good value and competitive, sustainable prices across the whole range of products a customer buys.  Deal 2 is about genuine and realistic core prices and the application of honest and meaningful discounts.

While we believe that most people would choose Deal 2 (if they genuinely knew such a choice existed) it’s the way that Deal 1 is presented that appeals.  We think that there are 4 basic reasons why so many buyers choose Deal 1, these are as follows:

  • Suppliers can manipulate price competitiveness tests.

Service, support and product quality are all important, but differentiating suppliers against these criterion isn’t always easy. Consequently buyers are faced with similar sounding service propositions and therefore price becomes a highly influential differentiator which they understandably tend to measure as follows:

  • The price of a core basket of goods. This tends to have the biggest influence on the choice of supplier.  The lower the price, the better the supplier’s chances of success;
  • The percentage discount from a supplier’s catalogue. The biggest and largest percentage discounts are most likely to impress and improve the supplier’s chances of success; and/or
  • The value of any rebates a supplier might offer. Understandably, biggest is often seen as best.

These are sensible and logical tests that should allow buyers to identify the most competitive overall deal.  But where buyers don’t know that some suppliers are charging far too little for the core basket, that the generous-sounding discounts are based on inflated catalogue prices or that customers themselves may be expected to overpay to fund their own rebates, then how can buyers possibly compare Deal 1 with the initially less attractive, but potentially better, Deal 2?

We are not criticising the criteria or the buyer, we’re just explaining how these sensible tests can be abused to manipulate the perception of what makes a good deal

  • Suppliers entice buyers with what sounds like a reasonable argument so that Deal 1 isn’t questioned, it’s just accepted as being too good to ignore.

Buyers aren’t supposed to know that the core list might be too cheap, that false discounts might be too high, that RRPs might have been hugely inflated or that they might be expected to fund their own rebates.  If buyers knew this, then Deal 1 might not sound quite as attractive, it might not become the obvious choice and some suppliers might have to answer some very awkward questions.  To encourage buyers to accept that it’s only the very largest suppliers that can offer the best deal a subtle but important message is planted; this is the size, scale and buying power argument.  It is usually quite effective and is rarely questioned.

Throughout the pre-tender relationship-building phase some suppliers are keen to emphasise how their size, scale and buying power will translate into lower prices, bigger discounts and more generous rebates than any independent reseller can offer.  To further set the scene the largest suppliers might seek to suggest that the supply chain used by the independent reseller will automatically mean that these smaller suppliers will be uncompetitive, citing the extra link in the chain as below:

At first glance this illustration suggests why the largest suppliers can offer the lowest cost solution. As there are fewer links in the chain, with fewer organisations needing to make a profit at each stage, then this argument may seem logical.  It’s important that you readily accept this argument as it helps to precondition you to expect that the largest suppliers’ quotations are bound to be the most competitive.  Therefore, when quotations are evaluated and the independent Reseller appears costly by comparison, you have no reason to doubt the effect of the shortened supply chain when this is combined with the large supplier’s buying power.

What you’re not told is that these large organisations have considerable overheads that need to be funded. Massive profits are needed to cover these overheads and they’re not going to be made by giving away low prices, huge discounts and generous rebates.

While their size and scale may seem credible we believe it is not their buying power that affords them a massive advantage; it is the unfair use of a misleading pricing strategy.

  • Office products are rarely seen as a high priority. Identifying a supplier is often perceived as an easy and straightforward exercise.

If you combine being time poor with logical price tests, reasonable assumptions and the fantastic job of preconditioning that some suppliers use, then it’s not surprising that the largest supplier’s package of prices, discounts and rebates appear to represent an obvious solution.

However there could be a different way that will give you a fair and transparent solution that will genuinely save you money and time whilst simultaneously protecting the integrity of your procurement process from the practices and problems we’ve outlined.

  • Many buyers simply don’t want to hear about pricing trickery or they frown on what they see as criticism of competitors.

Our blogs have addressed practices that can be used to mislead and manipulate, that can (and do) affect the outcome of a tender or benchmarking exercise and that can disadvantage customers and distort competition.  These practices are contentious but unfortunately they exist.

An understanding of these practices seems relevant and hugely helpful to anyone involved in the procurement of office products.  However, some buyers frown upon any denigration of the competition. We believe we need to be honest, open and transparent, providing information, insight and evidence to help buyers protect their finances, maintain the integrity of their procurement processes and obtain the very best deal.

Here are some of the reasons why this information is tricky to acknowledge:

  • Where there is a longstanding relationship with a supplier that uses these techniques it can be difficult to accept that the sales person or their employer has been misleading.
  • Low core prices, big discounts and attractive rebates can make it more straightforward and quicker to select a supplier.
  • Buyers think we’re criticising them, their choice of supplier, or their awareness of the issues. In this situation how could buyers possibly be expected to know?  All we’re doing is providing additional information and evidence that buyers can use to help make the most informed decisions possible.

The subject is contentious and potentially uncomfortable to discuss, but it is relevant. Buyers can demand change and stop these practices by insisting that suppliers give them a fair and transparent deal.  As a consequence, huge savings in time and money can potentially be made on a procurement exercise, especially where the outcome isn’t nearly as clear-cut as a supplier might like to pretend.