Why a basket of goods is a flawed strategy for marketing procurement?
There is no dispute that the use of a ‘basket of goods’ (BoG) approach is well suited to sourcing standardised products where the pricing can be imported into the purchasing software to ensure the savings are realised.
However, it’s surprising that many companies continue to use the traditional BoG approach in a Request for Tender (RFTs) for the print and marketing services category, when the majority of their spend is made up of bespoke and variable products that constantly change.
Here’s why it is flawed?
Sample size
The BoG is almost always built on a ‘representative’ sample of products. Suppliers know this and price the basket to win the contract even at a loss to ensure success. They know it rarely, if ever, represents the reality or a company’s actual spend.
Weighting imbalance
When a company produces lots of higher value collateral like catalogues, then the BoG can be heavily weighted to these products and not the total company spend. When there is an unbalanced BoG, it does not reflect the true cost of a company’s total spend.
Poor specifications that change
In our experience, the specifications of products in a BoG are often poor, leaving each vendor to interpret them differently and ultimately the customer comparing apples with pears. Additionally, specifications change, quantities change, manufacturing processes change and raw material pricing changes, all rendering the BoG worthless.
Accountability
The actual spend is rarely tested against the BoG pricing from a Request for Tender (RFT) exercise because they have no mechanism to compare them, it’s too time consuming and specifications seldom match.
Counterintuitive
Customers undertaking an RFT are doing so to ensure they are sourcing at the lowest total cost. These RFTs often ask vendors to provide details on how they can innovate but a BoG does not allow for this.
Alternative approach
At Finsbury Green we’ve been involved in RFTs where there is no BoG. In its place are questions on models, solutions, technology, innovation and
how we apply them.
Innovation, technology and product re-engineering are the cornerstone to reducing total cost of ownership. In reality specifications should change, there could be fewer products stored as inventory and more sourced as on-demand.
If you really want to compare apples with apples, benchmark the vendors and seek transparency.
Here are the three key areas you should seek for a breakdown of costs.
People
Ask how many resources will be required to service the account and the breakdown of the costs by roles.
Technology
Specify what technology will be deployed and at what cost. What are the one-off fees and recurring fees? What other technology does the vendor offer? At Finsbury Green the list of technology
is continuously growing as we look to automate the boring stuff and simplify the complex – sourcing, catalogues, local area marketing, digital asset management, campaign management, document printing and creative robotic automation.
Finance
Does the vendor charge suppliers a fee? We believe this just increases the costs to the customer. What are their supplier payment terms? Does the vendor take care of the transactional activity like Accounts Receivable and Accounts Payable disbursements?
Having complete transparency from vendors on people, technology and finance costs is the only true path to total cost of ownership.
Doing it better
At Finsbury Green we are proud to be leaders in our industry, pioneering the fully transparent pricing methodology with our market-leading software Sourceit in 2010.
Our model has now become the standard for print management contracts and one that continues to mature. Sourceit has been instrumental in driving more open, transparent and customer-focused solutions in the Australian print management market.